Performance Profile

Quest for value in Thailand - Long-term holdings and shareholder activism are keys to outperformance

There are not many hedge fund managers investing in the Asia-Pacific that have been around as long as Doug Barnett, of Quest Asset Management, in Thailand. The firm first started in 1994, when Lance Depew joined Barnet to manage a number of segregated accounts.

But Barnett has been running a Thai-invested portfolio since 1990, and over the last 12 years has given shareholders a six-fold return, while the Thai SET Index has lost nearly 60% of its value over the same period.

This is an outstanding achievement by any standards, particularly as it has been achieved in some of the most difficult investment conditions just about anywhere in the world. The Thai Focused Equity fund is up 20% so far this year and has put on nearly 30% over the past 12 months.

In the longer term, the fund has an annualised compound growth rate of 14% since 1997, solid by any standards.

Anywhere else in the hedge fund world, Quest would be managing significantly larger amounts of capital than its present $50 million. It isn't, but then again, Thailand is a little exotic for the mainstream hedge fund investor community.

As a result, Barnett has had to make up for the lack of assets with the quality of his investors. Julian Robertson has been an investor, almost from the beginning. Similarly, Sir John Templeton has been a long-standing personal investor. Indeed, the majority of investors are other fund managers.

Barnett's investment approach has evolved over the years, matching the on-going conditions in the Thai stock market. In the mid-90s, for example, when the SET Index was continuing to push up, he adopted more of a GARP investment-style approach. That has changed with events such as the Asian financial crisis, and he now adopts much more of a bottom-up, value-based style.

The portfolio is effectively split into two parts. First there's the core portfolio, 60-80% of which is made up of five to seven long-held positions. Quest can invest in a stock for a very long time indeed. The fund was only recently divested of a position it had held, in varying degrees, for the past 11 years.

'We're happy to hold if the valuation remains intact,' says Depew. 'But if the fundamentals change, then we're gone.'

Quest is also not afraid to take sizeable positions in target long-term investments. It can hold as much as 15% of a particular target firm's capital. This allows active positive shareholder influence at board level, and Barnett and Depew regularly make use of this tool. They find that they can most often add value in the areas of capital structure and investor relations.

Among the portfolio's core holdings at the moment are shipping companies, such as Thoresen Thai Agencies, of which Depew is a board member and in which the fund has a 10% stake. The fund also owns a chunk of Banpu. This is one of the fund's biggest positions, a stock that the team believes has been much misunderstood.

Given Quest's large involvement in the firm's capital, it has a level of access to management that few other analysts or investors could achieve. The stock has already strengthened considerably, but the team believes it has at least another 50% upside before it reaches anything like a reasonable valuation.

The second portion of the fund is managed more along the lines of a trading portfolio. This centres upon a number of statistical themes which, again, have been developed over the years as the Thai stock market has evolved. This part of the fund will invest in the broader market range of stocks and will also trade shorter term in core holdings.

This part of the fund's activity is not necessarily as large as it could be. Because of the difficulties in hedging,

the team can maintain very high levels of cash at times, occasionally as high as 50%. This is maintained in US dollars. The team is also very careful to ensure that the fund remains as liquid as possible. Given the Thai market's comparatively low liquidity at times, moving into and out of positions can take several days. 70 to 80 per cent of the portfolio can be liquidated within a month.

About 5% of the portfolio is invested on the short side. Shorting was only allowed in Thailand a couple of years ago, but now a number of local stock lenders are in operation and the fund regularly goes short. It tends to focus upon statistical analysis, again in over-valued stocks or on the spreads between foreign and locally registered shares.

Depew acknowledges that the fund tends to lag the Index in early bull market phases, but it outperforms significantly on the downside and in unclear market conditions. Going forward, the team thinks that Thailand has a lot more upside.

The market still has many smaller cap stocks that trade on a yield of more than 10%. As a result of the growing interest, the market's liquidity is improving. Valuations are also on the up, resulting in static earnings multiples despite the recent increases in share prices.

Nevertheless, the fund is about 42% in cash, as the market is in a short-term correctional phase at the moment, but Barnett and Depew are watching foreign investors very closely to see if they increase their exposure. Barnett believes that foreigners have continued to be surprised by the Thai stock market's strong performance in recent months, and will be part of the next impetus on the upside.