Foreign Fund Seeks The Overlooked In Thailand

[george]

Foreign fund seeks the overlooked in Thailand

By William Barnes

Investing in an emerging, volatile stock market separates the brave from the faint-hearted. Many fund managers feel safer putting their cash into blue chips with bountiful liquidity, a worldly management and a reliable profit and loss statement.

Others prefer the bottom-up approach, seeking hidden value in second, and even third tier, companies.

Doug Barnett, who runs the only Bangkok-based foreign fund concentrating solely on Thailand, prefers the latter approach. "We are not your normal passive, portfolio theory hedge fund manager."

In a capricious market, Quest Management seeks out the overlooked, the under-researched, the unsophisticated and, above all, the cheap.

The Thai Focused Equity Fund visits 150 companies a year to find quality businesses with a defensible niche, good earnings potential and a receptive management. The strategy appears to be working. Since April 1990, when the fund started, it has gained 1,500 per cent in value. By contrast the best performing of the 112 stocks that survived that period (a "very illiquid" Goodyear Tyre) put on 146 per cent. The Stock Exchange of Thailand index overall has lost 51 per cent.

"That tells you that the Warren Buffet buy and hold strategy does not work in Thailand. Doesn't work at all," Mr Barnett says.

A quarter of the 400 companies on the SET account for 85 per cent of its market capitalisation. They receive almost all the analyst coverage. Anybody below this level only gets coverage if they are very lucky.

Quest has "close" relationships with about 50, mostly small, firms.

"If we can find a really cheap company, the first thing we do is talk to the management. We say: 'Look, we think you have a really good thing going here but nobody knows about it. Would you be interested in getting your p/e up, which will help you raise cash and do other good things?'"

The reaction is very often positive. "I think I have only twice been shown the door. Thais are very open to foreign advice," he said.

Quest Management then works with the company's directors to train them in investor relations, culminating in a formal analysts' meeting. That may bring recognition but not trading volume or a bigger market capitalisation.

"That is when we bring in our friends: the local speculators," Mr Barnett says.

In a volatile market, three-quarters of the turnover is by local investors who turn over their portfolios 40 times a year on average. Quest turns over its portfolio about twice.

The fund suggests to certain speculators that instead of simply betting that they can time their exit better than another player, they can invest in something with a low p/e and a dividend yield of 30 per cent.

Mr Barnett believes that two or three local investment groups now follow Quest regularly.

A lot of work can add a zero to a company's market cap, even when they are as low as US$5m. "At that point, the magic begins. That is the threshold for a lot of funds to start investing and when the turnover gets high enough it becomes a mainstream stock, with a p/e of 10 or so."

Mr Barnett said that he personally had never been able to make money out of technical analysis. The fund attempts a partial hedge by shorting stocks and using options and swaps. The principle "hedge" however is cash. When the market surges Quest tends to cash in, when the market slips it tends to buy.

Rival managers say there is respect for Mr Barnett but argue that, having grown to $230m, his fund's size alone may make it more difficult to exploit super-small underachievers.

Mr Barnett says he is not worried. "Thailand is 20 years behind Taiwan and you don't have the big mutuals or hedge funds that are going to reduce the volatility anytime soon. And who is going to spend as much time as we do building up relationships with Thai companies?"

--FT 2003-12-22

[Khun ?]

This 5 year chart from their website shows it only went up a few % . Not where I

would risk money in a hedge fund. For them going cash up to 50% or more they do not do that well in bad times.

http://www.questthai.com/QUESTvsOTHERFUNDS.htm

Just as a side note how do you think millionaires live.

http://polls.yahoo.com/public/archives/57019568/p-quote-293