Quarterly Letter from CIO (VIP-IC), Q1 2022

Dear Sponsors, Board of Advisors and Members,

2022 has been off to a rocky start. We continue to fight new variants of COVID-19, gradually learning to adapt to transitions between different levels of COVID restrictions. As I write this letter from my dorm room in Beijing, my university has just tightened COVID prevention measures, ramping up testing and imposing a school-wide lock-down.

As cliché as it sounds, being in the middle an ongoing pandemic really does make you count your blessings. I’m able to live comfortably and focus on my education without worrying about having access to basic supplies. I get to see and interact with my professors and friends face-to-face in the classroom, and I get to admire the beautiful spring scenery that’s swept across the campus. Even as instances of failures in governments and healthcare systems flood my news feed, I see and hear stories of how some victims of the disease have been taken care of, as well as the collective resilience shown by communities here and back home. Our club is still able to meet over Zoom on Sunday nights, hear from passionate and experienced speakers and manage our portfolios diligently wherever we are based.

As young investors, we learn by doing, strengthening our own skills and gaining deeper insight into the topics that interest us. We learn from our peers and investment professionals, bounce ideas off each other but ultimately hone our own judgement and develop our unique intuition. To love investing is synonymous with loving life: to be in awe of feel passion and excitement about good companies that make our world better and create long-lasting value. And just as we continuously construct and refine our own life philosophies, we bring the same level of enthusiasm to the process of investing capital into ideas we deem worthy. The sense of agency that investing gives me is one of the most uplifting and empowering things I have ever felt, and I am certain that many of our members share such sentiments.

To our members, our Board of Advisors and everyone who invests their time and efforts in our Club: Thank you for making all of this possible and for being a part of our community. These quarterly letters are for you; we’ve been entrusted with real capital, so we owe everyone clear and open communication about what we’re doing with them. In these letters, we hope to share more about how we’re thinking about investments, and how we’re learning and growing as investors. These letters, as well as anything other record of our work we keep, will also help ourselves to make sense of our thinking, and over time accumulate into something past, current and future members can all look through and keep coming back to.

The following excerpt is taken from Steve Job’s Commencement Speech at Stanford in 2005:

His speech left a deep impression on me and helped put a lot of things into perspective. My wish is for all of us to be brave enough to overcome uncertainties, hesitations, or any fear of failure or embarrassment to see just how far we can each go in our respective investor journeys. Remembering that there is no time like now to take risks and make mistakes might just be the key to realizing what kind of work we really find meaning and purpose in.

Something new that we’ve begun to experiment with is a rather drastic change in how our program will be structured moving forward. As of April 2022, instead of having four sector-agnostic teams each manage their own USD 10,000 portfolios, we have decided to collectively run one USD 50,000 fund, dedicating each team to a chosen sector, with one or two fluid teams that can operate beyond sector confinements and offer us a bit more flexibility. Overall, we believe this structure will better facilitate cross-team partnership, promote a sense of shared ownership, raise participation levels, and give every member a taste of what running a fund professionally is like.

We are still value investors through and through, meaning we’ll always be on the hunt for undervalued businesses with strong long-term fundamentals. We’ve been given a considerable amount of capital to put to use, but that doesn’t mean we won’t be concerned about over-paying. There are times we’ll swing for the fences and give ourselves enough exposure to the market to learn as investors, but over time we’d like to build a framework for quality control regarding how rigorous our selection and analytical processes are. Our investment strategy should reflect who we are as investors, and our goal is to groom ourselves into independent, critical thinkers with the discipline, patience, resilience and courage to invest in high-conviction ideas and wait on the sidelines when the timing isn’t right.

In each team, we will limit ourselves only to businesses that we can understand and aim to identify durable competitive advantages in the broader context of trends we think will significantly shape the future of our chosen sectors. The team led by Zheng Qing will look at Consumer stocks, which the members feel will encompass simpler business models that they can better master. The team will be looking at how changing retail trends, such as the shift away from brick-and-mortar stores, will impact consumer spending in the coming years. Currently, the team has companies like Mercado Libre (MELI) , Shopify (SHOP), Carvana (CVNA) , and Nike (NKE) on their watchlist.

The team led by Yu Yang will be looking at Industrial Tech companies, zooming in on industrial applications of (1) Machine Vision and (2) Robots. The team believes there are ample opportunities at this point in time along the ‘S’ curve that industrial technologies have been developing on, and are confident that the sector can maintain stable, sustainable growth in the long-term. By analyzing the leaders in each field, the team hopes to identify the winners that will deliver the greatest value in the coming years. Companies on their watchlist include Keyence (6861 JP), Cognex (CGNX US), Hexagon AB (HEXAB SS) for Machine Vision, and Fanuc (6954 JP), Yaskawa Electric (6506 JP) and Teradyne (TER US) for Robots.

The team led by Ofir will focus on US nano cap companies (market cap < USD 50 mm, ideally in the 20 mm USD range). They believe that smaller companies will be easier to research, have a history of outperforming the market, confer us a comparative advantage our position as a small fund as opposed to other retail or large institutional investors. They also hope to train themselves more vigorously as they go through the process of conducting comprehensive due diligence. In addition, they believe that the US market’s high level of regulation, higher accessibility and larger pool of nano cap companies make it the preferred market for their team. As of now the team is narrowing down a list of potential investments.

Lastly, much like the ‘cabals’ that were the building blocks of the innovative atmosphere at Valve, we’ve decided to leave room for spontaneous assemblies of teams should some analysts wish to pursue an investment idea outside the confines of their chosen team. This is in alignment with our vision to build a more close-knit community where members can frequently approach their friends in the Club to embark on research in ideas that they are both interested in exploring.

This sums up the most updated actions the Fund has taken up till this point in time. The past track record of VIP International Portfolio is shown below:

The endowment’s current investments are accounted for in the table below:

The new fund structure we’ve transitioned into is undoubtedly a significant change, very much thanks to the support of every analyst, PM and the operating team behind the Club. As we move forward, I also hope that as everyone moves further along their paths and grow as individual investors, we can find a sense of shared ownership with our fund. Let’s help each other to learn, stay hungry, turn over every stone and have lots of fun through the highs and lows.

I am extremely honored and excited to work with everyone over the course of the year, and once again express my deepest gratitude to those who have lent this program their support. I look forward to writing to you in the next letter.

With Best Wishes,

Rebecca Yang

on behalf of the IC Value Investing Program TeamQuarterly Letter from CIO (VIP-IC), Q1 2022