Fubon OTC's Tzeng uses valuations to beat rivals

Ken Tzeng runs the Fubon OTC Fund by sticking to what he knows best: valuation.

Tzeng, 38, uses the training he picked up as an analyst to dissect a company's earnings, book value and other financial disclosures. His stock-picking has led Fubon's NT$4 billion (US$119 million) OTC fund to an advance of 5.1 percent this year, making it the only one of 12 small-company Taiwan funds to post a gain, according to data compiled by Bloomberg.

"We have set up earnings and book-value bands for every core holding and make adjustments accordingly," Tzeng said in an interview from his office in Taipei. He and analysts at Fubon Securities Investment Trust Co (富邦投信), Taiwan's second-largest mutual fund company, meet every Monday to review as many as 30 indicators to guide their investment decisions.

Tzeng's best performer in the first half was Powerchip Semiconductor Corp (力晶半導體), Taiwan's largest memory-chip maker, whose shares rose 61 percent. The stock closed at NT$26.40 today, down from NT$39 on April 14. The drop means Powerchip shares are trading at about 5.5 times estimated earnings -- or one-third of the average for stocks in Taiwan's Gre Tai over-the-counter index, Bloomberg data show.

"Powerchip's 12-inch wafer plant makes it Taiwan's most cost-competitive memory-chip maker, and it will be one of our long-term holdings," Tzeng said.

The Fubon OTC Fund has delivered a total return of 16.1 percent over three years, compared with a 12 percent advance for the Gre Tai index.

Tzeng's largest holdings at the end of May were Far Eastone Telecommunication Co (遠傳電信), Taiwan's No. 3 mobile-phone company; Novatek Microelectronics Corp (聯詠), a maker of integrated circuits; Springsoft Inc (思源), a developer of design-automation software; Powerchip; and AU Optronics Corp (友達光電), the world's third-biggest maker of flat-panel displays, according to data from the Securities Investment Trust and Consulting Association.

AU Optronics is a so-called main-board stock while Novatek and Springsoft are former Gre Tai stocks that have graduated to the main board's TAIEX index. The OTC Fund's rules require Tzeng to hold a minimum of 60 percent of assets in over-the-counter stocks, including companies that have joined the TAIEX, according to Fubon Securities.

Among stocks he bought and sold in the first half were brokerages such as Yuanta Core Pacific Securities Co (元大京華證券), Taiwan's largest securities firm. Yuanta's stock rose 26 percent in the first quarter, buoyed by the broader market rally.

Tzeng said he bought shares of securities firms in January when their price-to-earnings ratios were less than eight and sold them in March and April when the ratios climbed to about 10.

"It's not bad taking profits of about 20 to 30 percent from holding these shares for just two to three months," he said.

His exit proved timely: The TAIEX slumped in March as President Chen Shui-bian (陳水扁) claimed victory in a disputed election, a day after a bullet grazed his stomach in an apparent assassination attempt. After rebounding in April, the index resumed its slump.

"When shares have earned a lot for us but the valuations are getting too high, we must be quick to unload them," Tzeng said. At the same time, he sees buying opportunities after second- quarter declines of 12 percent in the TAIEX and 17 percent in the Gre Tai index.