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.
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%.
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.
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.
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.
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.
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.
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!
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.
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.
