A quiet approach to investment
Bruce Wonil Lee, chief executive of Allianz Global Investors Korea, says that what Korea’s stock markets need is quiet, watchdog investors that can prevent management from making decisions that may later harm small investors.
However, the 50-year-old warned that even watchdog investors could turn into activist shareholders if management refuses to listen to its investors.
Lee talked with the JoongAng Daily after the firm’s Value Creation Long-Term Equity Fund, which invests in firms with poor corporate governance and undervalued shares, posted as of Wednesday the highest returns among socially responsible investment funds in Korea that are three years or older. The fund, which manages assets worth 138.3 billion won ($111 million), has recorded an accumulated return of 62 percent since August 2006.
Q. Tell us how your fund differs from other SRI funds in other companies.
A. Other companies usually invest in firms that already have good corporate governance and valuation, and rarely use their stakes to actively influence management decisions. But we seek to invest in companies with undervalued shares and poor corporate governance. We analyze the financial conditions and business practices of our potential target company and then make suggestions for boosting business and increasing share prices. Also, we buy a stake that is large enough to actually have an influence, which is at least five to 15 percent. Even the most reluctant executives will sit down with us if we have a stake of that size.
In what ways do you work to influence a company’s management?
We try to find the reason why a firm’s share price is undervalued and make suggestions, for instance, discouraging investments that will destroy the company’s value or encouraging investments in promising areas. If the company management has a large amount of Treasury stocks, we try to buy them in exchange for an ample cash payment so the firm can use the money to make investments. Or we press companies to increase their cash dividends if they are holding an ample reserve of cash.
We urge them to sell idle properties, refocus their business or dump unprofitable businesses, and often arrange mergers and acquisitions with industry peers that can create business synergy.
We once bought 8-percent Treasury shares from Fnc Kolon [a textile firm] to help it improve its cash flow and repay its debt. We made it sell unprofitable clothing lines, sent our fund manager to board meetings and arranged for Kolon Industries to acquire a controlling stake in FnC Kolon in 2008. The share price of FnC Kolon was about 3,000 won when we started investing in 2005, but it surged to 18,000 won after the merger plan was revealed.
Are you an activist shareholder then?
We pursue “relational investment,” preferring long-term investments of more than two or three years, and seek quiet, behind-the-scene communication with management. As with Carl Icahn’s takeover bid for KT&G in 2006, many shareholder activists announce their presence in the market loudly, drum up share prices overnight and dump their shares soon after to reap quick profits. But we prioritize mutual efforts and dialogue with the management rather than blackmailing them and pushing up the share price in the short term.
In Korea, small investors often have an 80 to 90 percent stake in a company, while founding family members and owners have only a 10 percent or smaller stake. But look what happened to Samsung Group when the owner family decided to open an automobile unit. The auto business collapsed during the 1997-98 financial crisis and other Samsung subsidiaries ended up paying a fortune to repay the auto division’s debts before it was eventually sold to Renault. Meanwhile, it was their shareholders who were the victims.
We need a credible threat that can provide checks and balances for such companies before they make ill-advised decisions that may later harm the small investor. Credible threats are still hard to find in the Korean market. We want to be such a market force.
We can also turn into a stronger, tough-talking activist investor if management lies or breaks promises, so it really falls to management to determine whether we can be relational or activist investors.
How do the companies usually respond?
Not well. We experience some kind of conflict with about 50 percent of the companies we invest in or make suggestions to. Sometimes we are able to quietly collect enough stakes before putting pressure on the management. But such aggressive tactics don’t really work here given Korea’s traditional mentality, and declaring a public proxy fight in the market sometimes hurts the company’s share valuation, so we try to avoid that.
We once asked Kosdaq-listed Phicom [a semiconductor parts maker] if it wanted to sell some of its Treasury stocks to us so we could provide some cash to the firm and help improve its corporate governance and earnings. In return, we wanted the company to appoint a new outside director and auditor. But the CEO flatly refused all these requests, so we gave up the investment plan. Now the firm has deteriorated and it has recently been taken over. Its share price, which was about 8,000 won when we made the offer in 2006, fell to around 3,000 won when it was bought.
By Jung Ha-won [hawon@joongang.co.kr]
with the Korea JoongAng Daily
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