In his view, beating Hong Kong’s stock market by such a wide margin has only been possible because of the city’s weak corporate governance and lax regulatory oversight
By Sam Mamudi, Benjamin Robertson & Kana Nishizawa / BLOOMBERG
Most great stock pickers do all they can to preserve their competitive edge. David Webb is trying to make his disappear.
The former Barclays plc banker isn’t opposed to making money per se. After earning about 20% a year from his personal investments in Hong Kong shares since 1995 — more than double gains in the city’s benchmark index — he seems happy to have amassed a fortune of at least US$170 million (RM703.8 million).
But Webb finds the source of his outperformance troubling. In his view, beating Hong Kong’s stock market by such a wide margin has only been possible because of the city’s weak corporate governance and lax regulatory oversight.
While Hong Kong ranks favourably in international surveys of corruption and the ease of doing business, a spate of corporate scandals and wild small-cap stock swings have rocked the city’s equity market in recent years. The benchmark Hang Seng Index is valued at less than 10 times its companies’ reported earnings, one of the lowest levels worldwide.
“Think of me as an expert mechanic, walking around a second-hand car lot in which there are no warranties, and all of them are discounted for the risk of being lemons,” Webb explained in a recent speech at the University of Hong Kong.
By avoiding most of the lemons most of the time “and getting a substantial discount on good companies, I have been able to outperform”.
Webb wants to help the investing public steer clear of Hong Kong’s lemons, too. Over the past 20 months, he has advised readers of his widely followed website to avoid more than 75 of the city’s publicly traded companies — several of which subsequently became targets of the largest-ever raid by Hong Kong’s securities regulator.
Stocks on his “not to own’’ lists have lost US$16 billion of their value since he warned against buying them.
Webb said he doesn’t profit from any of this work, which takes up about half his time. Now 53 and comfortably rich, he’s OK with giving away his research — even if doing so ends his run as one of the world’s best stock pickers.
“I don’t want to reach the end of my life and say, ‘I was a really good investor, that was fun, but I didn’t advance the human condition,’” he said in an interview at his home office in Hong Kong’s Mid-Levels district, where he works until 2am most nights poring through financial statements and other corporate disclosures.
His attempts to clean up Hong Kong’s stock market trace back to 1998, when he decided to quit working life at age 33 to manage his own money. Most of his reform efforts since then have revolved around Webb-site.com, a forum for his views on regulation, corporate developments and other market news. The ad-free site is required reading in Hong Kong investing circles, despite a layout that hasn’t changed since the dial-up age (Webb’s kids have lobbied for an update, to no avail).
Webb, who was sent by Barclays to Hong Kong from London in 1991, has also pushed for change behind the scenes. By his own tally, he has sent more than 1,000 letters to Hong Kong Exchanges & Clearing Ltd (HKEX) and the Securities and Futures Commission (SFC) on topics ranging from company disclosure lapses to trading rules. When he served as an independent director of Hong Kong’s stock exchange operator from 2003 to 2008, board meetings lasted at least an hour longer than usual, said Oscar Wong, a former director who sat next to Webb at the monthly gatherings.
“He would pry into every aspect of the exchange,” Wong said, adding that he generally supported Webb’s positions. “He raised a lot of topics of public interest.”
Spokesmen for the SFC and HKEX declined to comment on Webb.
Webb has his fair share of detractors. He has often been too quick to dismiss the viewpoints of Hong Kong’s local brokerage community, said Choi Chen Po-sum, a vice chairman of the Hong Kong stock exchange in the 1990s who’s now chairman of National Resources Securities Ltd.
An ultimately successful campaign to end stock trading-fee minimums in the mid 2000s spurred some in the local press to label him an agent of foreign hedge funds, an allegation he laughs off.
Yet, even his critics admit that Webb’s an unusually astute investor. His publicly disclosed stock holdings — which likely understate his total wealth — have swelled to about US$170 million from US$30 million in 2003, when Hong Kong’s exchange started publishing the data.
Webb estimates his annualised gains since 1995 at about 20%, versus an 8.4% total return for the Hang Seng Index. While he declined a Bloomberg News request to view his trading records, Hong Kong market veterans including CMB International Securities Ltd strategist Daniel So and Accudo Capital Ltd CEO Manuel Schlabbers have said that his stated returns are plausible.
Here’s how Webb describes the basics of his investment strategy:
• Owns about 35 stocks at a time, with an average holding period of “five-plus” years.
• Long only, never short.
• Prefers large stakes in small companies and isn’t afraid to take an activist role: “If you are going to be a minority shareholder, it’s better to be a big one”.
• Doesn’t use leverage.
• Looks for businesses that are well-governed and undervalued.
• Reads the regulatory filings — almost all of them.
• Avoids large caps.
• Refuses to manage outside money: “It’s a lot of hassle”.
The reports on companies to avoid are a byproduct of his stock-picking process. “I am looking for good companies, but when you do that, you find an awful lot of rubbish,” he said.
“Things like the Enigma Network pop out.”
That’s the name Webb coined for the group of 50 Hong Kong companies he told investors “not to own” in May 2017. Six weeks after he alleged that the stocks were entwined in a complex web of cross-shareholdings that had pushed their valuations to unsustainable levels, 38 of them plunged suddenly, some by more than 90%.
Hong Kong law enforcement officials and the SFC have since conducted 20 search operations, seized more than 4,000 items of evidence and arrested at least three senior executives with ties to the companies, according to a person familiar with matter who asked not to be named because the details aren’t public. The SFC is preparing to file charges this year.
The prescience of the Enigma Network warning has only increased Webb’s influence. In October, his research on companies linked to China Huarong Asset Management Co, a scandal-plagued bad-loan manager, sent several stocks tumbling by about 10%. In mid-November, he triggered a US$228 million sell-off after highlighting shares at risk of trading suspensions because of what he called a misguided Hong Kong stock exchange proposal to change its listing rules.
While Webb doubts that Hong Kong will reform its markets any time soon, he says the benefits would be enormous: Higher equity valuations, more public companies and a lower cost of capital for businesses across the economy.
His portfolio would also get a one-time boost as Hong Kong’s lemon discount disappeared.
Finding mispriced stocks would become much harder afterward, but Webb could live with that.
“There is something more to life than just making money,” he said.