SLAM’s philosophy is that rigorous fundamental stock picking and direct company contact is vital to not be blinded in Asia. The team holds hundreds of company meetings a year. While regional equities have lagged economic growth, some optically cheap companies, based on simplistic metrics such as price to tangible book value, can be value traps. Yet, value investing principles adapted to the 21^st century remain at the core of its process. In 2021 SLAM merged its activities and teams with Hansabay, a Singapore investment firm founded by Florian Weidinger, to form a leading boutique with a strong regional presence. Weidinger is SLAM’s CEO and CIO and has over two decades’ experience in public and private market investing globally, in Asia for most of his professional life. James Morton, the original founder of SLAM, became the firm’s Chairman. He previously spent about three decades managing award-winning funds, including CIM Dividend Income and Mackenzie Cundill Recovery, and has authored several books on investing including the Pearson-Financial Times Investing with Young Guns.

The UI Hansabay Blossom fund was not rebranded after the merger; the word “Blossom” signifies auspicious abundance and is a punt on the cherry blossom flower. Lim Thiam Kon, who was at Hansabay since its founding in 2011, is a partner of SLAM and lead manager of the fund. He has about two decades’ Asian cross-asset class fund management experience, was an early investor in Vietnamese public equities, and chairs a local private healthcare firm.

Taiwan

SLAM works with a Taipei-based team of highly experienced research analysts, who carry out grassroots groundwork and channel checks in and around supply chains. They have 15+ years of equity research experience, most specializing in global technology supply chains covering both upstream and downstream sectors and across several TMT applications. They also collaborate with the wider network of SLAM offices in Singapore, Jakarta and London to feedback ideas from elsewhere in Asia, where Taiwanese companies invest extensively, including a significant China footprint from firms such as Foxconn. The textile and shipping industries also have global links. SLAM views Taiwan as a good hub and canvas for expressing some pan-Asian ideas due to good quality financial reporting and equity market liquidity.

Alpha

Nearly all the net 5% annualised returns since inception are alpha since the strategy has averaged only slightly net long, ranging between about minus 2% and plus 10% equity exposure, and is sometimes completely market neutral. Given that gross exposure is usually less than 100%, gross alpha, before fees, is into high single digits. The fee structure of 1.25% management and 12.5% performance above a 5% hurdle is competitive.

Alpha was slightly positive even in 2022, when interest rate sensitivity on bond collateral related to UCITS structuring caused the loss. The mark-to-market bond collateral losses should turn into a tailwind going forward for the next two years, adding more than 4% a year to gross returns. This is one of many hedge fund strategies that can make trading profits on top of interest on cash.

The long book is entirely 15-30 single stocks whereas the short book of 10-50 names can also include equity indices, with single equity names averaging around 30% of gross exposure. Notably, the short book has also contributed absolute returns since inception in 2019, despite Taiwan stocks rising over that period. To execute the strategy, especially with non-mainstream names, the firm must work intelligently to source inventory. The strategy is cognisant of seasonal bottlenecks. Borrow is sometimes not available around dividend dates or AGMs when there is more demand for voting shares. “Where short ideas are more thematic around an industry or sub-sector than company specific, they can be expressed through two or three names even if one is not available to borrow,” Lim points out.

Alpha generation potential was one key rationale for launching a broadly market neutral Taiwan strategy. The other reason was so that investors, and the fund managers, can sleep well in case geopolitical tensions escalate; on that question, Lim argues, “A practical long term cross straits solution will be found and the hung parliament following Taiwanese elections is supportive of the status quo”. Financially strong international counterparties, Barclays and Morgan Stanley, are used for the same reason.

Liquid stocks in tech & non-tech

The strategy finds enough liquidity in more than 60% of the nearly 1,000 stocks listed on the TWSE and does not usually invest in those listed on the junior Taipei exchange. The liquidity criterion of US$500,000 value traded per day can be met even for some smaller market capitalisation stocks, thanks to strong local participation including enthusiastic and active retail investors. “Private investors may trade based on suboptimal data – and even misinformation. We are aware of various such misalignments in Taiwan, but these have not inspired shorts because such firms’ share prices can get out of control for a substantial period of time,” points out Lim.

The strategy has sometimes traded the largest index stocks, paired against another competitor company with inferior technology and lower capital spending, but often the mega caps are so well researched that there is nothing to arbitrage. “We are more interested in looking for emerging technology and processes, linked to larger companies, which may be attractive acquisitions for larger companies. We expect to make a higher percentage return from more specific ideas on small caps,” explains Lim. One interesting example would be Wistron: a value stock that was trading at only 8 times forward PER around 4Q 2021, with a subsidiary, Wiwynn, that is a major AI beneficiary.

The strategy is also allowed to access some overseas stocks, typically listed in the US, Hong Kong, Japan or South Korea, where there is a strong link to Taiwan technology. For example, US semiconductor companies may be paired with or against Taiwanese counterparts and supply chains, as there can be technological differences or supply shortages in certain materials or processes. There has been some exposure to three of the ‘Magnificent Seven’, including a vertical pair trade owning Microsoft against a short in Taiwanese hardware makers. Some trades pair innovators against sunset laggards.

The strategy’s omniverse concept of industry supply chains means that pairs can be perceived vertically along supply chains, horizontally between competitors, or in a sense diagonally – one side of a trade may be on a vertical with another on a horizontal. “The most obvious pairs are already well researched by competitors,” observes Lim.

Technology

Technology has made up about 80% of the fund’s investment universe and returns. “Taiwan is a centre of excellence for innovation. We arbitrage upstream and downstream supply chains and industries. We are looking for generational game changers rather than shorter term cycles,” says Lim.

One winning theme, sized at about 13%, has been substrates, which was expressed through three Taiwan listed firms and one Japan listed firm, held for two years. Lim sees the complication of chips growing in an exponential not a linear fashion and in 2019 his Taiwanese colleagues recognised the growth potential of high-performance computing, AI, cloud and ADAS as demand drivers as the industry transitioned from a monolithic to a chiplet model. The on-the-ground analysts visited many companies and local associates to kick the tyres and conduct diligence. Substrates were paired against consequential bottlenecks in certain chips.

Geopolitics around restricting chip sales attracts a lot of headlines but is not a deal breaker for chipmakers. “Sanctions are important for chipmakers, but they have also been able to adapt their chip specifications to meet the rules,” says Lim.

AI is percolating into Taiwan in many more ways than Taiwanese Jensen Hung’s Nvidia. “All of the Magnificent Seven have different AI strategies, and these upstream players also filter through to enormous investment spending downstream in Taiwan. However, expectations are quite high, so we need to pick stocks carefully,” says Lim.

Non-tech

SLAM’s concept of a supply chain can be elongated into shipping, which may sometimes be the most sensitive way to play a long or short theme. The fund has been long and short of container shipping firms at different times but will rarely cut and reverse direction immediately. After exiting a position, the strategy continues to monitor the thesis development. The fund had so far mostly waited a year before revisiting past positions, but it might occasionally have to trade a position in order to size the exposure around order cycles. Industrials have also been an important contributor, while bicycle, textile and footwear industry trends often feature in SLAM’s market commentary.

Engagement

SLAM manages other mandates, including an SMA for a large institution dedicated to Southeast Asia and the firm’s flagship strategy, the value and dividend income strategy, “CIM Dividend”, which is ranked the top performer out of 253 funds in Asia-ex Japan long only, having annualized at a total return of more than 13%, including a target 6% dividend yield – which has been achieved every year since inception. There is only limited overlap with the long book of the Blossom fund as value recovery stories with dividends as high as 8% are not routinely part of the long-short strategy. However, the same lens for evaluating fundamentals, industry dynamics, and the interests of management and controlling shareholders applies.

SLAM’s high touch diligence process usually results in senior management teams of top holdings being familiar with SLAM’s investment team. “Constructivist” and “suggestivist” activism plays a larger role in the other strategies. “Any activism would tend to focus on constructive engagement and would not be too loud or aggressive. We might make suggestions around financial advice (e.g. dividends or corporate actions), sustainability or governance as well as improving investor relations, presentations and communications,” says Lim. Second and third generation entrepreneurs and modern senior management may have more enthusiasm and alignment for shareholder returns and corporate governance than historically, where listing motives may have been primarily for prestige. SLAM closely monitors corporate governance initiatives in South Korea, Japan, and elsewhere.

In common with many Asian equity markets, Taiwan is home to holding companies trading at discounts, which may narrow over time or given the right incentives. It is an area SLAM is looking into, potentially collaborating with other investors as it did in Korea, though not yet in Taiwan.

ESG and green tech

SLAM has full time staff dedicated to ESG, with a few team members having a background in environmental sciences, including Weidinger who holds a master’s degree from Stanford University’s School of Earth Sciences, incidentally also the chairman’s alma mater. Predecessor firm Hansabay was one of the first UNPRI signatories in Singapore, and SLAM became a signatory after the merger. SLAM has experience serving investors who have high standards in ESG, including a large sovereign wealth fund. The team started with exclusions in defence, tobacco, and casinos early in its history, and formalised policies today have evolved into a focus on forward-looking transition and engagement.

ESG is also bringing positive opportunities in green technology. “Taiwan firms are developing ways to address waste and recycling. We expect great discoveries over the next 3 to 5 years,” says Lim. These sorts of innovators might well do an IPO in the US or Europe, whereas in Taiwan they tend to be hidden inside divisions of larger firms and are not easy to find, but there are enough opportunities in Taiwan, and elsewhere in Asia, for SLAM to launch a version of its high dividend strategy that reports under SFDR article 9. The existing dividend fund reports under SFDR article 8 while the Taiwan fund is under article 6. “The newly launched article 9 fund will also have more freedom to invest in firms with a lower dividend yield requirement than the flagship fund’s 6% target but a focus on measurable contribution to the UN Sustainable Development Goals (SDGs). The streamlined SLAM research process works out which companies are the best fit for different funds and mandates,” says Lim. SLAM is working with Germany’s LAIQON to distribute the article 9 fund.

The UI Hansabay Blossom UCITS sits on the Universal Investments UI Umbrella Fund in Germany. It is also listed on Euroclear FundsPlace (formerly MFEX by Euroclear).

More than 80% of SLAM’s assets come from Europe, while US and Asian investors make up the rest. SLAM seeks investors whose thinking is well aligned with their own. “We are very thankful to have investors taking a long-term view on the journey we took together, and who often invest more after a drawdown,” says Lim. Firm assets are circa US$1 billion. The Taiwan strategy has plenty of capacity left while the article 8 high dividend fund might review capacity at US$700 – 800 million.

The investing marathon

“One of my mentors said investing is a marathon, not a race, and I am constructive on the longer-term outlook for the Taiwan strategy. Taiwan is a land of innovation. Technology will always create leaders and laggards, ideally suited to a market neutral or long/short strategy. We will find the next big thing and pair it with what is obsolete,” says Lim.

“The gross exposure is kept low, below 100%, for the sake of mental sanity, concentration and confidence,” he reveals. Even if longs and shorts both move in the wrong way, the manager can remain calm, collected and contemplative.

Lim was one of the first to invest in Vietnam during 2005 to 2006, and although he avoided heavy losses under his mentor’s guidance, it was a formative experience because, “The bubble burst after very high valuations, and managers benchmarked against indices had been pressured to buy at the top. The key lessons are do not be too aggressive, play a longer game and have the right investors behind you,” says Lim.