SINGAPORE (May 29): On Oct 31 last year, investment advisory platform The Motley Fool Singapore — citing a “challenging environment” — ceased operations in Singapore. But for two former employees, the passion to invest and the desire to help others make money remains. Chong Ser Jing and Jeremy Chia, who spent seven and two years respectively at The Motley Fool, say their time at the company had taught them the importance and urgency for investor education here.
“We noticed there was, and still is, a lot of room in Singapore for investor education,” Chong tells The Edge Singapore in an interview. “We saw a big need for an outsourced investment solution for long-term investors.” Together, the duo have founded the Compounder Fund to “enrich the financial health” of accredited investors in Singapore. David Kuo, the former Motley Fool Singapore chief executive, is advising the fund run under Galilee Investment Management, a Singapore-based asset manager led by CEO Joseph Ong.
The fund focuses on long-term investing in equities around the world of companies that can grow at high yet sustainable rates. As the name suggests, the Compounder Fund prides itself on playing the long game so that the wonders of compounding can have enough time to work its magic on the returns.
With the fund’s initial offer period slated to end on July 13, Chong and Chia are targeting to collect about $3 million in funds. Each investor is required to put in the prevailing Singdollar equivalent of US$100,000 ($142,110).
However, the fund has already “comfortably exceeded” the amount in terms of “soft commitments” in the form of verbal commitments from interested parties, they say.
The fund aims to generate annualised returns of 12% over a five to seven-year period at the minimum, which would outdo global indices such as the MSCI World Index. “That is not a guarantee but that’s just something that we’re aiming towards,” says Chong. “12% will likely be market-beating, and although it won’t be easy, I’d say it’s not unrealistic,” he adds.
Selectivity amid volatility
While some fund managers like to spread out their risks by investing in as many different companies as possible, Chong and Chia maintain that the Compounder Fund has a long list of criteria so that they can keep this list short.
Specifically, they are seeking companies that are operating in large or growing markets, have strong balance sheets, are run by solid management teams, are able to generate a high proportion of revenue from recurring sources as well as the proven ability to grow.
The list of companies that can check all these boxes may be limited but this is fine — they prefer quality and not quantity as it underpins performance throughout market cycles.
“In our communications to investors, we make it clear that whether it’s a recession or bear market, what we’re trying to do is buy and invest in compounders and hold their shares for the long run,” says Chong.
The fund might suffer periods of underperformance but the founders are confident of the returns over the long term. “Time itself is a key factor in being able to generate returns,” explains Chong. “We are designing the fund to have its returns driven by underlying business performances of stocks that it owns,” he adds.
They will also adopt a disciplined approach: If companies fail to meet their investment criteria, they will look elsewhere.
The duo say that they are closely monitoring between 70 and 80 stocks across different markets at any point in time. “Our investors are paying us to deliver investment returns, and part of the process includes us being aware of what’s going on,” says Chong.
The fund won’t touch fancy instruments such as derivatives but they will include ETFs as these would be “good vehicles” for investors to participate in certain investment opportunities. For instance, Chong says thematic ETFs such as those specialising in biotech could be worth looking at.
Staying for the long haul
The launch of the fund comes just as global stock markets are seeing unprecedented volatility. The Covid-19 pandemic has mauled stocks in industries such as retail, travel and hospitality. “You’re in serious pain if you’ve invested in these sectors,” says Chong. However, he argues that what the pandemic has not changed is the fundamental logic behind financial markets, which means the Compounder Fund’s investment framework remains applicable.
More than ever, investors need to have a “clear picture” before entering markets. “A stock will do well over time if its underlying business does well. This is based on the logical observation that if a business does well, it simply becomes a more profitable company on the whole,” says Chong.
“Over the long run, stock prices are governed primarily by the performance of a company’s business,” he adds. “We’re simply going to be looking for good compounders at reasonable prices to invest in their shares for the long run.”
For now, the Compounder Fund can only manage money from so-called accredited investors — defined by the Monetary Authority of Singapore (MAS) as individuals who either have net assets of at least $2 million, of which a maximum of $1 million can come from the primary residence or an annual income of at least $300,000.
While the accredited investor guidelines were set by the authorities, Compounder Fund has brought its own preferences to the table.
It favours investors who can invest for more than five years, and are capable of handling market volatility. By putting down the five year investment horizon preference, the duo say they have eliminated potential investors with the itch to time markets, and who are better described as punters.
To them, this is “perfectly alright.” In fact, they believe that financial markets are governed by the collective emotions of millions of market participants in the short term, making it tough for investors to enter and exit at the right times.
“This is just something that, to us, is really difficult to understand or make sense of,” says Chong. “It’s important to think about the long term rather than the short term.” The duo readily admits they are not experts in every, single asset class. For instance, they say the fund generally shies away from stocks in the commodities sector as it can often be difficult to predict commodity prices — just look at how oil traders and companies alike scrambled when oil prices collapsed, for example.
“So if we’re unable to have good knowledge or grasp of how commodity prices will move in either the short or long run, then it’s really difficult for us to form a view of how well a commodity-related company can do over a five to a ten year period,” says Chong.
The duo have even gone as far as to put in place mechanisms such as avoiding currency hedging and financial derivatives to prevent themselves from dabbling in asset classes they are not familiar with. “Otherwise, investing becomes like a guessing game, and that’s what we want to try to avoid as well,” says Chia.
“It’s supremely important for investors to be aware of what they don’t know,” adds Chong.
Fees and risks
Some fund managers have made a big show of how efficient they are by charging rock-bottom flat fees, without an additional complicated performance fee layer. They claim low, flat fees will add up over time and make the difference between beating and underperforming the markets.
Chong and Chia charge both a management fee tied to the assets under management (AUM) and a performance fee tied to how much the fund makes for the investors.
They believe the performance fee is justified as it is closely tied to performance.The Compounder Fund is looking to maximise returns to investors with a structure where the percentage of both management and performance fees will drop as the AUM grows. The management fee ranges between 0% and 1% of the fund’s total AUM. Performance fees will only be earned if the investors earn at least 6% per year over the long run.
In addition, the fund will impose a turnover ratio of not more than 20%, meaning that stocks will be held in the fund for a minimum of five years. This would translate to lower transactional and brokerage fees, and allow the savings made to compound over time.
“A lot of funds out there charge a high total expense ratio,” says Chong. “What investors don’t realise is that these fees get deducted directly from the fund’s total net asset value.
So it’s capital that comes straight out of the fund. The more you trade, the more commissions the fund actually pays. If we are patient, we don’t have to pay a lot in trading costs and commissions,” he explains.
To maintain a balance between diversification and risk, Chong and Chia have decided that the fund will at any given time, hold between 30 and 50 stocks — a quantum they are comfortable managing.
Yet, the fund’s allocation strategy will also prevent any single stock — regardless of its returns — from constituting more than 20% of the fund’s total assets. “Even if there are one or two companies that take a severe plunge, the overall effect to the fund’s portfolio will not be too drastic or severe,” explains Chong.
Both Chong and Chia feel that transparency remains key, and have made the decision to reveal all the fund’s holdings and portfolio actions to not just investors but to the public.
Barring a time lag in the execution and publication of information, the fund’s website will be updated on an ad-hoc basis to reflect the latest holdings of the fund and why a particular stock has been selected.
The duo also highlight how they will be “very slow” in selling shares, in order to “hold on to their winners.” Chong says it is important to inculcate a culture or behaviour of not taking profit and running. True to the fund’s name, the duo also believes that having made the right picks, better returns await those with the patience. “If we sell a company just because it has gone up by 100%, we are essentially losing all potential gains that a really good compounder can earn,” he says.
