South-East Asian Value Fund

• ASEAN’s consumer story has decades to run
• Asean alone has a population of 670 million –and they all want a house, two cars and high cholesterol just like the rest of us.
• There will be hiccups but the trend will remain strongly positive.  A combination of a strong work ethic and low taxes will encourage and enable Asians to create and retain wealth.  Each year millions are moving from the fields to embracing urban consumer lifestyles.  This translates into changing consumption patterns –a generation ago bread was a rarity; now it is an urban staple.  Building a new road or bridge in the developing world has a massive multiplier effect on the local economy.

Founded in 2004, the investment manager (company), with a team of 4 locals, is a specialised fund management company dedicated to investing in Asia with a long-term, absolute-return and research oriented, value approach. Its investment style is based on fundamental analysis backed by company visits, for which it believes there is no substitute. Currently, the Investment Manager manages 1 fund, this Southeast Asian Value Fund, with investments in undervalued companies mainly located in Thailand, Malaysia, Indonesia and Singapore.

The Fund’s investment objective is to achieve long term capital growth through capital appreciation and income. The Fund seeks absolute returns rather than to perform in relation to any benchmark equity index.

Fundamental company research to find undervalued stocks.  For the key to identifying undervalued stocks is to thoroughly research and analyse companies, and carefully estimate their intrinsic value.  The PMs continuously search for stocks which appear to be very undervalued based on quantitative measures such as Enterprise Value to Sales, EBITDA, or Free Cash Flow, Price-to-Book, etc., and then research them in-depth. Researching a company is highly time consuming, and involves analysing the financial statements, researching markets and competitors, interviewing management, etc., but it is crucial to reducing potential risks. Companies with very weak balance sheets, a poor track record of spending shareholders’ money, or where it is simply impossible to draw a reasoned conclusion are filtered out.

The next important element of work involves putting a price tag on a company. This is done by constructing detailed company and discounted cash flow models.  The PMs also use a variety of valuation yardsticks (often sector specific), and pay keen attention to the prices paid by the most knowledgeable buyers of companies – other companies in comparable businesses. They attempt to err on the side of cautiousness in this process. The end result is our estimate of a company’s intrinsic value, and therefore our target price.

The fund should be considered as a long-only vehicle.  Through its value approach, the investment manager typically finds neglected, often small cap, companies which no one likes but it doesn’t care as long as the macro story is good and if they can be bought inexpensively.  Little regard is given to geographical spread or diversification and the fund may hold 25% of its assets in the securities of one issuer at the time of   purchase.  Given the above, the performance may well be highly volatile.

The opportunity for an investor in this regional value fund is the investment industry’s obsession with liquidity.  The focus on liquidity results in smaller companies often trading at deep discounts to intrinsic values which leads to higher margins of safety benefitting the serious value investor. 

In addition, the volatility of the regional stock markets the fund operates in generates great opportunities to buy excellent companies for prices way below its calculated intrinsic value.

And in order to establish the above mentioned intrinsic value continuous hands-on (company and on-site visits) research is needed in these countries.  The investment manager considers itself to be a research house that occasionally buys some stocks.  If there’s no-one in its office, they’re probably out seeing companies!

As an aside, the founder of this Southeast Asian Value Fund has a significant personal  investment in the Fund.