Last week, we held a talk on the UOB United Global IPO Fund for our investors, at the Mandarin Hotel in Orchard Road. The United Global IPO fund invests in Intial Public Offerings, (companies seeking to raise capital by issuing shares and listing on a stock exchange). The fund invests into three main segments of the IPO market, including pre-IPO companies, Global IPO placements and Global Post-IPOs (companies within 3 years of going public). In addition, the fund also has the flexibility to hold cash if there are no worthwhile investments (click here to read a related report on the fund).

The talk began with a presentation on the fund, followed by a question and answer session. Thio Boon Kiat, Chief Investment Officer for the UOB Asset Management and the fund manager for the United Global IPO Fund, as well as Glenn Lee, Associate Director at UOB Asset Management tackled a variety of questions from investors. We produce excerpts of the session below.

Q: How do you go about selecting global and local IPO's (Initial Public Offerings) for the fund, and what happens to the stock after the IPO launch is over?

Thio Boon Kiat: There are a lot of inefficiencies in the market because new companies, industries and markets have emerged. For example, China is one of the new markets that has emerged. It will take a lot of time to understand the kind of companies in China, come to grips with the track record as well as quality of the management. For the past year, we have seen quite a few not-so-good Chinese companies being listed. The IPO's started off with a bang and then failed to perform. I feel that 3 years is sufficient for us to assess the quality of the management, as well as understand the new industry.

One of the strengths of UOBAM is that we have direct access to management in the post IPO market. This will help in our process of analyzing and understanding the company. Yellow Pages is just one the interesting companies that is going to debut shortly. I recently met the management team. Yellow Pages looks like a fairly simple business, but because there are no historical reference listings in Singapore, it will make analyzing the company difficult. If we are indeed interested in the company, having direct access to the management actually gives the opportunity of understanding the business quickly and efficiently.

In terms of the mechanics of what happens 3 years later, we can refer to Mobile One as an example. It is one of the companies that we have invested in after its IPO. There was retail and an institutional portion for the IPO. The institutional portion was priced at $1.30 and retail was at $1.25. Investing at that point would mean losing 5 cents immediately. Thus, we waited and only invested into the company at $1.25 when the market cooled. The stock has done very well in the last two years. However, if we hold a stock that hasn't realized its potential after 3 years, we'll continue to hold the stock. It means that if Mobile One does not perform after 3 years of listing, its holdings in the fund will not be increased. At the same time, I'm not obliged to sell the shares if I believe that the share has not realized its full potential.

Q: When the IPO market is not doing well, and in the doldrums, for example there is virtually no IPO's, what will happen to the fund? Also, what is the largest percentage that the fund can hold in a single stock?

Thio Boon Kiat: We are only allowed to invest up to 10% in one single stock. Regarding what happens if the IPO market is in the doldrums, the reason why we allocate 60% to post IPO's in the fund, is so that we can continue holding the stock, even if it doesn't do well in the immediate IPO launch. We can still hold the stock and benefit from the price appreciation later. Besides, we will most likely continue to see a new company listed almost everyday not only in Singapore, but also around the world. So there will be various opportunities for us in the global IPO market.

That then brings us to how much we are willing to pay for an IPO. This actually depends on how the underwriters are pricing it. I should personally like the company and think it's got potential. The most important point is whether the underwriters are pricing it at a price that I think is reasonable. I'll do my fair share of home work and analysis on the company, and if the price is too high, I will not be willing to buy the shares at that point. Markets do fluctuate and there will be an opportunity where I can purchase those shares at a price I think is reasonable.

Analyzing companies and waiting to buy the stocks we like at the right prices is an ongoing thing. The state of the IPO markets actually has nothing to do with the way we invest; looking for good quality companies at decent valuations is something we are constantly pre-occupied with.

The IPO market is a very interesting and very volatile. There can be periods of boom and bust, very compressed cycles even in one year. Every year, you can expect about two huge runs in IPO markets. Any company can run up 100% for no apparent reason. In situations where we feel that the stock will run-up strongly, I don't think we'll walk away from such opportunities.

Glenn: So the core focus will obviously be on quality companies. At the same time, we recognize and will look out for the different kinds of short term opportunities that the IPO market also offers. Every year, there will be one or two hot IPO periods offering this kind of short term opportunity.

Q: Is there any specific country or sector you are more overweight in?

Thio Boon Kiat: No. The only policy I will probably have in this fund is to make money. That can come from many sectors, because at the end of the day, the IPO market all depends on the pricing.

The opportunities that I see in the capital markets are in Asia. Specifically in the growing markets of India and China, there are numerous IPO opportunities because a lot of companies are growing and they need to raise money. In Singapore, as we are one of the largest asset management houses here, we have the advantage of having access to almost all the investment banking activities here. If we like a company, we can always take a stake in the companies.

I think the REIT (Real Estate Investment Trust) market will be one very interesting opportunity that we will probably want to participate in for the fund. In Singapore, the Suntec Reit is already on its way. And in 2005 there will be quite a few opportunities. I think F&N (Fraser & Neave) is going to have a REIT structured for malls. Maple tree, which is a Temasek subsidiary, is also a possibility.

Outside of Singapore, the REIT market is also developing very rapidly. Hong Kong is going to launch a very big REIT fund. It's called The Link. It's a series of car parks and retail spaces that belong to the Hong Kong authorities. They are going to be launched at a very attractive yield. So that is quite interesting. The property REIT market potential in Malaysia should be quite interesting.

I think the REIT market is actually going to explode in a very dramatic way in Asia. Singapore has taken the lead, and Hong Kong will be just as competitive. So we can expect that a lot of the property landlords will start coming out with some of the investments trusts.

REITs are not only about yield, they are also about price capital appreciation. Ascendas for example, has doubled in price. The REIT market in Asia is still not well developed, so people are not able to price it well yet. There are also a lot of growth and acquisition opportunities in REIT also. With REIT IPO's coming up, this could be one of the sectors that are interesting for next year.

Q: You mentioned there are interesting IPO opportunities in India, could you perhaps talk a little bit about that, are they mostly technology companies?

Thio Boon Kiat: Actually, we have participated in one technology stock fairly recently. It is in an IT services company Tata Consultancy. India is one of the prime IT service outsourcing markets in the world. It is where US companies have their call centres. The US has also outsourced a lot of the software programming writing.

More recently, the IPO opportunities in India have been more infrastructure related, i.e. power, utility companies. This is because with India is growing rapidly, there is a lot of capital required to build up these structures. India has got infrastructure needs that require financing and we can see quite a few of those companies coming to the market to list their companies. Thus, I would say the opportunities are across the board.

Q: A large portion of the fund invests into the Singapore stock market. Currently, we have seen alot of IPO's debuting here and going down after launch. Should we wait for the IPO market in Singapore to pick up before investing into this fund?

Thio Boon Kiat: For this year, I think the IPO market here in Singapore, on average hasn't been that good. However, I think that IPO markets outside of Singapore have been doing pretty well. It is also important to remember that this is a global IPO fund, thus we will not be restricted to the IPO market in Singapore.

Yes, we recognise the fact that the IPO market hasn't been good this year. But that's largely due to the services, poor quality of the companies that were listed. Furthermore, valuations have not been very compelling. Most probably, out of 10 companies that we see, I think you can most likely get one or two good quality ones. For example, Starhub has been priced at 95 cents during the offering. After launch, it drops to 90 and now after its first ever quarterly results showed that their losses have narrowed, it should have gone above the IPO price. This is one opportunity that we may take to benefit from the company's better performance. We consider these to be generally decent companies that we can consider investing into.

I think many companies have gotten greedy in terms of the price that they expect the market to pay. I have seen a lot of these companies. A lot of them actually open up their factories and sites for you to visit. The management of these companies will be visited as well. So far we have been up to China for several times. A large part of that were poor quality companies. I think it is made worse by the fact that investment bankers are actually pricing these stocks at higher than what is appropriate.

We have to be very selective in this market. We are not going to participate in every single IPO for sure, and we will be very discerning where the choices are concerned especially when we are going to take a big stake in the portfolio. The only time where it may be less discriminating would be when the IPO is assessed to be hot and enthusiastic. In this case, there may be a good chance that I can sell out in the short term and make a 20-30% gain. These are chances I won't walk away from also. But will be quite discerning on that concern.

This fund is also not obligated to support all IPO's that are underwritten by UOB.

Q: Are there other peer funds that we can compare this fund with? Alternatively what do you benchmark yourself to?

Glenn: In terms of benchmarking, we have picked the 6% absolute returns as our bench mark. We considered what is a reasonable gain that any equity investor would expect from an investment. We think that some where in the 6% range is pretty reasonable. If the return target is set too high, say about 9 to10 %, the team may end up having to take higher risks in an attempt to achieve the target. But do not forget that this is your money, and you will not want to get into an investment situation where you give someone money and incentivise them too much to take risks with your money. If they manage to achieve the target, they will be able to get a cut. If huge losses result from the high risks that they have taken, all they need to do is give you back what is left. So you will want a performance fee that is reasonably balanced and not too inclined to take risks. We took 6% per annum as benchmark and as the hurdle because we feel that it is a fair target that we are fairly comfortable with, in achieving. This prevents unnecessary risks taken by the team in order to cross the hurdle.

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