Value Partners Group Limited

Incorporated in the Cayman Island with limited liability

A company listed on the Hong Kong Stock Exchange
Stock code: 806 HK

Why is it so difficult to set up and

run a fund management business?

by Dato’ Cheah Cheng Hye

Chairman and Co-Chief Investment Officer
Value Partners Group

28 November 2014

Strictly Private and Confidential

Disclaimer
This document has been prepared by Value Partners Group Limited (the "Company") solely for use at the presentation.

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About the speaker – Dato’ Cheah Cheng Hye

CHEAH Cheng Hye

Chairman & Co-Chief Investment Officer
o Dato’ CHEAH co-founded the firm in February 1993 with Mr. V-Nee YEH.
o Actively engages in all aspects of the Group’s activities, including investment research, fund
management, business and product development, as well as corporate management. He sets the
Group’s overall business and portfolio strategy. He has more than 30 years of investment experience and
is considered one of the leading practitioners of value investing in Asia and beyond.
o Dato’ CHEAH led Value Partners to a successful listing on the Main Board of the Hong Kong Stock
Exchange in 2007, the first and the only asset management company listed in Hong Kong.
o Named Co-winner of “CIO of the Year in Asia” along with Mr. Louis SO in the 2011 Best of the Best
Awards by Asia Asset Management. AsianInvestor named him one of the Top 25 Most Influential People
in Asian Hedge Funds in 2010 and one of the 25 Most Influential People in Asian Asset Management in
2009. In 2007, he was chosen by FinanceAsia as “Capital Markets Person of the Year”. In 2003, he was
voted the “Most Astute Investor” in the Asset Benchmark Survey.
o In 2013, Dato’ CHEAH was conferred the title of "Dato' " - an honorary title that recognizes exceptional
individuals - by the government in his home state of Penang, Malaysia. (The title comes with the award of
an honorary "Darjah Setia Pangkuan Negeri".) In the same year, he was appointed a member of the New
Business Committee of the Financial Services Development Council by the Hong Kong Special
Administrative Region government. He was also named an Honorary Fellow of The Hong Kong University
of Science and Technology (“HKUST”) for outstanding achievements.
o Prior to starting Value Partners, Dato’ CHEAH worked at Morgan Grenfell Group in Hong Kong, where, in
1989, he founded the Company’s Hong Kong/China equities research department and assumed the role of
Head of Research and proprietary trader. Prior to this, he was a Hong Kong-based financial journalist with
The Wall Street Journal and Far Eastern Economic Review, where he reported business and financial news
across the East and Southeast Asia markets.
o Served for nine years (1993 to 2002) as an independent non-executive director of JCG Holdings, a leading
microfinance company listed in Hong Kong (renamed from 2006 as Public Financial Holdings).

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Three key topics

1) Asset management: the competitive landscape

2) Asset management: the operational requirements
3) The most important point: A “human-being business” that
requires very special skills and abilities to survive
– sharing my experience

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The competitive landscape

 Taking Asia’s hedge fund industry as an example, it has US$147 billion in

assets managed by more than 1,300 funds.
 Four out of five hedge funds in Asia liquidate within five years of launch;
nine out of 10 fail to reach a commercial scale.
Launches & Closures of Asian hedge funds

Source: Eurekahedge, Feb 2014

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The competitive landscape

 Around 41% of funds in Asia manage US$20 million or less, and only 2%
manage more than US$1 billion1
 Fund size of about US$300m needed to be commercially sustainable
 KPMG surveyed 25 CEOs of fund companies – some predict that between
20% to 30% of asset-management companies will disappear over the next
decade2

1. Source: Eurekahedge, 2011

2. Source: “Industry Insights”, KPMG, Mar 2013
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Operational requirements

Clients pick funds based on many factors including:

 Quality of investment team and process
 Reputation of firm and decision-makers
 Governance
 Operational capability
 Risk Management
 Client Service (especially for institutions)
 Fees
 Track Record
o Awards
o Performance over cycles
o Consistency
o Peer performance
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Operational requirements

 Consultants generally require a minimum track record of three years

 Growing expenses – a recent survey says that average yearly spending on
compliance alone is at least US$700,000 for small fund managers,
US$6 million for medium-size fund managers and US$14 million for large
fund managers1
 Increasingly, clients would only deal with institutions – which means that
it is difficult for smaller firms to attract business

1. Source: The Cost of Compliance”, AIMA, MFA, KPMG

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Regulatory requirements

 Asia generally is pro-business and places like Hong Kong and Singapore
welcome fund managers – still, the requirements keep getting stricter
 In Hong Kong, need to register with SFC which lists 10 types of regulated
activities related to securities and futures. Asset management firms
generally require at least Type 4 (advising on securities) and Type 9 (asset
management) licenses
 At least two Responsible Officers
 Licensing process can take up to six months
 Each fund offered to the public must go through SFC approval process

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Now, the most important point:
The “human being” factor

Even if you are an excellent financial analyst,

this alone is insufficient to make you
a successful fund manager

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Leadership of a commercial fund management firm:
The different skills sets required

 Excellent entrepreneur
 Excellent investment manager
 Excellent in fund-raising
 Excellent in operating an on-going business

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How to find a human being who can combine
such different skills?
 The problem is each of those skills are distinct and separate skills (and
each skill requires sub-skills, such as brand-building, leadership, risk-
management and communications)
 Such skills can often contradict each other, making it difficult to find an
individual or even a team that can combine them all together.
 Just because you have the skill to analyze investments doesn’t mean you
have the killer instincts or decisiveness needed to pull the trigger as a fund
manager. Even if you are good at both, that still doesn’t mean you can
raise capital and run an investment business properly.

This is why it is so difficult to start and sustain

a large-scale fund management business

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A successful Chief Investment Officer:
Skill set required
 Originating ideas
 Research
 Decision-making
 Structuring the transaction
 Execution
 Investment maintenance
 Exit
 Macro-strategy
 Fund raising

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A successful business leader: Skill set required

 Leadership / Drive
 Vision / Entrepreneurship
 Communication
 Creating and sustaining a corporate culture
 Identifying risks and new opportunities
 Social skills / community service

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Operating a business: Skill set required

 Customer service to highest standards

 Meet expectations of customers, staff and shareholders
 Team building / staff training
 Operational excellence / forward planning
 Strong management systems / risk controls

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Creating a corporate culture:
Value Partners as example
As a Value Partners person, I pledge to:

 Be honest and straightforward

 Put my pride, not my ego, into the job

 Always strive for self-improvement

 Put clients’ interests first

 Be fair and responsible to shareholders

 Keep our workplace free from office politics

 Keep secrets, maintain confidentiality

 Uphold our reputation for creative, high-value

solutions

 Emphasize a user-friendly, cost-effective approach

 Focus on concrete results, not excessive procedure

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 Thank you!
Q&A

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