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Overpaying for a stock is one of the greatest investment risks. It can be managed by developing an intimate knowledge of every stock in the portfolio
APS’ investment philosophy is centered on investigative research, rigorous valuation and constant testing of our own investment theses. Our investment philosophy and approach have remained unchanged since APS’ founding in 1995.
Investigative Research, Beyond Bottom-Up
Asian markets have traditionally been inefficient and they are best exploited by 1) experienced local investment professionals and 2) probing research.
We conduct on-site visits; field investigations including interviews with former employees, competitors, suppliers, industry specialists and other stakeholders; and verification of information and data with independent sources.
The extensive, granular body of knowledge we collect through this approach enables us to more effectively value a stock, conduct due diligence and think independently of consensus.
During some market cycles, investors tend to price securities irrationally and incorrectly. Thus, tools such as economic forecasting and modelling cannot be used reliably to produce outperformance and reduce downside risk in the retail-dominated Asian markets. Instead, portfolio risk can be mitigated by constructing a portfolio of alpha-diversified strategies (please see our explanation of alpha groups in the Alpha Groups & Generation section ).
Our focus is on each company’s intrinsic worth, and whether the listed price reflects that worth. The key to our success over the years is to buy at inexpensive valuations and to sell when a stock’s valuation becomes overstretched compared to its fundamentals.
We adhere to a clear sell discipline and exit when: 1) prices run ahead of fundamentals; 2) initial assumptions are proven wrong; 3) there are major changes in the fundamentals of either the industry or company.
In our view, there are risks greater than volatility, such as overpaying for a security vis-à-vis its fundamentals. That is why we examine every stock inside-out before making investment decisions—an intimate understanding of a company helps us to evaluate its behaviour under a variety of circumstances such as business and economic cycles, political fluctuations, regulatory changes, structural events, management changeovers, among others.
We also focus on a relatively concentrated portfolio of high-conviction stocks, which allows us to initiate positions at reasonable valuations.
Our portfolios are also managed with liquidity risk in mind. Only a small proportion of the portfolio is exposed to illiquid stocks from time to time, and as appropriate, in order to earn an illiquidity premium.
Competitive Advantages From APS’ Investment Approach
1. Our investment decisions are based on insights that can only be gained through a disciplined and rigorously applied process. It goes beyond bottom-up research.
2. When the company’s internal or external circumstances evolve, we have sufficient facts to test and validate our investment theses and make rational decisions, without being influenced by market noise.
3. This knowledge gives us the conviction to stay invested when less-informed investors irrationally run for the exit, revise our investment theses as needed and set valuation targets.