Translation to English

“No need to worry too much about US interest rate hikes and stock market corrections”

Ohad Topor, CEO of TCK Investment Management who consults high net worth individuals with assets of more than KRW5billion

Jangwon Hong for MK Luxmen
March 12, 2018

Volatility in equities has grown worldwide. At this rate, it is not easy to give a short-term view on whether the stock index would head north or south. Looking at the economic situation in the U.S.—a variable that greatly effects global stock markets—does not offer a clear view forward, either. In fact, if we were to look at the extremely low unemployment rate that points to a near full-employment job market, and the overall economic situation starting to pick up with the manufacturing industry taking a lead, it is unbelievable that the Dow Index plunged by over 4% on a day-to-day basis twice during the month of February. 

Looking at bond rates in the U.S.—which are known to quickly jump back over a short period—and inflation in salary and wages, some still argue that the chance of the stock market correcting itself is still valid. If wages take a steep jump over a short period, it adds inflationary pressure on consumer prices, leading to an even greater need for an interest hike. Meanwhile, a rapid rise in interest rates leads to greater volatility in financial markets. One of the things that stock market players abhor is uncertainty. As such, interest rates that are raised at a pace faster than previously anticipated drives people to “first take the money out and see how things unfold.” Just as vocal are those arguing a pessimistic view that an inflation in wages would undermine corporate performance which would in turn deal a blow to stock prices. There is constant talk that it is about time the U.S. stock market gives itself a break after continuing an upward climb for a decade without any large-scale correction. It is a difficult situation to figure out where exactly you should put your money, as on the one hand it looks quite promising, while on the other it seems inevitable that stock prices would fall. 

The sense of loss experienced by Korean investors, in particular, is quite significant. While there has been an increase in the number of cases where Koreans invest in overseas equities either directly or through investments in funds, the norm still is to invest in Korea. Dow Industrial Index has seen a rapid and steep incline over the past 10 years from its lowest point of 6,547.05 in 2009 to reach a hopping 26,616.71 earlier this year. In contrast, the KOSPI saw much lower volatility during the same period, even though it did bounce up from 892.16 to 2,607.10. 

After a lengthy period of low volatility, it was only last year that the KOSPI managed to record a rise in the index. But then as soon as the New Year dawned it was dealt a serious blow by a nosedive in the global stock market. Just when investors are about bask in the rally, now they have to worry about a correction. 

But as the saying goes, “it is during challenging times that a hero is born.” What should be paid the most attention to and observed closely is how the global wheelers and dealers are going about responding to the whole situation. If you do not know personally anyone who is considered a high net worth individual, then you should ask those who interact with such individuals what the “deep pocketed folks” are thinking these days. Your own approach to investment, too, should take into account the movements of high net worth people. There could not be a better person than Mr. Ohad Topor, CEO of TCK Investment Management, to offer me a glimpse into the investment strategies of such high net worth individuals. Along with Mr. Howard Marks, the co-founder of Oaktree Capital, a global alternative investment management firm, Mr. Topor established TCK Investment, a private investment firm. He is currently serving as Chief Investment Officer (CIO) and CEO. He can be referred to as a specialist who diagnoses and prescribes how high net worth individuals and corporations should invest their money. In order to solicit TCK Investment for their services, one needs to have a net worth of at least USD5million (approximately KRW5.4billion). The company has offices in London and Seoul and offers consulting on global asset diversification. In 2013, the firm signed a Memorandum of Understanding with Samsung Life Insurance to set up a collaborative network for work related to asset management for the ultra-wealthy. 

From a long-term perspective, interest rate hikes are favorable events.  There have been no big changes in the portion of equity in the entire investment portfolio of high net worth investors worldwide. The sudden drop in the U.S. stock market in February was quite a shock. Where do you see the stock market headed in the future? 

I would first like to touch upon something. It is that the high net worth individuals that we offer services to do not seek drastic changes in their investment portfolio. Now is the time to buy more stocks, not the time to sell. The U.S. stock market has shown sustained growth over a long period. The stock market eventually runs into corrections. A sustained period of rise means that it is about time a correction would arrive. Therefore, it is absolutely not the time to seek fundamental change to your investment portfolio, such as throwing away all the stocks you currently have, or drastically reducing the share of stocks in the portfolio to increase the share of bonds. The flip side is that correction in the stock market offers a good chance to buy quality shares at an affordable price. We recommend to our clients that they should purchase now good quality shares that can weather a recession. One such example is consumer staples. The principles of investing in blue chips that can weather unexpected recessions is still valid. 

Are there any key investment principles that TCK Investment holds itself to? 

One of the things that shocked me when I had a look at the investment portfolios of high net worth individuals in Korea was that they are highly undiversified. If I were to give a single piece of advice to Korean investors, it would be to “hold 30% of your investments in dollar nominated 

assets.” I am not saying you should have dollars in cash. But the share of your assets denominated in dollars should make up at least 30% of your total assets. Having exposure to foreign currency, rather ironically, can become a great source of reducing risk. The U.S. dollar is a key currency. If you look at high net worth individuals around the world, you notice that the more money they have, the higher the share of assets nominated in U.S. dollars. I recommend that you have at least 30% of your assets in dollars, but if you have more than USD5 million, then I also recommend that the share be brought higher than 30%. If all your assets are nominated in Korean Won, it is inevitable that your investment would suffer during times of volatility in the exchange rate or when the Korean Won starts to weaken against other currencies. Why are people sticklers for diversifying their investments into equity, fixed income and real estate, yet they forget to diversify them into different currency-nominated assets? If you are a high net worth individual with USD5 million or more, you absolutely need to incorporate the concept of currency diversification into your principle of investment diversification. 

Many investors are not sure when to buy equity. 

Unfortunately, there is no golden timing for buying equity. This is because we cannot predict the future. However, if I were to bring up one principle that always holds true, it is that you should buy good stocks and hold onto them over a long period. The number one principle of successful investment is to invest long-term. Let me tell you an interesting anecdote. Let’s say you invested in the S&P 500 when it was at its peak, immediately before the financial crisis. Where do you think your investments would be now? Quite surprisingly, it would have doubled. This is the power of long-term investment. You cannot be fickle when buying stocks. You can never become rich by buying stock A today since it looks so good, then buying stock B tomorrow because that one seems to be the flavor of the day. The key is to stick to a long-term investment strategy and look for stocks that you can hold onto for a long time. 

There are still concerns over a hike in the U.S. bond rate. 

Interest rate hikes in themselves are not a major concern. The issue is the pace at which they occur. Concerns are being voiced because the pace at which the rates are climbing is too fast. What I would first like to say is that you should not worry too much. A rising interest rate is a good sign. It means the economy is on an upward trajectory. The per annum rate for an investment grade corporate bond amounts to 2.8% (as of early February), but there are many places in the world where the interest rate hovers below 1%. This is testament to the strength of U.S. industries and its underlying competitiveness. It also means that the economic growth is robust. However, if the pace picks up too much leading to the coupon rates for bonds to sharply increase, stocks which are relatively riskier assets would start looking more expensive. This could drive away money from the stock market. But as long as no recession of a broader scope is forecast, I do not think it will be a major issue. I do not agree with a strategy where you would be selling off a large portion of your stocks now to increase the share of bonds in your investment portfolio. High net worth individuals tend to think that bonds are safer and better than equity. But we are operating a management program where we persuade such people to gradually increase the share of investments in equity over the long term. 

What should be the breakdown among different investment destination countries? 

What I would first like to mention is that the breakdown of investment destination countries change so drastically depending on where you are at a given point in time. It is true that up until January, we thought the U.S. stock market was overvalued. But with the correction that occurred in February, our opinion changed slightly. There have been very dynamic changes going on, because stocks became a whopping 15% cheaper than when they were at their peak. The attractiveness of U.S. stocks have gradually picked up recently. But it is difficult to say where it would go since by the time this interview is published, we may see a drastic jump in the U.S. stock market. 

If you were to offer advice to an average Joe, and not a high net worth individual? 

One of the most important principles to understand is the ‘magic of compound interest rates’. If you take a longer term viewpoint when investing your money, you can eventually become rich. One of the best products is by far the ETF. There are numerous products worldwide that are offered in the form of ETFs. You can find the investment approach you would like in ETF. It is difficult for laymen to analyze every exchange and stock to come up with an optimal investment strategy. You can of course solicit the help of experts but this would mean you have to pay a fee for such expertise. But with ETFs, you can diversify your investments around the world for a minimal fee. You might not take fees seriously over the short term, but the more time goes by, the fees that you save over time translates into additional income. If you had to do something right now for your grandchildren, it is to purchase a decent ETF and hand it down to them. If one of your ancestors had invested USD1million in 1900 in the stock market, you would be holding USD7billion now. This is of course an extreme example, but that is how scary compounded interest rate can be. 

The concept of investment firms that only serve high net worth individuals is rather new to Korea. 

My family in Israel, the Topor family, is a family of engineers over several generations and runs a technology business in Israel. My work of asset management started from managing my family’s assets. Drawing on that experience, I came to manage the assets of clients as if I were to manage my own family’s assets and consulting them to meet their needs. 

During my MBA at Stanford, I met a couple of Korean friends and they have been a great help to me. As they took on key roles, I, too, have been able to build a strong network in Korea. In addition to high net worth individuals, our client base also includes corporations. At present over 30% of our assets under management are corporate assets. That is how familiar we are with corporate asset management. Many business owners who have built a successful business in Korea feel the need to better manage their money. CFO’s of companies listed on the stock exchange have solicited our advice on how to manage their companies’ assets. We offer our 

insight into how they can more efficiently diversify their investments, by drawing on our global network. 

What do you think of the growth potential of family office services in Korea? 

I see great potential for growth. There are many corporations and business people in Korea who have made remarkable achievements. These people look for ways to continue the operation of their businesses or corporations through methods such as handing them down to their children. At the same time, they wish to maintain their wealth without adding burden onto the corporation. They are concerned with how they can better manage the company, how they can not only hand down their wealth but also the business to their children. Our expertise can provide the help needed in seeking ways for sustainable asset management. 

He is: Ohad Topor is currently serving as Chief Investment Officer (CIO) and CEO. During the last 17 years, Mr. Topor has invested across all asset classes globally, allocating to private equity, hedge fund, venture capital and traditional asset classes. Before founding Topor & Co in the UK he was with Square Capital, a private investment office based in London and Paris. He is an advisor to the Korea Israel Innovation Center. He holds a BA in Economics from Tel‐Aviv University, Israel and an MBA from the Stanford Graduate School of Business.