From Precy Dumlao, Opalesque Asia:

James Hay, Director at Singapore-based Pangolin Investment Management which manages Asia focused long only value fund Pangolin Asia Fund, said that the firm is sticking with its current geographic focus on Singapore, Malaysia, Indonesia and Thailand as these markets have enough going on to keep their fund managers busy. But he admitted that Pangolin might "stray" if it finds something compelling outside of the region.

Hay made the statement in an exclusive interview with Opalesque as he reported that Pangolin’s Asia Fund gained +11% in Q1 and he remained confident that if the firm continued to buy cheaply "and doesn’t make too many mistakes", Pangolin should be able to make money this year. The fund finished 2011 almost flat at +0.8%.

In March, Pangolin’s fund also suffered losses as most hedge fund strategies with a negative -2.51% loss. "It [fund] was affected by negative sentiment towards the Indonesian finance sector where we have quite large exposure. We're not too concerned with short term numbers but prefer to focus on the longer term outlook. For the better Indonesian finance companies, the prospects remain outstanding," he told Opalesque.

He insisted that their ability to invest cheaply without making mistakes is the major factor that determines the profitability or alpha generation of Pangolin. "Our goal is to make money and others can decide if there is any alpha. 2011 was relatively good for us because we were able to buy stocks cheaply enough to make money even in a bad year - and that is still carrying us in 2012," Hay pointed out.

He commented that the current market turmoil that has affected last month’s performance is not a major concern for Pangolin. Hay explained that as a long-term investor, Pangolin is not concerned with short-term concerns, although the existing bearish sentiments across the markets had given the firm the opportunity to invest cheaply.

"The Asian consumer story is a good one and is likely to remain a good one for a while yet. So we can continue to focus on this area," Hay said.

When asked to explain the fund’s approach in exploring the different market conditions to find the best reward, Hay said that Pangolin looks only at value. Once the fund has found a company that looks cheap, it then arranges a meeting and added, "If we can't see a company, we don't buy it. The fund's focus is on real businesses so if, for example, a company is getting contracts via political connections we'll ignore it. We don't buy commodities as I have no skill in calling the cycles. And we don't buy palm oil or timber as they are environmentally destructive as well as displacing indigenous peoples."

He continued, "So very often that leaves us with consumer stocks but this has been a good story for a while now. However, as most investors want liquidity, they won't touch anything small. We don't care about liquidity so this leaves us with lots of underpriced small stocks to research. And if we find a good one, we buy it and wait, and then at some point it'll become a mid-cap and others will start to look at it."

Moving forward, Pangolin will continue to carry on researching and visiting well run companies in search of opportunities where the markets allow the firm to pay less for their shares than they are worth.

This year, Hay refused to provide any predictions with regards to the fund’s performance saying "it is too near a time frame." But Hay is confident that Pangolin can continue to invest cheaply enough to generate the same kind of annualised returns over a three year period.

Strategy
Hay described Pangolin’s strategy as long only and driven solely by value. The fund invests in South East Asia and tends to own micro-caps as these are often the cheapest. He described the fund as liking net cash on a balance sheet, a high and sustainable ROE and a low PE. "Plus we like managements we feel will tend to reinvest the cash their companies generate sensibly and profitably," he said.

Hay commented on his decision to adopt the said strategy, "I have been a fundamental investor for a long time but what really swung it was the opportunity to buy stocks ultra cheaply during the Asian financial crisis. I made a pretty decent return on those investments and the fund was started as a request from a couple of my friends for me to invest their money along the same lines. Had I started a long-short fund I'd have raised more money but my focus is on finding value through analysis.

"I'd like to think we can achieve 15-20% net of fees and expenses to our investors. Over the past 7+ years our annualised return is just over 16% - so we're hitting the lower end of that range. Still, it's not too bad. We don't manage volatility or take much account of market conditions or economics. If a stock is cheap enough, we buy it. Volatility is something to be expected - it is all part and parcel of being in listed equities and not something we are bothered by."

This article was published on Opalesque and can be accessed here:
http://www.opalesque.com/641654/Pangolin_to_keep_its_focus_on_Singapore165.html