James Hay's Pangolin Asia Fund has $37m under management and has achieved annualised performance of 16.3% since launch in December 2004, and a return of 24.7% last year. Although the fund can do most things a hedge fund can, the current strategy is long-only value with an emphasis on investing in listed businesses for the long term. "The markets in which we operate are not that efficient and if you scratch around there are natural arbitrage opportunities" he says, in an interview with Asia Pacific Intelligence.
The portfolio is currently standing at 22% in Singapore, where the firm is headquartered, 42% in Malaysia, 24% in Indonesia and 12% in one stock in Thailand. The high return for 2012 reflects earlier portfolio positioning. "What tends to make us money is what we have done a year or two before" Hay says. "At the end of November 2011, markets were weak and we invested excess cash when things were cheap." The fund made money in Thailand and Malaysia.
"We are a research house that occasionally deals" Hay says. "We don't aim for performance over the month or quarter but really for the long term so our results largely come from something we have done a while ago."
Hay favours Malaysia, which is currently 3% of the MSCI Emerging Markets index weighting having been at 25% in 1993. "A lot of Asian institutions left Malaysia after the Asian financial crisis" Hay says. "Large institutional investors struggled to find liquidity and investments in Malaysia. The fund management industry in Malaysia is largely closed to foreign companies so not many fund managers are looking at the market in great detail. Once you get into the mid-caps the liquidity is low and, as a result, many companies are not widely covered or valued appropriately."
Indonesia has become a little too fashionable for Pangolin's value hunt. "We made pretty good money buying that market in 2008 and 2009 but we have been net sellers over the last couple of years. The valuations are stretched in Indonesia - you can buy stocks that offer as good growth prospects more cheaply in Malaysia and Singapore."
Unlike most fund management companies operating in the region, Pangolin does not invest in palm oil due to the destructive impact that crop has on the environment, the habitat of endangered species and indigenous people. "In my view, it is totally unacceptable for fund managers to own this industry and close one eye to the damage it causes" he says.
The firm has four full time investment professionals and presently invests in only four markets and 18 companies in total. "We have had institutional investors but we are too small for some" Hay says. "We don't hedge - we look for long term outperformance through buying good companies cheaply. When markets fall back we come scalable." The fund offers quarterly liquidity and a 2% redemption fee for the first 12 months, which is effective in deterring shorter-term thinkers. "We only want genuine long term money" he says.
"It is hard to find investors who share our long-term thinking. Or if they do, very often their clients don't. The macro news is always so gloomy that committing to a long only, emerging markets fund investing in small companies is something considered too risky by some; especially a fund that practises no hedging or volatility management".
The current investor based includes individuals (lots of fund managers and people who have visited for their institutions, found them too small and made a personal investment), private banks and single and multi-family offices.
The team looks for other opportunities beyond the four countries in which they currently invest. "China scares us on corporate governance, Vietnam we look at but there is an in-built currency depreciation, there are cheap companies in Sri Lanka and we are pretty comfortable with Korea. We understand the ASEAN markets very well and we could replicate our portfolio in other markets but there have to be strong arguments to expand our geographical coverage. It's bound to happen at some point in the future."
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.