“There is Value in Growth, which is Value Creating not Value Destroying”- Daniel Chan
It’s the beginning of 2021 and DCG Capital has established early and significant positions in Greater China from their new Hong Kong Office. I have known Daniel Chan, Founder & CEO of DCG Capital from my time at NUS Business School, where he served as a member of Board of the Student Managed Fund’s (SMF). Daniel is an icon in Singapore’s investment management industry, whose career spans nearly 40 years As of April 2020, total firm assets at DCG Capital are about U$110 million.
AV: Tell me about the evolution of DCG Capital? How are you different from many other Asia ex Japan long only funds?
Evolution of DCG Capital
DC: Having started out as an analyst and portfolio manager I have spent most of my time in my last two corporate jobs at UOB and OCBC, two of Singapore’s largest banks running their asset management business as CIO as well as CEO. It was energy sapping being an administrator as well as CIO. I felt I was missing out on the fun part, which is investing.
So, after deciding to quit Lion Global in 2010 I decided to take the plunge in 2011 and start my own little “boutique” firm to practice value investing.
I have always believed that the boutique business owner – investment management model to be a superior model for an industry like ours. Having longer term business partners cum employees not only will result in a more stable team but also better alignment of interest of all stake holders. Our personal wealth and reputations are at stake. Furthermore, a smaller collegial set up fosters a more collaborative culture of teamwork and excellence as well as a higher standard of professional integrity. .
So, DCG was established in mid-2011 with Melvin Tan and the DCG Asia Value Fund was launched in September of that year. Melvin had previously worked at Lion Global as an analyst. Both of us were passionate believers in the value investing philosophy and approach so there was a good fit. Two additional members joined the team, Alexis Tran (2011) and Tan Teck Jin (2014). .
Alexis left us in end 2018 to return to her native Vietnam after her husband decided to move back to develop a new business opportunity there. .
Melvin and TJ decided at the end of 2019 to leave the firm to pursue a new opportunity in the industry. .
We are fortunate at the same time this happen to have two seasoned accomplished investment professionals joining the team. Milton Lim and Ming-Wai Choi used to run Lockheed Martin Pension Fund’s Hong Kong outpost covering Asian markets with a particular focus on China. With them coming on board we now have a Hong Kong research base to cover this important and growing market. .
Having a Hong Kong presence is significant, enabling a more in depth and wider coverage of the enormous opportunity set we see developing in the world’s number two economy. .
AV: How do you navigate the current investing regime of Central Bank liquidity with global debt amassing to U$255 trillion, mainly coming from the US and China1? Is there a credit event in the near term?
Navigating regime of Central Bank Liquidity and global debt build-up. .
DC: Actions of Central Banks around the world particularly the Fed, ECB and Japan have resulted in a situation where interest rates remained potentially low which in turn has caused massive distortion in asset prices, credit spreads etc. Given there is hardly any inflation pressure, this is fine but should these heat up then we need to be very watchful for signs of reversal of the interest rate cycle. Central bank’s actions and policies will bear close watching.
At DCG, while we pay attention to such macro factors, we really focus on bottom up ideas and selecting those businesses which we think will be resilient under different kinds of economic conditions. We generally avoid businesses which tend to be very sensitive to interest rates and which are highly leveraged. We look for comfortable margin of safety in terms of the valuations which we are comfortable with paying up for. Many poor-quality stocks are truly priced to perfection so in a major change in the interest rate structure will be very vulnerable to devaluation pressures. So we generally avoid these names.
AV: What do you think China’s position will be post Covid-19 as global companies will bring back their supply chains domestically or diversify away from China? Will they still be viewed as the global manufacturing hub?
DC: The pandemic experience has revealed just how dependant the world is on China’s manufacturing capacity. Naturally there is a call to reduce this over dependence particularly among countries who are more wary of China’s rising power and influence.
But businesses are profit seeking and each will decide based on their own assessment of cost-benefit. With China soon to be the number one economy, corporates will need to factor in the opportunities such a vast market presents. It is a competitive world and companies compete on thin margins.
If moving out of China to less productive location means raising your costs would you want to gift that to your competitor who figured it’s still cheaper and more efficient to remain?
Which countries offer the scale, productivity, infrastructure, eco-systems that China offers? Mexico? Vietnam? Indonesia? India? There are not that many options.
So, while I believe there will be some re-location taking place, I don’t think it will be on a large scale unless governments impose huge trade barriers to force such an outcome.
AV: What are the positive aspects in investing in China in the current climate? Has the growth of ESG investing been a criteria for inclusion for companies in the portfolio?
DC: While China has come along way in the last thirty years or so it remains an underdeveloped economy in some ways. For one, its GDP per capita at ranks it somewhere around number 80 in the world. It is no more productive in an economic sense than Malaysia or Mexico.
I think it is reasonable to say that the Chinese can become as rich and productive as the average Korean or Taiwanese which will be a catch up of two times and three times respectively.
China’s urbanisation rate is also still relatively low at about 60%. The rural population is still enormous – bigger than the rest of S.E. Asia combined.
China is also under consuming and over saving relative to the rest of the world. As the middle-income segment grows bigger and wealthier there will be enormous change in consumption patterns “premiumisation” and consumer upgrade in their spending will be an enduring theme.
In terms of each year China churns out 7 million graduates of which 4.7 million are in STEM (Science, Technology, Engineering and Mathematics) more than India, United States, Russia, Iran, Indonesia and Japan totalling 4.5 million put together.
The examination system has traditionally and will continue to place a strong emphasis on such technical subjects. Combined with the strong infrastructure that China has been building up we have little doubt that the catch-up phase will happen.
Yet another interesting trait that China possess is that with its one party-in-charge system, it is able to (and has been) to plan its macro-economic policies in generational terms looking out over the next several generations’ welfare.
ESG
As responsible stewards of capital, DCG has always placed heavy emphasis on good governance for all our investments. Good governance encompasses not just responsible corporate governance but also taking care of all stakeholders, including employees, customers and also the environment. We believe that firms that do not adopt good ESG policies will not survive the long haul in a world that is clearly becoming more aware of environmental issues. So, as a general rule we avoid companies that engage in heavy polluting businesses and socially undesirable products like tobacco and gambling.
AV: In your Illustrious career, what was your biggest mistake as an investor whether it was people, investment process, risk management or prone to any behavioural biases?
DC: I have always maintained that in investing, mistakes of omission vastly outweigh mistakes of commission.
If you have bought the wrong stock and lost 100% that’s all you have lost. But if you have missed out on a stock that goes up 10 or 20 times, the opportunity lost is much much more. And over the years there have been many such stocks that I could have invested in.
The important thing is not just to have identified them but to hold them long enough and to allow the power of compounding to work its magic.
AV: DCG Capital was one of the investment managers to participate in MAS’s Singapore VCC Program. Besides fund’s operational costs efficiencies, and a single umbrella structure, what are the other benefits to DCG and how will this help the Singapore Investment Management Industry?
DC: The benefits to DCG are:
- The Singapore VCC platform will enable us to easily launch new funds and or re-domicile existing offshore funds to take advantage of cost reductions, proximity to local service providers and accord us the protection of Singapore law, including transparency and economic stability. The cost savings can be passed on to all investors.
- The benefits to Singapore’s Investment Industry: Enhance Singapore’s status as an established international financial centre by providing increased business opportunities to local service providers in the fund management industry including lawyers, accountants and corporate secretaries.