Thursday, 7 February 2019


Note : This post is a performance review of the Pelham Blue Fund last year. We briefly discuss past performance, thematics, as well as the 2019 outlook. To summarise, we had an inconsistent year in 2018 with major gains in the first half, followed by weak performance in the second.

Total Gains in 4Q18, in percentage terms : 2.83%

2018 Total Gains, in percentage terms : 44.3% 

Against our performance benchmarks:

1) Amanah Saham Bumiputera 1 : 7% (2018 dividends)

2) FBM KLCI : -5.16%

4Q18 : Return to Stability, Low Excitement

This period was marked by policy risks as the Government began introducing and implementing new initiatives, some of which severely affected certain sectors such as gaming and telcos. As you may know, the end of October also marked a period of accelerated decline in the global markets, with US and Hong Kong indices falling as much as 10% within two months (for context, these kinds of declines have not been seen in such a short time period since the global financial crisis).

Similarly, oil prices staged a similar fall due to oversupply concerns. The commodity hit a four-year peak in October 2018 before losing almost 20% in value by the end of the year. These factors and more have shaken the market's stability and investors' confidence, driving down stock prices.

In Malaysia, the selling activity during 4Q18 spans sectors and business lines. GENTING, TM, YTL, AIRASIA were among the big caps that took a big hit. We also saw price shocks in the mid cap and small cap spaces, with PRESBHD falling by as much as 50% (due to a margin call and forced selling by its major shareholder). Previously favoured stocks such as DSONIC, VS, and most construction companies also fell steeply for various reasons.

The good thing from all the events described? They actually contributed to a more volatile market, allowing for certain opportunitistic trades to be done and replicated. We have captured short term trading opportunities in some of the stocks above to capitalise on the artificial mispricing - a core mandate for this Fund - as well as short term volatility present in the indices.

Hang Seng put warrants continue to be a decent source of active trading income, as Hong Kong reacts strongly to the shocks in US and China. For put warrants, we would only consider a trade when the price shocks is at its greatest. That means we don't trade day in day out; it is much too dangerous.

On the other hand, having learned some important lessons during a very challenging 3Q18, we made the decision to reduce active trading activity significantly to minimise losses. In addition, unfortunately there was a drought of opportunities in 4Q18 to make consistent, market beating profits.

A broadly negative market means that a market bottom is never assured. We are also wary for the souring prospects for the Malaysian economy. Analyst estimates put GDP growth at 4.7% last year, yet from our own admittedly basic research, overall corporate earnings have been broadly negative over the same period!

This is not something that we feel is realistic, or sustainable. There will be a point where either the economic data makes sense, or the markets will readjust its expectations further. Basically we expect GDP growth to slow, reflecting the already slowing corporate earnings trajectory.

At this moment, in early February 2019, there seems to be a positive lull in the global markets. After a miserable last two months of the year, global markets have rebounded at least 10-15% from their recent lows. This positivity is contagious: indeed, Malaysia has seen an increase in investor inflows in January. Whether that translates to a long term holding position, or a short term bargain hunting trade, we do not know yet.

The Fund's 2.83% return in 4Q18 is reflective of greater prudence and a reduction in trading activity. We do not want to risk a 10% quarterly loss. Relative to the market, the quarterly return is considered encouraging, though we acknowledge that more can be done, and in a better way.

As part of the longer term vision for this Fund, we are actively seeking more stable and consistent returns to reflect better risk management. We have shown in 1Q18 and 2Q18 that it is possible to record strong double digit gains, but these kinds of opportunities are seasonal and not meant to last. This is an opportunistic Fund; we are committed to ensuring a better deployment of capital this year, even at the cost of lower overall returns. Our plans for 2019 is described later in this message.

2018 Review

It was a year of mind boggling highs and disappointing lows. To sum it up, our investment style worked particularly well during the first half of 2018. It fared a lot worse in 3Q18 and 4Q18, indicating that our style is a seasonal one. We are cognisant of this serious issue, and are making active changes to improve.

If you're a regular reader of our investment blog, you may have got a better idea of our typical investment approach. While we do have a mandate and a proven competitive advantage, our 'hit rate', or trading consistency, was admittedly spotty in 2018. There were simply too many opportunities missed, and major losses that held back our overall performance. Our task this year is to iron out those deficiencies and ensure that we can make optimal returns, relative to market conditions.

To avoid being a 'six-month wonder', we have significantly reduced our trading activity. With our extensive research, we have established very strict parameters for identifying and trading a stock or warrant. Being selective is our main challenge for the year. A scattershot approach works wonders in a bull market, but in a very challenging one, a degree of wariness and conservatism is important.

We have different approaches that work well to a certain degree. Some are based on market conditions, or the current investor sentiment. We are continuously working towards cutting down approaches that don't work too well, and those that are inefficient.

Our focus is on identifying the very best opportunities only. We will not trade until we find them, even if it takes weeks or months. Less is best.

2019 Vision and Approach

We largely agree with the general view that the market is heading downwards. We believe that an economic slowdown in Malaysia is inevitable, as well as a (further) slowdown in corporate earnings. Some past market champions have already stopped paying dividends; don't be surprised if more join the fray.

While this may be considered a bearish view, as an opportunistic Fund our job is to react to whatever market conditions presented to us. Our mandate is to beat the market and deliver returns in good times or bad. This has not and will never change.

In light of this, let us reiterate : we are going into cautious mode for the first half of 2019, at least. This means that the Fund will be extremely selective in its trades. We will only consider opportunities where we have a definite competitive advantage.

Our 'edge' lies in two things : short term artificial mispricing (driven by negative news, for example), and special situations based trades (momentum breakout, IPO listings, et cetera). There will be no massive speculative accumulation of warrants. There will not be any buying of cheap stocks if there are no catalysts to accompany them.

Furthermore, we are slowing things down in order to ensure stability and sustained returns. In 2019, the Fund aims for modest monthly returns of between the 4-5% range. Once this is achieved, we will cease all trading activities until the next month begins. In fund management parlance, this is known as 'going flat' - we value being in cash and the leverage it provides to capture only the best opportunities.

There is no guarantee that each month will show profits. On the other hand, we prefer to show smaller, sustained returns compared to the 2018 performance where overall performance was distinctly divided into two halves of the year.

This Fund is a trading fund. Its specialty is in capturing short term trading activities; nothing more and nothing less. Unlike most funds, our active exposure in the market is meant to be minimal. Once we hit our targets, we dispose of the position and return to 100% cash. Think of this as ammunition in order to capture the next big opportunity.

There may be minimal trading, but we will constantly observe the market for trading opportunities. As always, we have a watchlist of stocks that we observe over the longer term, simply to analyse and understand the stock/warrant's behaviour. Many companies with positive fundamental prospects are currently langushing in the market right now; we are waiting for the right opportunity to strike.

Best Regards,

The Team
Pelham Blue Asset Management

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