Diaries of a fund manager: Jack Hsiao on running a multi-billion pound investment giant
As 2023 gets under way, the spotlight is firmly on the City and on its fund managers. What will be their next move? How and where do they find inflation-busting assets? Are they opting for more risk or playing it safe?
City A.M. checked in with fund manager Jack Hsiao, he is a managing director and a member of the Investment Committee at Weiss Korea Opportunity Fund.
He oversees all strategies in Asia including investments across preferred shares, holding companies, bonds, distressed, value equities and other instruments. He has a bachelor degree in economics from Harvard.
Tell me more about Andrew Weiss,
Weiss Asset Management was founded by Dr Andrew Weiss. Andrew is an academic economist. Prior to setting up WAM he was a professor of economics at Columbia University and Boston University. Andrew has always been interested in economic anomalies—that is, economic situations that shouldn’t exist at all, or seldom persist, in accordance with standard economic models. For instance, currently Hyundai Motor Group’s preference shares generally trade at prices approximately 50 per cent lower than the corresponding common shares yet they have the same economic entitlements, and the same dividends, as the common shares. This is both a striking economic anomaly and a potentially interesting opportunity for a value investor.
Some funds, including those managed by Weiss, invest in South Korean preference shares – can you explain to me what exactly South Korean preference shares are?
Most Korean preference shares are essentially non-voting common shares: they are generally entitled to the same economic entitlements as the voting common shares plus they receive an additional nominal fixed payment. To be clear, that means these preference shares also receive the same dividend payment amount as the common shares. Because they trade at a discount but receive the same economics, many preference shares receive higher dividend yields and lower price-to-earnings ratios than the common shares.
“The name “preference shares” is a something of a misnomer—these shares are treated largely the same as the common shares when it comes to cashflow priority; they simply lack the voting rights held by common shares.”Jack Hsiao
Many large companies in Korea, like Samsung Electronics, LG Electronics, and Hyundai Motor Group issue preference shares. These three—and many others—are currently trading at discounts to their corresponding common shares. Investors who are interested in creating exposure to these companies, Korea or Asia more generally are currently able to replicate a meaningful portion of Korean market exposure via preference shares at a discount to the respective common shares.
Will Russia’s invasion of Ukraine have an impact on the South Korean economy and funds that invest in the South Korean economy?
The accumulating international sanctions against Russia will impact the global supply of energy, raw materials, and exports into Russia generally. As a major global exporter, Korea is not immune to these effects, but we don’t believe its economy has disproportionate exposure to the conflict in Europe. Consequently, we expect some decrease in demand of Korean exports such as mobile phones, as sanctions will prevent Korea from selling into Russia, and we expect temporary cost increases on raw material inputs as well.
Could you describe South Korea as a safe haven from the turbulence currently occurring in Western markets?
Relative to peers in developing and developed markets, South Korea has fared very well through the Covid-19 pandemic. So far South Korea has experienced significantly fewer cases and deaths than G7 nations, and its response seems to have resulted in smaller economic declines and a faster economic recovery than other developed countries, recording an estimated GDP contraction of -0.09 per cent in 2020 and growth of 4.0 per cent in 2021 and an estimated 3.1 per cent growth for 2022. But, South Korea is an export-driven economy—and exports reached a record high in 2021—so the country’s continued success will in large part depend on the health of its trading partners, the largest of which, by a large margin, is China.
Finally, what is attractive about South Korea for London based investors?
South Korea is one of the world’s most innovative countries. It has ranked at the top of various global innovation indices for several years. It also ranks in the top 10 globally as measured by GDP and exports. South Korean companies are also critical in the supply chains of many new technologies; they are some of the largest suppliers of battery cells to the electric vehicle market and they are the single largest exporter of memory chips globally.
Yet South Korea trades at very low valuation multiples as compared against developed and developing market peers, so South Korea appears cheap. And that’s for the common shares. Preference share investors have the opportunity to participate at a further discount, making South Korea an even more attractive option