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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Dec 14 - 20, 2015.

 

Part-3_PW_TEM1088_theedgemarketsHedge funds have always been perceived as highly risky propositions. As the first licensed boutique fund manager in Malaysia, Malayan Traders Capital founders Devan Linus Rajadurai and Aaron Yew aim to debunk that perception with their low-risk hedge fund, which uses value investing strategies with leverage.
 

IN managing the fund, Yew and Devan also use different investment vehicles such as derivatives as a means of buying into companies in markets that are not easily accessible. “We use derivatives such as swaps and options in restricted markets like India, South Korea and Taiwan, which a regular investor does not have access into. We cannot buy directly into stocks in these markets,” says Yew. 

The fund is domiciled in the Cayman Islands, which Devan says is typical of hedge funds. “There are multiple reasons why we chose the Cayman Islands. The tax benefit is the main reason why you go offshore to structure your funds. They also update their laws governing hedge funds regularly and make sure the laws are fair to the treaties of every country.”

Hedge funds typically abide by the 2/20 fee structure, which is to charge a 2% management fee and 20% performance fee. The Malayan Traders Capital Absolute Return Fund carries a 1% management fee and a 20% performance fee on the profit above the high water mark of its net asset value. The fund does not charge any sales fees.

“We can afford to charge a 1% management fee because we are uniquely situated in Malaysia. Our operating cost is much lower than if we were located elsewhere,” says Yew. 

“We also feel that focusing on the performance fee will be fairer to investors. The management fee will just be enough to cover costs. We should only be making money when our clients do.”

Devan explains how the performance fee works for individual investors. “Let’s say an investor parks RM10 million with us, net of the management fee. If his RM10 million grows to RM11 million, he has made a 10% return. So, we take 20% of that, which is RM200,000. The investor will be left with a profit of RM800,000, so his net return is 8%. He now has a total of RM10.8 million. But the high water mark is RM11 million. If we don’t surpass that amount, we will not take a performance fee. We feel that is fair.”

The company used to disclose its top five holdings, says Devan. “Then we realised that this doesn’t always work. At times, our investors question our stock selection instead of looking at the strategy and how it would work in the long term. But when investors ask, we tell them.” 

The fund focuses on capital preservation. To diversify its bets, it holds between 10 and 15 stocks at any time. Devan says the fund will cap its investments at 20 stocks.

“We feel that having this amount reduces volatility substantially. That is what we aim to do as we are not only managing our but other people’s money as well. If we invested in, say, five stocks, we may get returns if we are good. But it is going to be extremely volatile.”

Is there a possibility of losing one’s entire capital in a hedge fund like theirs? Devan says no. “We ensure that the stocks we buy have downside protection. Our diversification in 10 to 15 stocks means that if we get one wrong, we are protected. We also have our own money in the portfolio, so we are motivated to make sure there is capital preservation.” 

Yew adds, “The first thing we look at when assessing a company is how much tangible book value and cash it has. If it goes bust, what am I going to get back? We should buy low, so we aim to protect at least 80% of our capital. The most we can lose is 10% to 20% [in the short term while waiting for the stock prices of their holdings to recover], never more.”

Devan explains the valuations that fit the criteria when selecting companies. “We look at those with a price-earnings ratio (PER) of less than 10 times. For price-to-book (P/B), it depends on the organisation. If it has a sustainable high growth rate, then we are okay if its P/B exceeds two times. In Singapore, many property firms trade at a P/B of less than one time. That is like a bargain to us and we will look into them further. 

“There are also other metrics, where we not only look at the earnings but also the actual cash flow of the company. There’s this other ratio called price-earnings to growth [the PEG ratio is a stock’s PER divided by the growth rate of its earnings). So, a company can be trading at a PER of 20 times, like Google when we bought it, but we knew the company would be a good buy because we knew it was going to grow at 20% per annum. A good indicator is a PEG ratio of below one.”

Wilmar International is another of the fund’s holdings. “Wilmar is a well-managed company. And the beauty about it is that not only are commodities undervalued, the company is also an agricultural player that actually owns the land. Wilmar is a well-run, safe investment, so we can trust that. Valuations are also good,” says Devan.

The fund recently began investing into a Malaysian company, Coastal Contracts. Devan sees the long-term potential of the company, which has inventories and cash and should be able to ride out the downturn in the oil and gas industry.

“Plus, it has a long track record of being a conservative and well-managed company. It is a hidden gem. When you compare it with other players in the industry, this company is in a net cash position,” says Yew.

The fund allows investors to create a self-dividend policy, which is suitable for those looking for a steady stream of income. It allows investors to withdraw a minimum sum of US$10,000 monthly.

As at end-November, the fund held about RM70 million in assets under management (AUM). With the licence, MTC Advisors expects to grow its AUM further.

To extract the full benefit of the hedge fund, Yew recommends that investors have a holding period of at least three to five years. 

“We look for high-quality companies that are currently out of favour and buy into them at a cheap price. Most people are short term, so they naturally discount these companies. From our experience, it takes three to five years for a company to double or triple its stock price,” he says.

Malayan Traders Capital aims to go beyond just providing returns to its investors. “Like our logo, our goal is to manage wealth for generations. We want to manage a family’s money not just for this generation but the subsequent ones. We want to build a long-term partnership with that person and family. We see our clients as our partners and want to build that relationship with them.”

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