The chief executive of Value Partners has ambitious plans and $335 million to spend. George Mitton meets King Lun Au.
King Lun Au had been employed at Eastspring Investments for less than a year when he heard that the chief executive of Value Partners, Timothy Tse, was leaving.
The move created a vacancy at a company Au knew well. Hong Kong’s first listed asset manager, and a specialist in Chinese equities, Value Partners is perhaps the most visible of the territory’s homegrown fund firms. It helped that Cheah Cheng Hye, the man who set up the company in 1993 and who continues to oversee it as chairman, had known Au for many years. When the job offer came, says Au, “it was too good to turn down”.
Au left Eastspring, where he had been chief executive of the firm’s Hong Kong business, to take up his new role. A familiar figure on Hong Kong’s asset management scene, he is a bespectacled, professorial man with a PhD in theoretical physics and a long CV, which includes roles at HSBC, Baring Asset Management and BOCHK Asset Management, where he was chief executive.
His appointment at Value Partners, however, would signal a shift in gears. Both he and his chairman had ambitious plans to enlarge the business, and were willing to spend money to do it, namely the 2.6 billion Hong Kong dollars ($335 million) on the company’s balance sheet at the end of last year.
The money could fund growth abroad. The bulk of Value Partners’ assets come from clients in Hong Kong and mainland China, with a relatively small contribution from institutional investors elsewhere. Au would like to change this.
Last year, the firm increased the headcount to 12 at its Singapore office and opened an office in London, which employs two people. He wants to increase the firm’s marketing and distribution abilities in Asia and Europe, eventually extending its reach to the Middle East, the US and Latin America.
Au is willing to acquire foreign companies, too, possibly in Europe. “We are cash-rich and looking at inorganic growth,” he says. “It has to be complementary and most likely it would be overseas to fill our product gap. Hopefully it could be a mutual relationship.”
The firm is also developing products in-house. Value Partners is known as an active manager of Greater Chinese equities – the firm’s name reflects its approach of seeking underpriced shares – but Au wants to broaden the product range. He is developing the company’s exchange-traded fund (ETF) activities with the aim of creating a series of hybrid funds, half actively managed and half index-tracking. “These products will be rolled out on our Ucits platform in Ireland,” he says.
The firm has also launched a global emerging market bond fund, with a tilt towards Asian assets, and plans to follow it with an emerging market equity fund and a credit long-short fund.
“Last but not least, alternatives,” he says. “We have recently set up a real estate team.”
With such grand plans, you might think Value Partners is riding on a wave of asset inflows and profits, but its recent financial report tells a different story. In 2016, the firm’s profits halved compared with the previous year. The decline came alongside a 15% fall in assets under management, which stood at $13.2 billion at the end of the year.
Au says the redemptions came in the first half of 2016 as investors lost their appetite for Chinese shares, which were volatile and subject to regulatory intervention during the ‘circuit breakers’ fiasco.
“We are known as a China expert,” he says. “We went down with the market.”
Value Partners was not alone in losing assets. A net $8.2 billion flowed out of retail equity funds in Hong Kong last year, according to the Hong Kong Investment Funds Association. Assets at Value Partners have since risen and, at the end of February 2017, the company had $14.4 billion under management.
Nevertheless, the effect of last year’s redemptions on the company’s balance sheet was severe. Income from performance fees in 2016, for instance, slumped by 97% compared with 2015.
Value Partners had some more bad news in January when it was fined 4 million Hong Kong dollars ($520,000) by Hong Kong’s regulator, the Securities and Futures Commission, for mismanaging two of its funds. The regulator found that the China Greenchip Fund and Greater China High Yield Income Fund had issued shares in excess of their authorised share capital.
The commission said the incidents were “serious” and noted that Value Partners did not report the breaches until six months after they were discovered. However, the regulator said Value Partners co-operated with its investigation and engaged an independent review of internal systems. Investors seem not to have suffered losses.
“We set up a company structure for a couple of funds,” says Au, of the incident. “It was so successful that the number of shares issued was greater than the authorised capital. As a result, we were in a technical breach.”
Au denies the company’s reputation has suffered, saying his clients regarded the incident as “a minor administrative error”.
As Value Partners attempts to expand overseas, it will face challenges. Although it has a good brand name in Hong Kong, Value Partners is not well known in Europe. Marketing is expensive, even for a company with $335 million on its balance sheet. Au says he will target institutional and professional investors, not retail customers, and intends to work with distribution partners to reach clients.
He hopes the progressive opening of China’s capital markets will give momentum to his project. When index providers such as MSCI include Chinese mainland-listed equities in global emerging market indices, institutional investors will be obliged to increase their holdings of Shanghai and Shenzhen-listed shares. Value Partners’ 24-year track record of managing these assets may appeal to investors in London, Paris or Frankfurt who are looking for a Chinese equity manager.
However, Value Partners is not the only China specialist hoping to grasp some of the predicted inflow of foreign institutional money. The competition will be fierce. To prevail, Au will need his formidable talents and a dose of good fortune.
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