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Singapore IAM’s innovative discretionary model helps propel 46% return in 2023

Paul Lee, Paragon Capital
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Unlike typical independent asset managers (IAM) that heavily rely on retrocessions, Paragon Capital Management Singapore has found success with its discretionary-based business, a model that may not be suitable for every private banker.

That strategy is also helping it to deliver strong returns for clients. The firm’s flagship Paragon Alpha I fund gained 45.62% for 2023, beating top-performing asset classes including the Nikkei 225 (28.2%), S&P 500 (24%), and even the NASDAQ (44.7%).

The discretionary model means that instead of generating income primarily through transaction-based fees from clients, Paragon Capital charges a percentage based on the assets it manages. Its income depends solely on the performance of its funds and the firm manages three open-ended public market funds and one close-ended private market fund.

“We are not a typical IAM … clients pay us a percentage based on the assets we manage for them, ranging anything from SGD 1 million to SGD 200 million. We’re evaluated based on how well we perform for our clients. If we increase their wealth, our income rises,” explained CEO and CIO Paul Lee, whose firm manages SGD 950 million in AUM.

“Conversely, if we decrease their wealth, our income decreases. If a client is dissatisfied, they can terminate our services with just a month’s notice, and our revenue drops to zero,” he told Asian Private Banker.

The early days

Paragon Capital was founded by a former private banker who was granted a capital market services license by the Monetary Authority of Singapore in 2017. Today, the firm’s assets under management is SGD 950 million, and the headcount has grown to 13 from three.

“After the initial rush to set up the firm, I shifted focus to transitioning my book of clients from my previous banking role,” Lee shared. He was previously a senior advisor at Julius Baer, and prior to that, he worked at Credit Suisse and Barclays.

“They [private bankers] struggle to convince their clients to give them a mandate for a discretionary management portfolio with a management fee.”

“Most clients had transitioned, and by the end of the first year, the business was sustainable. Our sustainable model, based on management fees, enabled us to reach above SGD 180 million in assets by the end of year one.”

Around 70% to 80% of its client base is in Singapore, with the remainder primarily located Southeast Asian countries, including Malaysia and Thailand.

Not for every private banker

In Asia, especially in Singapore, retrocession fees continue to dominate the IAM landscape, and transitioning to a management fee-based model remains a work in progress. While Lee tends to attract more experienced bankers, he noted that when he explains his firm’s purely management fee-based operations, many bankers are unable to join him.

“Simply because they [private bankers] struggle to convince their clients to give them a mandate for a discretionary management portfolio with a management fee,” he explained. “Currently, most private banks rely on transactional revenue, which is a brokerage model.”

“If the client transacts, the bank earns, and that’s how the bankers are assessed and compensated. So, our economic model is not easily acceptable to a large number of private bankers, whether in Singapore or Hong Kong.”

“Our secret sauce lies in the use of derivatives to execute our perspectives, whether on the long or short side.”

Add more than sell

Primarily focused on adding value for clients and investment management, Lee counts his team as patient investors, constantly seeking strong, profitable businesses with clear economic moats.

Their “secret sauce lies in the use of derivatives to execute our perspectives, whether on the long or short side. This approach provides a level of confidence in determining entry and exit prices.”

The firm’s flagship strategy, Paragon Alpha I fund, achieved a total return of 45.62% for 2023 and 72.81% since its inception on 31st October 2018. Managed by Lee himself, the fund recorded an annualised return of 11.17%. He attributes the performance to his long-term view.

“We tend to add more than we sell and take profit,” he shared. “If you examine the top three holdings of the Paragon Alpha I fund, you’ll notice the familiar Magnificent Seven. However, their prominence isn’t solely due to last year’s market uptrend. We’ve held these companies since the COVID era, and their prices during that time have significantly contributed to our overall performance.”

Nvidia, for example, the fund’s top holding, was acquired in 2021 because of its data centre story, a trend Lee anticipated early on. With the increasing reliance on data centres by cloud computing users, Nvidia products are well suited for this market. Other companies Lee has held for a long time are Apple and Visa.

What about ESG?

Regarding his view on ESG, Lee said, “While we do consider ESG factors, we do not have a clear hard and fast framework. I take a more common sense approach, and it’s very simple. Does this business help the world or does this business harm the world?”

“Take Philip Morris, for instance, a tobacco company. While it’s a profitable company, we steer clear of it because tobacco isn’t exactly great for humankind. We have a very small exposure to the energy sector.”

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