Idea Brunch with Desmond Kinch of Overseas Asset Management
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Desmond Kinch!
Desmond is the founder of Overseas Asset Management (Cayman) Ltd (OAM), a Cayman-based boutique investment manager. Since inception in 1998, Desmond has managed OAM Asian Recovery Fund, which invests in open-ended funds managed by boutique investment managers in Asia, closed-end funds trading at a discount to NAV that invest in the region, and listed equities trading a significant discount to intrinsic value. In late 2002, OAM also launched OAM European Value Fund which invests in listed European companies, closed-end funds and family-controlled investment holding companies which he managed until 2023, but with which he remains deeply involved. Both OAM Asian Recovery Fund and OAM European Value Fund have compounded at around 11% per annum in US dollars over just over 27 years and 23 years, respectively, with their NAV/share increasing roughly 18x and 11x since inception. Notably, in light of empirical studies showing that roughly 90% of fund managers fail to beat their comparable passive ETF or benchmark over a decade, both funds are ahead of the returns of their comparable ETFs, net of withholding tax on dividends, in each of the first two decades this century and on track to do so again this decade.
Desmond, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Overseas Asset Management?
My finance professor at university, Paul Fenton, sparked my interest in investment analysis. He was unusual in that he founded and ran an investment business in Boston which he sold in the 1970s before switching to academia. Apart from being a finance professor, he had several investment consultancy contracts with UK and European institutions, principally with respect to their US and Canadian equity investments. In my final semester, he was asked by one of his UK institutional clients if he could recommend a student for them to interview for an analytical role in their investment department. That led to me working in London for 2 ½ years, learning investment analysis of UK equities from a very talented team at Clerical Medical.
In the summer of 1986, I visited Cayman and whilst there, a member of senior management at probably the leading trust company in Cayman at the time said that they were looking for someone like me in their investment department. This led to a short interview and a job offer which I initially declined. I am originally from Barbados and although I was educated from the age of 11 in England and Canada, the cold grey winters in London were not exactly nirvana so I subsequently accepted the job offer in Cayman at the end of 1986 and left London. The job turned out to be intellectually unfulfilling and I only spent a year there. Paul Fenton came to the rescue again and I was employed as a roving analyst by one of the earliest hedge funds for which Paul was a consultant. I was allowed to remain based in Cayman but travelled extensively. That role taught me a lot, particularly in analyzing smaller companies in developed markets and larger companies in emerging markets, neither of which had much, if any, analytical coverage at the time. However, I realized that “living out of a suitcase” was not sustainable.
In 1989, I took the bold move of setting up OAM and received a licence to do so days before my 27th birthday. I looked about 19 at the time so as you can imagine, it was hard raising money. After 3 years, OAM had US$5 million under management. My naïve self-confidence that I could do a much better job of managing equity investment portfolios than the incumbent offerings at that time in Cayman by bank and trust companies was what got me started and kept me going.
Can you please tell us about your research process and how you construct your portfolios?
We do not have a formal or structured investment process and no checklist of questions to ask. Our process is driven more by intellectual curiosity and pulling on strings and seeing where that leads. Having said that, once we discover an area of market inefficiency, we tend to look for further opportunities in that area.
Closed-end funds are one example. In the early 1990s through the early 2000s, there were incredible opportunities in closed-end funds, many of which were not listed but which traded through market makers who posted bid/offer spreads which as we liked to say, you could “drive a truck through”. The market makers were based in London and the funds were generally incorporated in Cayman, Jersey or Guernsey. Our first investment in this sector was in Five Arrows Chile Fund, which was managed by a Rothschild affiliate in Chile, BICE. The Chilean market was trading at about 5x earnings at the time and we bought shares in this fund at a 45% discount to NAV. It was one of our first big winners. Others followed. There was Oryx Fund managed by Blakeney Investors in London which invested in Oman. The Oman market was trading at 10x earnings and a 6% dividend yield but we bought a huge chunk of Oryx Fund at a 40% discount to NAV.
Many of these funds had open-ending or wind-up provisions which created a built-in catalyst for the discount to NAV to narrow or disappear without us having to agitate. In about 2000, I found a closed-end fund listed in Osaka called Asia High Yield Bond Fund which was managed by HSBC and sold to Japanese retail investors. It invested in USD investment grade bonds but the shares traded in JPY. When I found it, this fund was trading at a 55% discount to NAV, and it had an open-ending or wind-up vote in a couple of years. We bought shares daily through a trusted broker in London (with whom we still do business) and were able to invest about $10 million for clients before the discount narrowed significantly. I asked the broker to promise me that he would not share this idea with any of his clients if we gave him exclusivity on the brokerage to buy these shares. Then, we found another similar fund, also listed on Osaka, called Asia Bond & Currency Fund, this time at a 45% discount. It was managed by Jardine Fleming and it too had an open-ending or wind-up vote in a couple of years. I remember going to see HSBC and Jardines in Hong Kong to verify my interpretation of the prospectus and Memorandum & Articles of Association as it seemed too good to be true. We made about $20 million or 100% return for our clients within about 2 years in these two low risk investments during what was a pretty bad bear market. Neither closed-end fund was held by OAM Asian Recovery Fund as it invested in equities, not bonds, but our clients benefited through their segregated accounts.
At the time, and for the first 10+ years, we managed segregated accounts for clients and the Asian and European funds were only launched at the end of 1998 and 2002 respectively because prospective clients wanted to see an audited track record. The funds also simplified our admin processes as OAM grew.
The two funds have a more structured approach than our earlier days. The Asian fund invests in three segments, the largest being funds managed by boutique fund managers who we consider exceptional in their specific area of expertise. We focus on managers who have deep knowledge and understanding of companies serving the Asian consumer as we think this is where the most durable moats can be found, and it seems highly likely that consumer spending as a share of GDP in the region is likely to grow over time. With a double layer of fees, it is difficult for what is in large part a fund of funds to outperform its benchmark so we mitigate this by backing boutique managers early and generally get favorable terms as founding investors. The other two segments in which our Asian fund invests are closed-end funds trading at a discount to NAV or listed companies that we think are decent businesses and well-run which are trading at or below our estimate of liquidation value. In terms of structure and risk control, OAM Asian Recovery Fund has a limit of investing no more than 40% in each of 3 geographic regions: Greater China, consisting of China, Hong Kong and Taiwan; the Indian sub-continent which is almost entirely composed of India in our case; and ASEAN and other, namely Korea. This discipline, though sometimes restrictive, keeps the fund well diversified as geopolitical risks are undoubtedly higher now than even 5 years ago and we have no way of handicapping this risk.
The European fund, since Day 1, has segmented its portfolio into market leaders and consolidators; deep value; family-controlled investment holding companies; and closed-end funds and investment trusts. There are factors we look at such as insider buying, alignment of interest, corporate governance, withholding tax rates on dividends or other tax considerations, barriers to entry, pricing power, quality of management, and many other factors than any good analyst will consider. We look in places where market inefficiency is most likely to arise such as spin-offs, companies with no or little analytical coverage, businesses which are listed in one market but do most or all their business in another market, companies with dual classes of shares, and so on. A few examples of this are Standard Chartered and Wilh Wilhelmsen.
Standard Chartered is listed primarily in London but does most of its business in Asia. It is led by Bill Winters who first came to our attention in Gillian Tett’s book in 2009, “Fool’s Gold”. We think he is a first-class banker and leader. We were able to buy Standard Chartered at about half book value and wait while Bill Winters turned around what is an excellent banking franchise. The reports that I had from clients and people I met in Asia was that he was doing an excellent job. This is now our European fund’s second largest holding, even after trimming the holding.
Wilh Wilhelmsen is our largest holding. The Wilhelmsen family is a multi-generational Norwegian shipping family with an impressive track record. Yet we were able to invest in their listed family investment holding company at a nearly 60% discount to NAV, and even today, the discount remains at around 40%. Our longstanding investment in Wilh Wilhelmsen led us to invest in three Norwegian companies operating in the car carrier business, starting with Wallenius Wilhelmsen during the depths of COVID. It was trading at 0.15x book value and we determined they were very unlikely to go bust and that there was likely to be a shortage of car carriers in a few years, which turned out to be the case. We sold the last of these investments late last year and generated an IRR on the three investments as a package of over 100% per annum. Whilst we have trimmed our shareholding in Wilh Wilhelmsen, we still think it is undervalued and owns an attractive collection of assets.
In your January 2026 Chairman’s statements for both OAM funds, you mentioned that nearly 30% of each fund’s shares are owned by OAM’s directors, employees and their spouses. Has this large insider alignment in your funds always existed? What are some other ways you differ from traditional asset managers?
Whatever money I had when I started OAM, I used to buy a condo and fund OAM’s start-up. When OAM Asian Recovery Fund was launched in 1998, I put all my accumulated savings into the fund and added to my investment in this fund and OAM European Value Fund over the past 27 years. Our non-executive directors and most of OAM’s employees have also invested a significant portion of their net worth in our funds. One of the first things we look at when considering an investment is incentives and alignment of interests. We think it is telling that directors and employees have chosen to invest their own savings in our funds.
I think OAM is probably unusual in that we have low client turnover, low employee turnover and low portfolio turnover. Our average client relationship is probably 15-20 years. We only have 5 employees and 3 of us have been here for 16,21 and 36 years. The average holding period for our investments in both funds is probably approaching 10 years. It is unusual for anything close to 20% of our portfolio to turnover during any year. These factors allow us to take a long-term perspective when making investment decisions. Studies suggest that this is a key factor in determining which of the few investment managers add value after fees and expenses over a decade or more. Apart from the likes Berkshire Hathaway and endowments which have the luxury of a pool of captive assets, we think owner-led boutique investment managers are the most likely to add value within an open-ended investment structure.
International markets have historically underperformed the U.S. stock market. Do you think this will continue? Why is now a good time to invest in Europe or Asia?
For about 15 years until the end of 2024, US equities were the only game in town. US equities peaked then at around 70% of the MSCI World index, a proportion we do not expect to see for a long time, if ever again. The gap between equity valuations in the US and Asia, Europe and emerging markets was close to the most extreme that we have seen in my more than 40-year career. Moreover, value stocks and smaller companies in these markets were at an even greater discount. Finally, the US dollar was very expensive against virtually every other currency in the world. We travel a lot and could see this on the ground in terms of purchasing power parity. US dollar strength was driven by massive capital flows to the US. From 2007, the net international investment position of the US widened from -10% to around -90% of GDP today. We expect this to reverse as capital flows the other way. If we are right, this should cause the US dollar to continue to weaken and non-US equities to outperform US equities for many years, though obviously not in a straight line.
An important point to consider is that equity returns are driven by EPS growth, the dividend yield net of withholding tax, and P/E re/de-rating. For non-US equity returns measured in US dollars, there is a fourth factor, currency re/de-valuation. For Asian and European equities, certainly as far as our funds are concerned, both currency devaluation and P/E derating were headwinds to our funds’ returns from 2014-24. This changed last year and we expect tailwinds from both factors over the next 5-10 years. P/Es and currencies move in long cycles and we think we are much nearer the beginning than the end of the upcycle for these two factors vis a vis our funds.
Another factor to consider is that US equities are very expensive on every measure we look at by historical standards whilst most equity markets outside the US are still reasonably priced, even after last year’s strong returns. Value still looks cheap relative to growth on a historic basis while small looks cheap versus large in terms of factors on a historic basis. This, and the record high concentration of the US equity market have no doubt been driven by the increasing share of passive investing versus active. We avoid crowded trades and seek overlooked investments. US equities now comprise a record 45% of US household assets. In contrast, domestic equities comprise around 5-10% of household assets in the UK & Europe and Asia. This share is starting to increase from a low base. Foreign investors also have low exposure to UK & European and Asian equities. Until about 18 months ago, China was deemed uninvestible, and even after the strong run in Hong Kong & Chinese equities, foreign money is only now starting to trickle in to their stock markets.
The fundraising environment for Asia ex Japan equity managers and European value managers is very difficult, and as a result, we are seeing exceptional terms being offered to founding investors like us in new Asian fund launches by seasoned investment managers. An interesting anecdote worth relaying is that my colleague, Camilla, and I were invited to and attended a value investing symposium in Europe this past summer which served as a forum for investment managers to exchange and pitch investment ideas. Almost every idea was a US company and a couple of the ideas pitched were Costco on 50x earnings and Tesla on 200x earnings (maybe more). This, and other similar examples, suggest to us that everyone is on one side of the boat, and we do not want to be on that side.
In the OAM Asian Recovery Fund, part of what you do is select funds run by boutique investment managers in the region. What qualities do you look for when allocating to managers in Asia? What does your diligence process look like?
We need to understand the investment process and be able to identify the edge a manager possesses. Alignment of interest is also paramount. The manager(s) needs to have a high proportion of his or her net worth invested in the fund. We insist on a strong bottom-up process where the manager can demonstrate that they know the business in which they have invested better than virtually anyone else. We also look for managers who engage constructively with senior management to improve capital allocation when necessary, while focusing in the first instance on strong operational management. We avoid managers who have a significant exposure to commodity-type businesses. Some kind of moat that gives the businesses pricing power is important. Most of these businesses are consumer facing and as mentioned, we think consumer businesses in Asia have a tailwind that from rising consumption as a proportion of GDP in what are amongst the fastest growing, most dynamic economies in the world. Finally, we pay close attention to management fees and fund expenses and have passed at many seemingly attractive funds where we think the fee structure is too high.
You say that OAM Asian Recovery Fund also invests in listed equities in Asia. Can you give us an example of such an investment and explain your investment thesis?
A good example is COSCO Shipping International (Hong Kong: 0517 — HKD 10.5 billion). We started buying shares in 2014 at below HK$3.00. The company had net cash of HK$4.00/share. It made money every year in the previous ten years. The company paid a dividend, not as high as we wanted, and it is a capital-light services business so there was no need in our view for them to hold that much cash. It is majority owned by COSCO, the large Chinese state-owned shipping company so we knew that they would do exactly what they wanted. In 2019, the share price dropped to around HK$2.00 and we bought a lot more shares on the way down, accumulating a stake equivalent to more than 2% of the free float. That year, I started to engage with the company when I visited Hong Kong and tried to persuade them to do three things: repurchase and cancel shares, move to a 100% dividend payout ratio, and put in place a share option scheme to incentivize senior management. We also wrote to the Board of Directors of COSCO. It took a while, but all three things have since happened. In the interim, we collected handsome dividends, all of which flowed to us because there is no withholding tax on Hong Kong dividends, and the company’s share price is now around HK$7.00. This shows the importance of both patience and constructive engagement.
In 2025, we think the company will generate close to HK$0.50 in operating after-tax earnings (ex interest income) per share and they still have around HK$4.00/share in net cash. We think the company’s intrinsic value is roughly HK$10.00 so it remains undervalued but without any remaining visible catalysts for this to be realized. We sold a big chunk of our holding, but still own shares. The reason for the sales were because our Greater China exposure hit our 40% limit and because we found two other opportunities that we felt had greater upside. One was Mandarin Oriental where we made over 100% return in less than a year which was taken private by Jardine Matheson before we had a chance to build a proper holding. Rather than give up on the investment in what we felt was a decent and massively undervalued business, we bought more shares and have so far generated a high teens IRR on our investment.
After more than 40 years of investing internationally and allocating capital, who are some other investors or operators you admire most?
My three heroes in the investment business are Warren Buffett, Sir John Templeton and Jeremy Grantham. There are numerous reasons for this admiration, but one worth citing is that they were naturally frugal and lived relatively modest lives, living well below their means and remaining grounded. Whilst they were frugal in this sense, they treated others generously, gave away a lot of money, and shared their knowledge with others.
Amongst Asian managers, I have known Cheah Cheng Hye, Richard Lawrence and Claire Barnes for at least 25 years. They are all brilliant investors and wonderful individuals who I look forward to seeing whenever I am in Asia. There are other managers who I have known for 10-25 years, such as James Hay who you recently interviewed, that I think can emulate the track records of these brilliant investors and we hope to continue joining them for the ride.