UOB Asset Management is making use of their expertise in evaluating and analyzing global companies to launch an IPO fund that invests in new global listings. The United Global IPO Fund invests in companies that wish to list in the near future (in 12 to 18 months' time) or companies that have just been listed (up to 3 years after their listing). This fund appears exciting to many retail investors as they can gain access to a wide range of interesting new equities through a single fund. Access is a strong attraction as financial institutions such as banks generally tend to have better allocations to placements when the IPO market is hot. Besides better access, the team of investment professionals behind this fund may be at a better position to analyze the quality and valuations of new listings. They are able to visit the companies and communicate with the management. In short, a "professional touch" is brought to IPO investing. In this interview, Thio Boon Kiat, the fund manager of the United Global IPO Fund, speaks about the newly launched fund and how it can add value for investors.

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Q: Can you give us a general idea about this fund and how can investors benefit from it?

A: Well, it's essentially a fund that invests in new listings. The reason we set up the fund was because we felt that we could add a 'professional touch' to the IPO selection process. Evaluating IPOs professionally means providing a fundamental evaluation for new listings. We have the resources and experience to plough through the prospectuses and analyze companies in detail. We benchmark IPOs against industry comparables and attach a proper valuation to them. On top of that, we have a fairly vast network of investment banking contacts and we can get placements in Singapore and outside Singapore. We are able to provide scale and receive allocations that are likely to elude retail investors. As the post IPO market has been a fairly volatile one, buying into IPOs that we think show attractive valuations after their launch is also another opportunity for us.

Q:How do you add a 'professional touch' to the IPO selection process?

A: In a single week, you can get up to one or two IPOs in Singapore. Retail investors typically speculate in these new listings, and when market conditions happen to be good, they can actually make a little bit of money. However not all investors are equipped to make the right decisions and some can fall into the trap of investing in an IPO that does not have strong qualities or attractive valuations. The value that we add is in assessing whether the valuations are acceptable and if the quality of the company and its business is something we like. And we make a considered decision on whether we should be taking a meaningful stake in the company.

Q: Some say that valuations of companies during initial listings would be usually lower than the true valuation of the company. What do you think?

A: In theory, an investment banker wants to price the IPO attractively to make sure that it does well during its initial launch. This would make it easier for the investment bank to raise more capital in the future. A successful launch would also reflect investor confidence about the business prospects of the company. Thus, in general, valuations may be lower for IPOs. However, that may not always be the case. Specifically in Singapore, we have observed that there are bouts of greed and fear. When the market is not doing well, IPOs are priced relatively cheaper than those coming out during a market up-cycle. As the market picks up and investors get excited about IPOs, you can see headlines that IPOs are 100 times oversubscribed. During this period, IPOs are likely to be priced 6 times, 8 times or even 10 times over earnings. That is when we become more sensitive to prices. However, in periods when the market is in the doldrums, but the company is priced at a discount to its value and passes the quality test, we will take meaningful stakes.

Q: Can you explain the investment allocation of this fund? Why is this fund allocated in such a way?

A: The pre-IPO portion is less than 10% because, for this class of asset, regulations do not allow us more than this amount for collective investment schemes available for the retail public. Why do we invest up to 30% in placements only? The answer is that we are not going to find an IPO placement every other day, so to a certain extent, IPO placements are opportunistic. For this portion, the supply of placements must be there and the kind of placement must pass our quality and value test and they cannot occupy the entire fund.

We think that there are good opportunities in the post-IPO investment arena. Certain IPOs may not be worth investing at the launch price and when the price of these companies slides, it provides us with the opportunity to invest in them. 30-60 is just an average of what we thought was reasonable to reflect the relative demand/supply. We are flexible in terms of allocation and can swing either way from these numbers. When there are no placements, we can theoretically invest up to up to 90% in the post-IPO market. So the 30-60 proportions is an estimate of the long-term asset allocation at this point of time.

Q: Is it true that these IPO funds are likely to outperform in poor market conditions?

A: During poor market conditions, you can get IPOs at cheaper valuations. However, whether they perform well immediately after their debut will depend on market conditions. In our case, the way we approach companies is pretty long-term. For example, Ascendas Real Estate Investment Trust is a company that we have been holding since its launch. We look at their acquisition of properties and the yield accompanying them to determine the viability of investing in it for the longer term.

Q: How much is likely to be invested in Singapore and Asia? Is UOB able to reach out to global placements?

A: This fund is likely to be Asia-centric. We are seeing more opportunities for growth in Asia and companies in this region are raising a lot of capital compared to the rest of the world. These opportunities suggest to us that most of the portfolio or a significant part of it will mainly be in Asia. We also have global capabilities as we run some global funds. Our international networks are established and we contact investment communities in Japan, Europe and the US regularly. In fact, we have a very large analyst team that covers companies in Europe and North America.

Q: In what way do you think that the pre-IPOs portion that takes up 10% of the portfolio would influence the performance of this fund?

A: Theoretically, the expected return of this portion of the fund should be higher than the rest. But there will be greater risks as well because of some technical factors. These include the risk that you may invest in a company that may not even list. When we structure the deal, we try to make sure that we have 'exit options'. If the listing does not happen, we will be in a way protected by the investment mandate set out in these structured deals. In terms of proportion, it is only around 10%, but we are expecting a higher return than the other portions.

Q: Do you think that Singapore has a fairly active pre-IPO market?

A: We think that it is a relatively active market, especially with the high net-worth investors and institutions. There are numerous opportunities in pre-IPOs, but companies that are issuing pre-IPO stocks may be selective in choosing their shareholders. Some companies want pre-IPO investors that have clout in the market, to add value to their shareholders. One issue is that retail investors have limited access to these issues. The value that we can bring is to open up this opportunity to retail investors.

Q: What difference does it make for an investor when he directly invests in IPOs relative to just investing in this fund?

A: Diversification of risks will be one important point. Another difference is that we have done research on these companies, we are likely to have a better idea of whether the valuations are reasonable or not. The main risk for ordinary investors is that they may be governed by factors such as greed and fear. They are inclined to 'follow the market', and buy and sell according to sentiment. In our case, we would have met the management, done our homework and know how to position ourselves. How the price moves after its debut is not really an influencing factor. As a disciplined investor, you know the price you want to buy and sell the stock.

Q: What are the risks for the fund?

A: We have touched on the risks of the pre-IPO portion, which are essentially the liquidity and the risk that the company eventually does not wish to list. The risk of the IPO placement portion is largely market risk. The short-term risks are mainly equity market conditions especially when markets are falling. However, that is also an opportunity for us as we get to invest in good companies at lower valuations, when others are not optimistic. Companies will be affected in general if economic activity slows down. But we are also aware of the microeconomic factors, and if prices come down due to something unrelated to the operations of the company, that is probably an opportunity. As this is an absolute return fund, we will try to minimize the downside and protect the capital as much as we can. However, we can still take favourable positions if we believe in the quality of the company over the long term.

Q: Can you explain the rationale behind having a performance fee? How does this performance fee work?

A: As a fund benchmarked against an absolute return, the goal is to add value by being able to actively grow investors' assets as well as to protect against losses when the market changes suddenly. The more successful the fund manager is in achieving this, the more he should be rewarded. An investor should guard against a remuneration structure that is not very rewarding, where the manager provides modest gains and takes few risks all in the name of being cautious. On the other hand, the investor should also guard against a remuneration structure that provides overly great incentives to the manager for taking risk with the investors' money. This can result in too much risk. Thus we believe that our fee structure, partly fixed and partly based on performance, provides the best compromise.

 

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