Pheim and fortune

Singapore’s Pheim Asset Management has prospered in up and down markets by seeking out small stocks.

At the height of the Asian financial crisis, fund manager Tan Chong Koay slashed his salary, abandoned his secondhand Lexus and began taking the bus to his cramped office in one of the refurbished “shop houses” -- two-story buildings with a store below and the proprietor’s living quarters above -- in Tanjung Pagar, Singapore’s old town. Instead of inviting clients out to lunch in fancy restaurants, Tan served them tea in the cramped boardroom, once a master bedroom, of his four-year-old firm, Pheim Asset Management. Many of the region’s small investment outfits were merging or folding, but Tan was determined to hang on. He wanted to set an example for his employees -- whose pay he did not cut, lest the best of them quit.

“People joked about how long I would survive,” recalls Tan. “But I tightened my belt and cut my costs. I knew I just needed to do it for a few months and things would eventually turn around.”

As he rode the lumbering bus home late at night, Tan would mull over which beaten-down stocks to purchase the next day. “The crisis was a great opportunity for us,” he says now with a smile. “Fortunately, I had got out in time and was sitting on a lot of cash just as the market hit bottom.”

Sure enough, Pheim (pronounced “feem”) emerged as one of the best-performing asset managers in Singapore and Malaysia in the grim years of 1997 and 1998. In ’97, when Singapore’s Straits Times index plunged 25 percent, Tan’s firm was down only 7 percent, and in ’98, when the STI was down roughly 7 percent, Pheim was almost flat. Tan had cashed out just before the turmoil erupted, and he kept reducing his equity stakes as the markets dove deeper. Around the middle of 1998, just before the bottom, he began buying again. Today he calls that move one of his best ever -- it made him a lot of money.

Standard & Poor’s and Lipper today rate Pheim Asset Management as one of the region’s most successful investment management houses on three-, five- and ten-year returns. Consulting firm Watson Wyatt Worldwide calculates that Pheim’s Malaysian funds have outperformed the benchmark STI for 11 years in a row since their inception and that its Singapore funds have outperformed their benchmark for ten successive years.

“Anybody can outperform an index over six months or even one year,” says Tan. “But outperforming the indexes and all your peers over five years or ten years is what gives you a track record.”

The soft-spoken Tan, 55, hasn’t had to ride the bus in years (and he now drives a brand-new Lexus). His 30-person firm manages 2.6 billion Malaysian ringgit ($700 million) -- six times what it had amassed at the end of ’98 -- making it one of the largest privately held investment firms in Southeast Asia. Still headquartered in that old shop house by Singapore’s port, Pheim now boasts five funds: Pheim Asean Emerging Companies Growth Fund, Pheim Vittoria Fund, Dana Makmur Pheim fund, Pheim Emerging Companies Balanced Fund and Pheim Income Fund. Assets grew more than 40 percent last year (helped by an $80 million mandate from Japan’s Aizawa Securities Co.) and come from all over Asia.

Pheim’s clients -- almost all of them institutions -- include some noteworthy names. One is Government of Singapore Investment Corp., which manages more than $100 billion for the city-state. “For a small boutique fund management house like ours,” Tan brags, “we have been given a lot of money to manage by GIC.” (He cannot disclose how much.) Another regional heavyweight that invests a sizable sum with Tan’s firm is Malaysia’s $65 billion-in-assets Employees Provident Fund. Tan says that most of Pheim’s clients are European fund managers and European insurers but that it also caters to some Asian investment firms and a significant contingent of high-net-worth individuals.

Already perhaps the best-known value investor in Singapore, Tan is now eyeing a bigger share of the investment action in Southeast Asia as well as in India and China. Simultaneously, he’s gearing up to go after retail investors in earnest -- as it is, they account for only 5 percent of Pheim’s assets. Tan predicts that for the next three to five years, his firm will be able to grow its assets under management at 25 to 30 percent annually, or roughly twice the pace of the Southeast Asian asset management industry.

Yet he doesn’t intend to be any rasher about expanding than he is about choosing stocks. “We are ready to grow regionally, but one step at a time,” Tan vows. “The key in China and India is finding the right partners or having a strategic tie-up with an existing financial services player. We are still looking around, talking to people, but these are emerging markets where the asset management industry is still in its infancy, so we believe there is no need to rush. If it takes us another six months, a year, to find the right partner, do all the homework, so be it.”

Putting more emphasis on retail customers by selling them mutual funds should foster Pheim’s growth at home as well as in other Asian markets. As more and more Southeast Asians go gray and discover to their horror that they haven’t saved enough for retirement, they will clamor to invest with top-performing firms like Pheim. Or so Tan reasons. Within 20 years South Korea, Taiwan and Thailand are projected to have a median age of about 40, compared with just under 30 now. For Hong Kong and Singapore, where the current median is also just shy of 30, the future figure looks closer to 50.

“We need to grow our retail business,” Tan stresses, noting that Pheim regularly gets inquiries from individual investors. “Until now my philosophy has been, Why waste time and effort on low-margin retail business when you can build your institutional business?” He adds that “retail and institutional segments will be equally important as we diversify and grow our business. It’s just that right now I see a lot more growth potential in retail over the next ten years, and we want to tap that opportunity.” His ambitious goal is to build retail funds to 30 percent of the operation within five years.

Yet doing so could be harder than achieving double-digit returns. Investment industry insiders in Singapore say that Pheim has a great track record but is neither well known nor well marketed outside its home base. Tan himself wryly concedes, “My problem is I am not good at marketing myself or our business.” Nonetheless, he has been, until recently, resistant to hiring marketing professionals. The trick, as he acknowledges, will be to find a pro who gels with the firm’s culture and, though he doesn’t say it, with Tan himself.

The firm’s approach has skeptics speculating that Pheim will end up being bought by a big global financial institution eager to expand in Asia -- and fully versed in international marketing. Tan, however, says that he doubts anyone would want to buy him out and that he hasn’t ever been approached seriously about selling. “Even if someone wanted to buy Pheim,” he says with a shrug, “they would want to keep me around by offering me a stake in the business and a long-term contract.”

“Simple” is how Tan describes his investment philosophy. “I invest only in undervalued stocks,” he says. “I don’t believe in being fully invested at all times, because Asian markets are far more volatile than developed markets like the U.S.'s. I believe in trimming equity exposure when the market is near its peak, to preserve capital and increase exposure in equities when, in my view, the market is near its bottom.”

Aha, buy low and sell high. The hitch, of course, is knowing just when to make such moves. Tan has been working on getting his timing right for close to three decades.

BORN INTO A LARGE OVERSEAS CHINESE TRADING family in the small town of Jeniang in Malaysia’s northwestern Kedah state, he grew up working after school in his father’s provisions store. He learned to be thrifty and to keep things simple by watching his father deal in soap and rice. Tan still found time to do well in high school on the nearby island of Penang and wound up heading to the U.S. for college, graduating from Western Illinois University with a liberal arts degree in 1974.

He began his career as a trainee in Kuala Lumpur for Seacorp, the first locally owned manager of unit trusts in Malaysia and Singapore and today part of the Malaysian Industrial Development Finance group. He showed a knack for identifying small, unloved stocks and shortly was named a portfolio manager, overseeing a growth fund that invested mainly in small caps. In 1981 he joined Arab-Malaysian Merchant Bank, then Malaysia’s biggest investment bank (now AmMerchant Bank), as its first chief investment officer. Five years later Tan scored a coup by launching Arab Malaysian Gilts, a mutual fund that invests in Malaysian government and bank-backed securities and today has more than $1 billion in assets. In 1987, Arab Malaysian assisted Morgan Stanley & Co. in launching the New York Stock Exchangelisted Malaysia Fund -- the first Malaysian closed-end country fund. Consulting firm William Mercer & Co. named Tan Malaysia’s top fund manager for 1988.

One year later Germany’s DG Bank (now DZ Bank) recruited Tan to manage a Southeast Asia equity fund out of its Singapore office. He boosted performance, in large part by channeling much of the fund into small caps: Within two years assets had soared from $18 million to more than $120 million. His reputation grew along with the fund, and in 1990, John Govett (Asia), the Singapore arm of the U.K. investment firm, offered him the job of director of investments for all of Southeast Asia. Two years later Tan was managing $75 million for Govett Emerging Companies Fund and $30 million for Govett’s Singapore Sesdaq Fund while developing a Southeast Asian warrants fund on the side.

Stock markets from Hong Kong to Indonesia doubled in 1993. Tan’s Sesdaq fund, which invested in Singapore’s second-tier companies -- mostly penny stocks -- surged 248 percent, compared with a 110 percent rise for its benchmark, the Sesdaq index. Though pleased by his fund’s performance, Tan felt restless. “By November 1993, when my fund was already up over 200 percent, I was thinking of striking out on my own and starting my own fund,” he says. Toward the end of the year, Tan cleared out his office and began looking for cheap space of his own in Kuala Lumpur. To his surprise and delight, ordinarily slow-moving Malaysian bureaucrats promptly granted him an investment management license.

“The government was very keen on developing Malaysia as a financial center, and they were going out of their way to encourage local professionals like me to set up shop,” explains Tan. “And I always wanted to work for myself instead of answering to some boss in London or Boston who really didn’t understand Asian markets.”

In January 1994, Tan launched Pheim Asset Management with a secretary and one other employee, a senior fund manager who has since retired. The firm operated out of a tiny two-room office in Kuala Lumpur’s UBN Tower, which adjoins the Shangri-La Hotel. (Tan confides that he got the space cheap because although it was a corner office, it was wedge-shaped, so nobody else wanted it.) Most of his friends gave the firm two years, he says. Some reassuringly told him that failing on his own would be a good learning experience because it would toughen him up for the jostling on the fast track as a mutual fund executive.

Tan’s first choice for Pheim’s headquarters had been Singapore, but the city-state’s monetary authority had turned him down flat because it granted licenses only to firms ranking among the world’s 300 top investment managers. On a whim, he applied again for a Singapore license in early 1995 and received one on the basis -- or so he was informed -- of his fund’s overall performance. In any event, Singapore had liberalized its rules in the meantime. Tan now runs Pheim from Singapore but spends at least two days a week at the firm’s Malaysian affiliate in Kuala Lumpur.

From the start he loaded up on the stocks he felt most comfortable with: undervalued small caps and midcaps. It proved to be a shrewd strategy. Pheim’s Malaysian Emerging Companies Growth Fund rose 45 percent in 1996, compared with 24 percent for the Kuala Lumpur composite index.

A reporter for the Asian Wall Street Journal, who had heard that Pheim was making a killing in small caps came to call just a few weeks, as it happened, before the Thai baht collapsed in early July 1997, triggering the Asian financial crisis. Tan told the journalist that he was bailing out of stocks and taking refuge in cash. A story headlined “Wary Investor Set to Sell Pricey Shares” appeared on the paper’s front page, adding to Tan’s reputation for foresight once the crisis erupted. His strategy, of course, was more than just good public relations for the firm: By sitting on a pile of cash when interest rates were on the rise and stocks were in free fall, Pheim beat the indexes hands down in 1997 and ’98.

Tan demonstrated his skill as a market prognosticator again in late 1999. As technology stocks reached all-time highs, he warned anyone who cared to listen that it was time to cut exposure to equities -- and, above all, to dump any stocks having anything whatsoever to do with technology. Tan pulled a business reporter aside at a local function and bent his ear with his tale of a tech bubble about to burst. The story ran in the Asian Wall Street Journal in late 1999, adding (soon enough) to Tan’s standing as a market savant.

The Pheim founder was by no means technophobic. In July 1998 he had accumulated 2 million shares of a small Malaysian semiconductor-assembly company, Unisem, at the IPO price of RM5.10. The stock fell to RM3.50 but then shot up to more than RM44. Tan sold at an average of about RM30 in March 2000 for a sixfold gain.

“Sure, Unisem went up another 20 to 25 percent after I sold, but the trick is getting out in time,” he says. “You should take a profit if you’re sitting on a six-bagger by selling it at a very high valuation instead of hoping it will become a seven-bagger.” Eight months after he sold the stock, Unisem plunged to little more than its IPO price.

Tan insists that he isn’t the “king of small-cap stocks,” as he was dubbed by the Southeast Asian press -- in particular the financial weekly The Edge, which is published in Singapore and Malaysia -- pointing out that such shares now make up no more than 30 percent of Pheim’s investments. The rest ordinarily consists of growth or value stocks, many of them midcaps. Nonetheless, he is identified with small caps for good reason. As he says of Pheim’s early days, “If we had focused only on big-cap stocks, we wouldn’t have outperformed the indexes, and we wouldn’t have the track record to get new investment mandates.”

Malek Merican, a former CEO of Arab Malaysian Merchant Bank and a minority investor (5 percent) in Pheim from the beginning, says of his onetime employee, “He is a workaholic who loves what he does -- finding interesting little companies, investing in them and seeing them grow and prosper.”

The term “workaholic” is especially apt for Tan. “The best value is in small and midcap stocks,” he declares. “But it’s a lot of hard work. Big asset management firms that pay their managers huge salaries just don’t have the time to talk with hundreds of little companies in the hope that they’ll get lucky with one or two. For us, this is bread and butter. We keep knocking on doors, keep looking until we find the gems.”

Thoroughgoing company knowledge is vital in volatile Southeast Asian markets, Tan maintains. His modus operandi is to build rapport with CEOs or CFOs by asking them out to lunch or dinner and plying them with polite but probing questions about business conditions. He and Pheim’s ten other investment professionals -- five in Singapore and five in Malaysia -- also make a point of casing factories and button-holing head office executives. They check out customers and competitors too. Their aim is to get the true measure of a company by going far beyond its published financials. “You need to know the company well and understand its business to judge where it is going,” Tan points out. “I won’t invest in a stock if I don’t know the managers well and am not comfortable with their style of management.”

As a fellow entrepreneur, he can empathize with CEOs of small-cap companies, Tan maintains, presumably because he feels similar pressures and temptations. “It’s the little things you notice,” he says of the clues that he picks up on company visits: a pretentious office decor, perhaps, or a flashy sports car in the CEO’s parking slot or the big boss’s habit of talking too fast or acting impatient when he’s asked a question. “A good small-cap manager needs to be a good judge of people,” he says.

Tan grants that he sometimes misreads CEOs, passing up a company because of a gung ho boss who strikes him as recklessly aggressive and arrogant yet who somehow succeeds in driving up the stock price. “I don’t mind missing out on one or two,” says Tan, “if I can avoid getting into a few bad ones.”

How does he zero in on stocks? For a start, he doesn’t count heavily on sell-side research, which is scant or nonexistent on most small- and midcap Southeast Asian stocks. “Brokerage reports and sell-side research is important for ideas or as a secondary source,” Tan says. “But we have a strong in-house team of analysts who are our primary source.” His firm employs four analysts, who are always subject to being approached, if not poached, by larger firms because of Pheim’s reputation. Some have succumbed to the blandishments over the years, but most have stuck around for long periods.

Tan shuns companies with high leverage and weak cash flows. He prizes good growth momentum and pricing power. “I’m looking not just for low price-earnings ratios but also low price-to-book ratios and higher margins,” he says. He deems operational transparency highly important. He also prefers companies whose managers are owners with a significant equity interest. Contrary to conventional wisdom, family-run companies aren’t that bad as investments, he says, provided the family possesses a large enough stake to want to ensure that the company pays good dividends.

Nevertheless, he is adamant that Pheim not be run like a family firm, even though one of his two daughters, Tan Wai Szi, is a business development executive in the firm’s Singapore office. “Pheim is no family business,” Tan says. “I have tried to create an institution, and I’d rather not have any involvement of family or friends.”

Tan can be just as strict in defining an undervalued stock. “I ask myself, ‘Is this a stock others would eventually want to buy?’” he says. “You might think a stock selling at a P/E ratio of 6 is cheap, but it could go to a P/E of 3. Undervalued stocks can sometimes become even more undervalued. There are a lot of other factors to look at. Sometimes investors don’t understand a company or its business model.”

Worse, he adds, they’re prone to behaving irrationally. “When we see an undervalued stock go from $5 to $15, instead of asking whether it has become overvalued, we start to rationalize that still has more upside,” Tan says. “Somebody tells you it might actually go to $40, and you think you can safely get out at $35. When it crashes to $20, you’re still wondering if that was just a minor correction before a rebound.” By contrast, he says, a proper value investor “will do his homework and might get out at $15.”

Tan’s sell philosophy sounds straightforward: “I sell stocks that I believe will soon be sold by others.” He contends that most money managers vastly overestimate their ability to extricate themselves from a small-cap stock before it gets run over by a stampede. On average Pheim holds stocks for nine to 15 months. “There are some gems in my portfolio that I have held for more than seven years,” Tan says, while pointedly noting that he has “lost count” of those he has jettisoned in mere weeks or even days. “Holding on to a bad stock only prolongs the misery,” he says. Among the oldest holdings in his portfolio is Malaysian building materials and construction company WCT Engineering, which he began buying nearly nine years ago. It trades today for three times what he first paid for it (after adjusting for splits and bonus shares). Tan has taken profits along the way but is holding on to a few shares.

Seven years ago, after he noticed on his Bloomberg terminal one evening that Dialog Group had suffered a bout of heavy selling that day, Tan loaded up on the Malaysian oil and gas services company at slightly more than RM3 a share. What had sent Dialog reeling was a wider market sell-off as part of the Asian financial crisis. Tan, however, had snooped around the company and was convinced it was a sound value. “Sometimes I get a really good deal because I see a lot of selling in a stock,” he says. “The investors might just be selling because they believe some other stock is going to go up faster.”

Pheim has made tens of millions of dollars on Dialog over the years and remains one of its larger stockholders. Tan considers the company promising now because it caters to the booming oil and gas services sector. Dialog shares trade at more than RM0.50; Pheim’s cost (after taking into account bonus shares and a ten-for-one stock split) was less than RM0.10 a share.

“Tan is a very difficult man to please, but he has been a very supportive shareholder,” says Ngau Boon Teik, Dialog’s CEO and controlling shareholder. Ngau reports that Tan constantly grills him and his managers and that just when they think they’ve answered every conceivable query about the business, he comes back with another one. “He really cares about our company, and he tells us that he wants to grow with us,” says the CEO. “I don’t think he is in it just to make a quick buck on our stock.”

The most controversial -- but seemingly successful -- aspect of Tan’s investment style is his unrepentant market timing. “In Asia’s volatile markets,” he argues, “if you get your asset allocation and timing wrong, you can be in a lot of trouble. And, sure, you can never buy at the very bottom or sell at very top, but as long as you buy undervalued stocks and sell them when they are looking overvalued, you will get the timing pretty much right.” A value strategy, suggests Tan, has the serendipitous benefit of forcing a portfolio manager’s hand in timing decisions: “You have lots of money to buy at the bottom of the market and not much money to burn at the top.”

IF TAN WERE TO BE RUN OVER BY ONE OF THOSE buses he used to ride, what would become of Pheim Asset Management? Critics describe it as the quintessential one-man shop. Tan concedes that he has been the driving force behind Pheim -- he still owns 65 percent of the Singapore arm and 45 percent of the Malaysian one -- and that “I am hands-on in some ways.” However, he swears that this “doesn’t mean I don’t delegate or that without me nothing happens around here.” Half of Pheim’s ten investment professionals are chartered financial analysts.

“We are a very lean and mean organization,” Tan says. “I try to outsource anything that’s better done by others [chiefly, back-office chores]. Although we don’t pay as well as some of the large U.S. or European houses, we have a dedicated team of people who like the freedom that I give them.” In any event, the former marathoner and squash player, who still looks fit, says, “I intend to go on for ten years, maybe longer.” Still, Tan says: “I need to single out a No. 2, a successor. I have been so busy building up the company that I guess I have ignored an important element -- identifying a successor.” Within a year or two, he pledges, he will have a second-in-command in place.

Tan likes to rattle off statistics indicating how important small and medium-size enterprises are to Southeast Asian economies. “Small, innovative companies play a very important role, and without them no economy [in the region] would have real growth,” he says. “Small-cap entrepreneurs, if they are honest, hardworking, dedicated and run companies with a good business model, must be supported by investors, especially if their stock is selling at ridiculously low valuations. If fund managers don’t encourage them by investing in them, who will?”

Plenty of imitators of Pheim, that’s who.