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Interview with Brook Tellwright and Jeep Chatikavanij of Ton Poh Emerging Thailand Fund
Eurekahedge

January 2006

The Ton Poh Emerging Thailand Fund is managed by Ton Poh Capital, whose CEO is Brook Tellwright and advised by Bangkok-based Hunters Asset Management, whose CEO is Jeep Chatikavanij. Brook was previously an employee of British investment bank, Cazenove & Co. He has 20 years' experience, four of which were in Thailand, in analytical and fund management roles. Jeep was formerly director of institutional broking at Jardine Fleming Thanakom Securities. Jeep has been in the securities industry for 15 years now, and has founded Hunters in 2004.

  1. Could you briefly outline the fund's investment objectives (target return, volatility levels) and how performance so far has matched up?

    The fund's investment objective is to achieve long-term capital growth through a fairly concentrated portfolio of 10-15 emerging Thai businesses. I'll talk later on about how we define an "emerging business", but these are basically small- and mid-cap companies of around US$25-500 million market cap. They are very different in nature to the typical SET 50 large-cap stocks. As a result, we anticipate that volatility will be high. We aim to identify companies that meet our investment criteria and hold them for as long as it takes for the market to recognise their potential – or until we change our minds! This may require us to hold on to a fairly illiquid stock through a period of high volatility. But we think the rewards for this type of investing will be very attractive. We believe that the companies in our portfolio have the potential to become the large-caps of tomorrow. Their stock prices would then benefit not only from earnings growth, but also from multiple re-rating, as many of our holdings are currently on extremely undemanding multiples – something that is true of almost all Thai small and mid-caps at the moment.

    We aim to achieve an average return of at least 15-20% per annum, but we recognise that returns are likely to be volatile. There will be years that are considerably better, and considerably worse, than this target. In answer to your question about performance so far, the fund was launched at the end of July 2005, so it is still early-days, but to date we are up about 4%.

  2. What other funds does Hunters Asset Management manage? How does the Emerging Thailand Fund fit in? Could you give us a breakdown of HAM's current assets by funds/private accounts managed?

    Hunters was launched in 2004 to manage private accounts for mainly Thai investors in the Thai small- and mid-cap companies space. Following the launch of the Ton Poh Emerging Thailand Fund in July 2005, Hunters took a decision to focus on advising offshore clients, who tend to be much longer term in outlook. This is more suited to Hunters' style of investment, given the volatility in small- and mid-cap stocks that we have already mentioned. As a result, Hunters is now entirely focused on advising the Ton Poh Emerging Thailand Fund.

  3. Could you give us a country-wise breakdown of the sources of the fund's assets?

    To date we have raised about US$13.5 million, which has come from the fund's management and a number of European HNWI's and private banks. These investors are long term in outlook and very committed to emerging Thai stocks, where, like us, they see a big opportunity. We are not really looking to raise 'hot' money from trading-oriented investors. We just don't think that would be sensible, in view of the fact that many of our holdings are fairly illiquid. We will in any case close the fund to new money when we reach US$100 million.

  4. One of the fund's stated objectives is a 3-year investment horizon and constant review of its concentrated portfolio of 10-15 stocks. How dynamic do you intend the portfolio composition to be? What is the average holding period of an investment?

    Let me say a little more about the kind of stocks that we aim to invest in, and then I think it will become clear why we typically invest on a 3-year time horizon.

    By the term "emerging Thai businesses", we mean to convey that these are leading participants in businesses that are well positioned to benefit from the long-term growth of the Thai economy. Examples of this would include companies that capitalise on the growth of discretionary income among Thai consumers, the growth of tourism to Thailand, or the growth of government infrastructure spending. Our research aims to seek out companies that have sustainable returns well above their cost of capital. Then we set a long-term target for the stock price based on our own forecast of earnings growth and, in some cases, the potential for multiple re-rating. If this price target indicates to us that the potential returns are attractive, then, in a very disciplined way, we will start to build up a sizeable position. Obviously, we cannot always say what will be the trigger for the market to re-rate such a stock, or predict the timing. But we believe that where we are successful in identifying companies that meet these criteria, long-term earnings growth will eventually force a re-assessment of the company's prospects, and that this will be reflected in the underlying share price. Hence the need for a 3-year investment horizon.

    Whilst we are patient investors however, we do not hesitate to close a position if circumstances change. Hunters chief investment officer has over 13 years of experience as a research analyst in Thailand on the buy and sell sides, and keeps the fund's holdings under constant review. We regard access to management as an essential condition of investing in any company. If this is not granted, if management or results fail to meet our expectations, or if a holding simply exceeds our share price target earlier than anticipated, we may decide to close our position at any time.

  5. Could you elaborate on the risk management machinery in place for the fund?

    The fund holds a concentrated portfolio of small- and mid-cap stocks, implying a high degree of risk, but we believe this is partly offset by the fact that the fund is long-only and unleveraged. We aim to manage further the level of risk in the portfolio, primarily through stock limits. These will enforce a discipline of taking profits as valuations rise. The fund holds between 10-15 stocks at any time, but its largest five holdings are restricted to no more than 65% of the most recent monthly NAV of the fund, and its largest holding is restricted to no more than 20% of NAV. In addition, the fund may hold no more than 10% of any company's issued share capital.

  6. It is stated that the fund aims to capitalise on Thailand's growth in infrastructure spending and the spending power of middle class – characteristics typical to an emerging economy. Could you enlist any specific strategies in place to take advantage of the same? For instance, does the fund focus on particular sectors?

    First, it is important to point out that the fund is not intended to be a play on the Thai government's so-called "mega-projects". These vast and very well publicised government infrastructure projects have a tendency to be "high profile / low profit", and, as a result, we rather shun them. We prefer to search for specialist companies that can benefit from spin-offs of smaller, lower profile infrastructure development. This may be below the radar screen of international investors and is generally higher margin than the mega-projects.

    Second, when we talk about the rising spending power of the Thai middle class, we are referring to families with a combined spending power of more than Baht 30,000 per month – not a fortune by Western standards, but a level at which a family begins to have significant discretionary income. This is a fast growing category in Thailand, although such consumers are still only just regaining their confidence after the 1997 financial crisis. Basically we believe that this is a class of people screaming out to be catered to, but that surprisingly few companies are really aware of. They are desperate to get on the first rung of the property ladder; they want to be entertained in their leisure time; they want to travel; they want better healthcare and better education for their children. In other words, they aspire to a lifestyle that people take for granted in more developed economies. We have identified a few companies that understand this important demographic trend; for instance, property developers that have moved into this under-served space, and away from the overcrowded luxury end of the market where margins are low. Healthcare is another sector where we see great potential.

    We particularly look out for companies with business models that have succeeded overseas, in economies at a similar stage of development to Thailand today. We also look out for companies where management's financial interests are aligned with those of shareholders.

  7. The focus of long-only funds on emerging Asia is a trend that has been gaining ground for some time now. In your opinion, in the near term, how accommodating of the spate of new entrants is this space going to be?

    It is true that long-only funds are a growing trend in Asia; we guess that's probably because an increasing number of investors recognise that the longer term outlook for Asian equities is very positive, and believe that it will be more rewarding to invest there on a long-only basis. We agree. But having said that, we don't yet see many other long-only funds in our specific area of expertise - emerging Thai companies. We'd welcome some more competition; it would indicate greater investor interest in our space, and it would hasten the kind of revaluations that we were talking about above!

  8. According to the Eurekahedge database, there are over 120 long-only absolute return funds operating in emerging markets. Whom do you perceive as your main competitors, in the long-only Thai equities space or otherwise? How do you differentiate yourself from these other players?

    We just don't look at it that way. We like Thailand, we have great faith in the potential and the resilience of the economy, and we are excited about the companies that we are investing in. And we have put our own money where our mouth is. So we really don't worry too much about what our competitors are doing. In that sense, we see fund management as being a bit like golf! We play against the course, not against the competition. We believe that if we put our heads down and keep doing our own thing, it will produce good results.

  9. And lastly, do you have any insights to share about the Thai economy, and its near-term growth outlook?

    The Thai economy has come a long way since the 1990s. Corporate balance sheets are much stronger, dominated largely by equity or baht currency debt. As a result, the economy has been able to withstand external shocks, such as much higher energy prices.

    In the near-term, growth will probably not be very spectacular, due to a combination of higher interest rates, continuing high energy prices, and the possibility that the government's spending on mega-projects may come in below expectations. In this type of environment, we expect average earnings growth for the market to be in the mid single digits. Not very exciting. But we see our task as being to seek out companies that can grow earnings faster than the market, and we are confident that by following the strategy that we've been discussing, we can achieve that task.

    We see the next phase of GDP growth coming not from government expenditure, but from corporate investment. The private sector has so far been surprisingly timid in this cycle, reflecting the ongoing effects of the financial crisis of 1997. But until the private sector is ready to step up to the plate, we rather welcome the current lull in economy and markets. It gives us plenty of opportunity to seek out great investments at bargain prices.

Contact details

Brook Tellwright
Hunters Investments Ltd
+44 79 6731 6552
brook@hunters.co.th
www.tonpoh.com

 

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