While disruptive companies such as Facebook, Alibaba, and Apple have changed the way we communicate, entertain, pay and even invest, not many investors in the region are investing in them, says Gerard Lee, CEO of Singapore-based Lion Global Investors (LGI).
“We know how powerful these technology companies are and we even use their products and services. But for one reason or another, we do not buy these stocks. The two main reasons are they are not listed here and people do not know how to gain access to them,” he says.
“Most professionals in my line, including me, do not buy into these stocks. I find it a bit strange because we are supposed to be experts in this area. I feel that there is a mental block here for people in this region. They know that these companies and their stocks have the potential to perform well. But somehow, they do not make the link between these high-growth companies and potential returns of these stocks.”
To address this gap, LGI recently launched the LionGlobal Disruptive Innovation Fund — the first fund in the region to invest in tech companies that have been termed “disruptive innovators”. The fund house wants to give investors access to a portfolio of global disruptive stocks, says Lee.
The potential of such stocks are huge, he adds. For instance, Facebook was the fastest company on the S&P 500 Index to reach a market capitalisation of US$250 billion while Apple’s stock saw a 4,000% increase in value between 1992 and 2012.
A key feature of this passively managed fund is its low entry — the minimum investment is only S$100. It should be noted that the typical minimum investment amount for a Singapore fund is S$1,000. Lee says this is to encourage more participation from millennial and other retail investors.
“We have two objectives. The first is to target internet-savvy investors, who are generally millennials. These people are in their twenties or early thirties and have just started working, so S$1,000 is a hefty amount for them. Thus, we lowered the minimum amount to allow them to participate,” he says.
“The second objective is to encourage regular investments among investors because we feel that the disruption phenomenon is going to be here for a long time. Of course, S$100 is not a lot of money. But if they can put in S$100 every couple of months, it can accumulate and become a huge amount over time.”
Although the fund is aimed at millennials, Lee says all age groups are welcome to invest in it so that they can be exposed to high-growth innovative companies. “For us fund providers, obviously we want to tap the millennial [segment] and get them to be early adopters of our funds and hopefully be our long-term partners. But older or more affluent investors are welcome to invest as well.”
Smart beta approach
Globally, there are about 500 companies that fit this disruptive theme, says Lee. These companies are broadly classified under software innovation (e-commerce), hardware innovation (automation, mobile devices, wearables) and breakthroughs (artificial intelligence, big data analytics).
The fund only invests in companies with an established track record and not start-ups, even if they have attractive valuations. “Although there are companies that we would like to invest in — such as Uber and Airbnb — these companies are not listed, so they do not fit into our investment universe,” he says.
“From these 500 stocks, we cut them down to 100 by using the smart beta approach, rather than the traditional way of sizing a portfolio based on only market capitalisation. We want to look at various drivers of the stock price.”
LGI uses a five-factor screening process — market capitalisation, volatility, sales growth, earnings per share growth and price-to-sales ratio. These factors are equally weighted and similar to some of the other factor-based investing approaches.
“Each of these factors can be given a score of one to five, thus the maximum score is 25. Then, the scores are then weighted to determine the ranking for the stocks. Only the top 100 are chosen for the fund,” says Lee.
“Although this concept of smart beta is common in the more developed countries, it is not very common in this part of the world. Using smart beta to construct a portfolio over the traditional market-capitalisation approach is well supported by academic literature. Hence, its adoption by the market here should not be too difficult.”
The country exposure of these stocks varies depending on the outcome of the screening. Generally, says Lee, disruptive companies are based in the US, China, Japan, South Korea, Scandinavia and Israel.
“For example, the US has the FANG stocks — Facebook, Amazon, Netflix and Google. In China, there are the BAT — Baitu, Alibaba and Tencent. In South Korea, there is Samsung and in Japan, Rakuten. So these are the common names in the disruption theme that the fund will be exposed to,” he says.
Lee says those who invest in the fund should have a long-term outlook as it is not a tactical portfolio. Disruptive stocks are growth stocks, so they will have a higher beta than the overall market.
“Disruptive stocks have higher beta. If the bull market continues, the portfolio of disruptive stocks is expected to do better than the market. But if we are entering a bear market, the portfolio of stocks will probably lose more money than your typical portfolio, which consists of both old economy and new economy stocks,” he says, adding that due to regulatory restrictions, LGI is unable to give any return projections for the fund.
The fund does not have a lock-in period, so investors are free to buy and sell their investments. The fund is open to Malaysians and Singaporeans.
The beginning of a series of funds
With S$42.5 billion under management as at Dec 31 last year, LGI is one of the largest asset management companies in Southeast Asia. Lee says the LionGlobal Disruptive Fund could mark the beginning of a series of funds to be launched in the near future.
“This is our first smart beta fund, so we will see how it goes. If the outcome is good, it will give us the ability to do more. Currently, we are looking to launch an exchange-traded fund some time this year. In the last couple of years, we introduced private equity funds.”
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