Investor Trip to SE Asia

We had a productive and informative investor trip to SE Asia this past month.  Our group of 17 traveled to Singapore, Vietnam, and Thailand, with an extension trip to Angkor Wat in Cambodia.  During the trip, we met with all three SE Asius managers and eight of their portfolio companies. 

Group meeting with Justin Seow, the CIO of Albizia Capital, and Wendy Yap, the founder and CEO of PT Nippon Indosari Corp., the largest bread producer in Indonesia

All three managers emphasized that their portfolio companies are performing well and achieving healthy profit growth but are trading at historically low valuations.  Portfolio company earnings are forecast to grow 20% or greater in 2024.  Their portfolios trade at just 8-9x forward earnings.

All three managers highlighted their ability to identify high growth companies before the rest of the market (“undiscovered gems”).  We met with two such companies.

Cimory CEO Farell Sutantio presenting to the group

  Meeting with the iFAST management team

Cisarua Mountain Dairy (Cimory) is the leading producer of premium dairy products and consumer foods in Indonesia.  We met with CEO Farell Sutantio and CFO Bharat Joshi.  They described how their focus on flavored yogurt and milk products and innovative marketing campaigns have super-charged revenue and profit growth.  Revenue has grown by an average of 85% per year since 2020 while profits have grown even faster. 

iFAST Corp is a digital banking and wealth management platform.  We met with Wong Tin Niam, the GM of the Singapore business, and Lim Kian Thong, the CFO.  iFAST recently signed a contract to provide the digital infrastructure for Hong Kong’s government pension program for residents.  The contracted revenue and forecasted profits in 2024, the first full year, are large – HK$900 million in revenue and HK$250 million in profit.  These amounts would, by themselves, increase iFAST’s revenue by 66% and more than double its profits.  The annual increases included in the contract for 2025 and beyond are substantial. 

The three managers highlighted several other companies in their portfolios whose strong operating performances are not reflected in their current stock prices.  As iFAST has shown, stock prices can jump quickly once the market starts taking notice. 

The main risks to SE Asian markets, according to the managers, are political – unstable governments or anti-business policies, and ongoing high US interest rates, which caused investors to pull money from SE Asian markets this year. 

1.      Key Catalyst for SE Asian Markets

SE Asia is experiencing a surge in FDI as global manufacturers seek to diversify outside of China.  SE Asia replaced China as the largest recipient of FDI in 2022. 

In 2022, SE Asia received four times as much FDI as India.  Vietnam, by itself, received twice as much as India.  The economies of SE Asia are relatively small compared to China and India, and the FDI is expected to substantially boost economic growth and income levels in these countries in the years ahead.

This scenario is similar to what occurred in Thailand in the mid 1980s.  At the time, US trade restrictions caused Japan to massively increase FDI into Thailand.  This surge in FDI supercharged Thai economic growth over the next decade.

The Thai stock market, which had been in a nine-year bear market from 1976-85, also surged, gaining over 1,000% from 1986-1993.

We believe that the current increase in FDI into SE Asia could act as a similar catalyst to SE Asian markets, especially in Vietnam, Indonesia, and The Philippines.

2.      Advantages of The SE Asius Fund

We have been investing in SE Asia since 2013 with the launch of The Asius Fund.  Over the years, we believe we have identified and invested with the leading investment managers in SE Asia.  In May 2022, we set up the SE Asius Fund to offer investors dedicated exposure.  The Asius Fund transferred its investments with the SE Asia managers to The SE Asius Fund. 

 Our SE Asian managers have been able to generate a positive return for us since May 2013 even though SE Asian markets have declined significantly. 

Our managers have been able to generate a positive return even though they predominately focus on mid and small cap companies.  Mid and small caps have generally declined more than large caps in most SE Asian countries.  The most extreme example is Indonesia, where mid and small caps have declined by over 70% since May 2013.

Our managers, though, perform best when markets are rising.  In previous bull markets, they outperformed the index by an average of 3.5x. 

In a world where developed country returns could be muted over the next several years, SE Asia offers substantial upside potential.  The SE Asius Fund offers investors unique exposure to this region via local managers with extensive track records of investing in high growth companies that have performed strongly in rising markets.   

New Cycle of Emerging Asian Market Outperformance

We believe a possible cyclical transition occurred late last year that would provide a huge boost to our funds’ performances over the next several years.  The relative performance between the US and Asia ex Japan markets is highly cyclical.  There have been four cycles going back to 1988.

There are several indications that the most recent cycle of US market outperformance peaked in late 2022, and that we are now entering a period where Asia ex Japan markets outperform. 

The emerging market index had its best relative performance over the US market over the last two months of 2022 in over a decade.

The implications of a new cycle are very positive for our funds.  During the last cycle of Asia ex Japan outperformance from 2001-07, the markets we focus on had substantial multi-year gains.

Institutional investors have taken note of this transition.  Jonathan Garner, Morgan Stanley’s Chief Asia and Emerging Market Strategist, stated recently that “we are confident that we are at the beginning of an emerging-market bull cycle.”

Global investors have reacted by withdrawing money from US equities and investing in emerging market equities. 

This transition would turn the strong headwinds that our funds have faced over the past decade into equally strong tailwinds for the next several years.  

Pete's Post: Perspective on China

Recently, I was asked by directors of a regional bank for my perspective on China. I share it here as it may be of interest to our investors.

Given China’s scale it seems reasonable to call it at least an emerging super-power (second largest population; third largest landmass; second largest economy; etc.). We could quibble about timing, or the definition or role of a super-power but one can’t soberly deny China is just about to arrive at that status. (Our investors who have studied or traveled to China certainly come away with this sense.)

Yet, there is a consistent drumbeat from the West that China is second rate, does not deserve the mantle, is about to collapse, or can only be viewed as an adversary. This is rooted in misunderstanding, naivety, conceit and possibly racism. In addition to the scale elements listed above, China is an independent, sovereign nation with 5,000 years of recorded history. Certainly, it has the right to and authority for self-determination. That right, since 1949, has been manifest in a communist party dictatorship that espouses socialist/communist principles. Deng Xiaoping, after being purged three times, gained power after Mao’s death in the mid-1970s and set about opening China’s economy, which Mao had all but ruined. He coined his program the “Open Door Policy” and it is chiefly responsible for the economic success we’ve seen since.

Deng promoted capitalist methods in his policy using slogans like, and I paraphrase, “to get rich is glorious” and “who cares if a cat is black or white as long as it catches mice.” Historically, the Chinese have been pretty good at commerce. It turns out, once many of the obstacles Mao erected were cleared away by Deng, that they are still pretty good at it. Said in another way, by most accounts the Open Door Policy has brought China back to economic parity with much of the world.

To my knowledge, no country has lifted more people out of poverty in such a brief timeframe as China has, ever. Gone is the reputation China had when I was a child of being a poor, third world nation unable to feed itself, subject to natural and other disaster, and foreign humiliation. Granted, much of China’s earlier poverty, and backwardness, was self-inflicted, but in the last forty years China has caught up with and surpassed some once leading nations (Germany, Japan, etc.) economically, and in many other aspects.

I experienced the beginnings of the Open Door Policy from the ground, in China. Because of the Policy, in 1988 I, a foreign person in China, was legally able to establish a company. I started with one and grew to about 25,000 employees. For the first couple years I watched them come to their first job off the farm, learn industrial culture - how to dress, how to arrive at work on time, how to achieve high quality standards, how to take a break, how to work safely, how to receive and deposit a payroll check, and even how to accept income tax. Over the years they all became skilled, loyal and valued employees, and respectable middle-class citizens: paying taxes, buying motorcycles, then automobiles, mobile phones, enjoying eating out at restaurants, drinking imported wines, setting up retirement accounts, taking vacations both in and out of China and sending their children to good schools. I would say this result is very much like the American Dream, and in that regard I would say they are very much like Americans. I would add that the Chinese have a very strong work ethic, very similar to what was Americans’ in the 1950s: Get a good job, work hard, save some money and try to enjoy life. I also perceive that they feel about their government as many American’s do theirs – the system works, isn’t perfect, and offers prospects for a better future.

Deng’s genius in the Open Door Policy was not only to economically unshackle the average citizen, but also to utilize development methods already proven effective in other countries. China has emulated how Japan started (light industrial products for export); how the U.S. established its national interstate road system; and how Europe operates its massive port/shipping infrastructure, to name a few examples.

A micro example of the legacy of the Policy is the very business I mention above. Since opening in 1988 the business endures and excels. After thirty-four years of operation, competing with low-cost sources Vietnam, Indonesia and India, it is still, consistently, the best performer on a net margin basis. It makes world class, name-brand flagship products (highest difficulty and complexity) for one of the best brands in the world. China lost its low-cost advantage a decade ago, but our Chinese managers continue to innovate and find efficiencies to stay competitive and profitable. On top of this, thirty years ago we exported 100% of our China-sourced product. Today almost half of it stays in China for domestic consumption.

Many observers have misunderstood China’s economic success to mean it is now capitalist with a propensity to move toward democracy. Nothing could be further from the truth. They will permit capitalist activity as long as it is beneficial to the overall socialist cause. However, they will intervene when something is contrary to those principles. Witness recent central government intervention in several high-flying public companies because those businesses were deemed harmful to society; or public dressing down of several billionaires (Jack Ma of Alibaba for example) who thought they were above the law or untouchable because of their wealth. Here is where the mistaken observer claims China is veering off into the weeds, when in fact they are doing precisely as their principles dictate.

Undeniably, China has had some recent examples of questionable action internationally: totally abrogated their contractual pledge to leave Hong Kong alone for fifty years; ridiculous claims about offshore and territorial rights in and around the South China Sea; engaged in malicious cyber-attacks as well as industrial espionage particularly in the U.S. Domestically, there are also examples: unprecedented social control, market intervention, Xi Jinping’s declaration of emperor for life and his decision to align, for the time being, with Putin/Russia.

In all the years I’ve been a student of China (since 1975) there have been frequent predictions of China’s impending demise. I can’t predict the future, but I can say unequivocally those pundits have been wrong. (For some comparative context, as of this writing, China is sixty-three years into its national experiment. They are about where the U.S. was when Abraham Lincoln was in his second term in the Illinois House or Representatives. On that note, over its first sixty-three years and beyond, many predicted the impending collapse of the U.S.)

I do not pretend that China is some benign entity that should be ignored, or lightly treated. On the contrary, they should be engaged and deemed and treated as a partner. Those with experience know partnership means work, understanding, patience and give-and-take. In the not-too-distant past China demonstrated their willingness to be an able partner, as had the U.S. Recently though both sides have been very weak in this respect. I would like to see both sides re-double their efforts in the relationship and both sides up-hold their commitment to one another. National eccentricities can exist and not terminally impact a long-term relationship. The U.S. isn’t engaged in cyber-attacks and industrial espionage outside of the U.S.? And our own internal racial tensions should become a reason for terminating a national alliance?

Does China have the system, the structure, the institutions to innovate and sustain itself and perhaps lead and excel? Who knows. What I do know is China will do what is in China’s best interest, and they mean to compete using their system, not that of the West. I do believe China wishes to be part of the international community both behaving with high standards, and maintaining high standards of responsibility. If “containment” and isolation continue to be the West’s objective China will simply create other spheres of influence that are easier for them to operate and thrive in. We see evidence of this already. To continue down this road would be unfortunate, and un-necessary, and is avoidable.

To conclude, surely China is now one of the top nations in the world and is here to stay. It should be recognized as a legitimate player that deserves and commands respect and should be dealt with on the basis of an equal, both as a competitor and a partner. Viewed from an un-informed perspective some of their policies and decisions look odd and sometimes extreme, and some are. On the other hand, those odd-looking policies and decisions are what’s best for China, and that’s all one should expect. The same is true for the U.S. and the West in general. It would be regrettable because of these and other differences to conclude that China is an enemy and they should be isolated or contained. They won’t be contained as there is no longer a hyper-power who could lead/achieve such containment. Despite its structural, political and social differences from the West, China’s economic expansion, in the long run, will continue. Charles and I believe, as we have from the onset, that our Chinus fund is well positioned to achieve superior gains there.

New Fund Formation: SE Asius Fund

We are pleased to announce the formation of a new fund, The SE Asius Fund, LLC, focusing on Southeast Asia, which includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. 

The SE Asius Fund will have the same investment strategy and terms as our other funds. The launch date is May 1.

We are particularly bullish on SE Asia right now and believe our SE Asia managers are poised to generate strong returns over a multi-year period.

Market conditions in SE Asia are attractive – our managers are finding companies with leading market positions that are achieving rapid revenue and profit growth trading at single digit multiples. In addition, increased foreign direct investment could super-charge both economic growth and market gains.

We are launching the SE Asius Fund to enable investors to participate directly in this opportunity.

The Asius Fund will contribute its existing investments in four SE Asia funds to the SE Asius Fund in exchange for a stake in the SE Asius Fund. The Asius Fund will then be a true master fund, investing in the Chinus, Indus, and SE Asius funds.

If you are interested in learning more about the SE Asius Fund, please contact us.

Indus Fund Best Performing FoHF in 2021

We are pleased to announce that the Indus Fund generated the highest return of any equity fund of hedge funds in 2021.

This is the third time in the Indus Fund’s eleven-year history that it has generated the highest annual return. In addition, one or more of our funds have been in the top ten in performance rankings in nine of the twelve years since we launched the Chinus Fund, out of over 300 fund of hedge funds globally.

We are particularly proud of the fact that our funds have generated industry leading annual returns through the years, even though emerging Asian markets have frequently substantially underperformed US and developed country markets.   Our funds, in effect, were competing with US and other regional fund of hedge funds on an uneven playing field. 

We believe we are at or near an inflection point where this cycle reverses, and emerging Asian markets start to outperform.  When that happens, our funds’ returns should rise even farther from the pack.

Indus Manager Steadview Capital at the Forefront of the Tech Boom in India

India is on the cusp of a wave of tech IPOs that will dramatically expand the universe of listed Indian tech companies.  There are expected to be 15 tech IPOs in India over the next 18 months.  India’s public tech market is forecast to grow by up to 30x to $500-600 billion by 2025.

Tech companies in India currently account for less than 1% of the $3 trillion total market cap in India, versus 29% of total market cap in the US, and 32% of total market cap in China, so there is huge room for growth.

The Indus Fund has a front row seat to this tech bonanza through its investment in Steadview (and to a lesser extent, Malabar, which has a smaller but highly lucrative private tech portfolio).  The Indus Fund was the first institutional investor in Steadview back in 2012 when it had less than $30 million in assets.  In the following year, three college endowments invested, and Steadview closed the fund to outside investors. 

Over the years, Steadview has established itself as a leading, if not the leading, investor in private tech companies. 

Steadview has focused on an underserved part of the funding market – companies with market caps of between $100 million to $1 billion.  Most venture capital firms invest in companies below $100 million in market cap, and private equity funds tend to invest at a much later stage, typically greater than $1 billion in market cap.  Steadview looks to invest after the business concept has been proven, which greatly reduces risk.

Steadview’s investments in Unacademy, India’s fastest growing education tech firm, is a case in point.  It made its first investment in Unacademy at a $225 million Series D valuation in June 2019, after Unacademy had proven its business model and was growing rapidly.  Global investors, including Facebook, Softbank, Temasek (Singaporean sovereign wealth fund), and General Atlantic, then followed at substantially higher valuations.

Unacademy Funding History ($MM)

Of the eight Indian IPOs expected by the end of this year, six will be Steadview-backed companies.  The first will be Zomato, the leading food delivery company in India, which will list on July 26th.  Zomato’s IPO has generated the most investor demand in India in the past 11 years, drew the second highest ever number of applicants, and was oversubscribed by 40x.  Aptus, Freshworks, Nykaa, Policybazaar, and Delhivery are then expected to list over the following six months.

Tech companies, once they go public in India, tend to have very large share price gains following their IPOs because of demand by retail investors.  There were four tech IPOs in India from 2017-19, and the average annual gain for this group has been 170% since their listings. 

We are focused on maximizing the Indus Fund’s exposure to this opportunity.  Steadview is the Indus Fund’s largest allocation, accounting for almost 40% of the portfolio.  We are eager to build larger exposure.  This is not an opportunity to waste.

Two Chinus Managers Receive Eurekahedge Asian Hedge Fund Awards for 2020

We are pleased to pass on that two Chinus managers won Eurekahedge Asian Hedge Fund Awards for 2020.  Brilliance won the Best Asian Billion Dollar Hedge Fund award, and IvyRock won the Best Greater China Hedge Fund award after generating an 84% gain for the year.  

In addition, Springs China, the third of four Chinus managers, was awarded the prestigious "10-Year Outstanding Private Fund Firm" in China at the 11th Golden Sunshine Awards in August. We have long claimed that our managers are the best investors in China.  Our claims are now backed up by industry recognition.

Brilliance is an excellent example of our value proposition.  We were an early investor with Brilliance at the beginning of 2017 when their fund had $250 million in assets.  We were impressed by their brain power, passion, and level of due diligence that they conducted on investment candidates.  When evaluating a windfarm operator, for example, an analyst cross-checked data from government wind stations across the country to validate wind generation revenue.   This focus has enabled Brilliance to generate a 397% return since inception, more than 5x the 76% return of the MSCI China index.

Brilliance recently surpassed $1 billion in assets under management and closed the fund to outside investors.  It is one of several managers across our funds that no longer take in new investors.  In effect, our funds provide access to many of the leading hedge funds in Asia that are otherwise inaccessible. 

A Contrarian Case for India

It would be easy to give up on India right now.  Although the Modi government enacted one of the strictest lockdowns in the world, Covid-19 cases are rising rapidly.  Tens of millions of migrant laborers fled from large cities and returned to their villages.  Credit growth has stalled after several banks had to be taken over by the government in the past year.  India’s economy is forecast to shrink by 5-10% this year.

In overcoming the pandemic, India has one distinct advantage over the rest of world.  It experienced a similar short-term economic shock during demonetization in late 2016, when President Modi declared without advance notice that 86% of India’s cash was no longer valid.  The Indian economy came to a standstill that lasted approximately three months before sufficient volumes of a new currency were produced.  India was able to bounce back quickly following that economic shock, with GDP growth recovering to over 8% within a year.  Indian companies, therefore, have experience in recovering from short-term economic shocks, which should aid India’s rebound this year.

India stocks, most of which were already in a severe multi-year bear market prior to the pandemic, experienced one of the steepest sell-offs globally in March.  Foreign investors pulled $8.3 billion out of Indian markets, the highest monthly outflow since the financial crisis in 2008.

We have a contrarian view on India and believe it offers very attractive upside potential over the next three years.  A closer examination of the market dynamics in India reveals a critical distinction - the market declines since 2018 have been largely sentiment-driven and not due to a corresponding decline in corporate profitability.  As a result, valuations in India have declined significantly since the start of 2018 and now trade at the lowest level in over a decade.

Price to Book Valuations by Market Cap in India

It is important to note that the sentiment-driven market declines have been broad-based, impacting both strong and weak performing companies.  This has caused companies in India with rising profits to experience massive valuation discounts.  

This divergence between corporate operating performance and stock performance has particularly impacted our managers in India, who focus on companies with rapidly growing profits.  Indus Manager I-1’s top 10 positions, for example, generated average five-year revenue and earnings growth of 21%.  Despite that stellar operating performance, those companies suffered a 56% decline in average trailing P/E ratio since the start of 2018.  Some specific examples include:

Manager I-1’s performance, which historically has closely tracked its portfolio company profit growth, started lagging at the beginning of 2018, and the gap has widened significantly since then.

Indus Manager I-1 Trajectory of NAV vs. Portfolio Profits

From 2013 through 2017, when NAV tracked profits, Manager I-1 handily outperformed the MSCI India index every year, generating a 172% cumulative gain versus 42% for the index. Over the past two years, though, valuation compression caused Manager I-1 to underperform the market, generating a -32% return compared to a -3% for the index.  

The large divergence between Manager I-1’s performance and portfolio profit growth since 2018 means that its portfolio now has substantial intrinsic value that is not reflected in the share price.  There is very large potential upside, therefore, just from Manager I-1’s NAV catching up to its portfolio profits.

 Manager I-1 conservatively forecasts that its portfolio companies will generate zero profit growth this year, and then 15% annual growth in 2021 and 2022.  The combination of this modest profit growth and valuation normalization back to 2017 levels would cause a 381% jump in Manager’s I-1’s NAV.  The other three Indus managers have similar upside potential.

There are additional potential gains if portfolio company profits rebound stronger than the 15% conservative forecast for 2021 and 2022. Indus managers’ portfolio companies are generally sector leaders with strong balance sheets, and these companies are expected to emerge from the pandemic with significantly higher market share and profit margins as weaker competitors are forced to exit the market.  

For these reasons, we believe that our managers’ portfolios have the highest three-year upside potential that we have seen since launching the Indus Fund in 2010.  This upside potential requires only that portfolio companies achieve modest profit growth and P/E multiples normalize back to 2017 levels.

Bajaj Finance best illustrates the opportunity that India offers now. Bajaj is the leading consumer finance company in India and is the Indus Fund’s largest aggregate position.  Over the past 12 years prior to the lockdown, Bajaj grew revenue by 42% CAGR, profit by 62% CAGR, and its share price by over 45% CAGR.  The cumulative gain in Bajaj’s share price over that period is over 8,500%.  

Since the lockdown, Bajaj has been one of the hardest hit finance companies.  Its share price declined by 16% in May and is now down approximately 60% since the start of the year.  The sell-off is not due to any operational issues and is primarily sentiment driven.  In fact, with one of the strongest balance sheets and most widely used fintech platforms (92% of customers make payments electronically), Bajaj will likely emerge from the lockdown with a significantly enhanced competitive position. 

Bajaj’s share price has historically performed strongly after major crises.  There have been two major corrections in Bajaj’s share price over the previous five years.  The first happened after demonetization in late 2016 when Bajaj’s shares declined by 25% over two months.  The second happened in 2018 when a blue-chip infrastructure bank, IL&FS, unexpectedly defaulted on its bonds, causing investors to exit out of finance stocks.  After those sell-offs, Bajaj’s stock price averaged over 100% annual gains as its stock price caught up to its profit growth.      

Bajaj’s stock price decline from the pandemic is significantly larger than the previous two crises, which provides more room to rebound.  The market has started to recognize Bajaj’s large potential upside this month.  Bajaj’s stock price jumped 38% MTD through June 19.  

Indus Manager I-3 forecasts that Bajaj’s earnings will grow by 5x over the next five years.  Bajaj currently trades at 16.5 PER FY2022. If its multiple increases to its historic average of 30x, Bajaj’s gain over the next five years would be approximately 10x.  A 10x return over five years may sound outlandish, but in Bajaj’s case, it would be a letdown - it equates to 58% CAGR, which is substantially below Bajaj’s average annual returns following the past two crises. 

That is not to say there are not substantial risks.  India being India, the path back to normalcy will likely encounter numerous speed bumps.  We have summarized some of the main risks here.  For investors who have the fortitude to handle the volatility, our managers’ portfolios should generate extremely attractive returns over the next three years if India gets back to normal.

Corporate insiders in India share our view.  Indian insiders (founders and management teams) dramatically increased their purchase of company shares in March.

Stock Purchases by Corporate Insiders Soared in March

Indus Manager I-3 reported to us this month (our bolding): 

The stock charts and data above, almost scream that it is wise and pays handsomely to invest during such times. Nevertheless, it requires courage to remain non-consensus. It is hard to stand up to uncertainty, especially when we haven’t seen anything like this before. But that’s our test of character when pessimism reigns but opportunity shouts.  It’s when all the near -term negativity is reflected in the prices. The long-term opportunity is magnified when markets extrapolate the near-term uncertainty, believing it to last forever and the crowd refuses to look at the basic structural issues which remain undented. Stock prices usually are at their lows then. They scream opportunity.  That’s where the private sector financials appear to be at the moment – based on history, data and human behavior.  

We agree with Manager I-3 that, contrary to current investor sentiment, India screams opportunity right now. 

Chinus Fund Best Performing Emerging Market FoHF in 2019

We are pleased to announce that the Chinus Fund was the best performing emerging market fund of hedge funds in 2019.  

We also measure ourselves against the global universe of fund of hedge funds, which include funds that have US, global, and other market focuses.  The Chinus Fund ranked #3 out of all fund of hedge funds globally out of 389 funds.  This marks the seventh time in ten years of operation that one or more of our funds have been ranked in the top ten globally.  

We are proud of the fact that, at the end of 2018 after the Chinese onshore market had declined by 34% and investor sentiment was at its lowest, we took a call that the sell-off was overblown, and that Chinese markets had significantly more upside potential than downside risk.  We took action and added money to the two most aggressive strategies in the Chinus Fund.  I also personally added to my investment in the Chinus Fund.  Our moves paid off as those strategies jumped 59% and 47% in 2019 and were major contributors to the Chinus Fund’s outperformance. 

Part of our value add as managers is to make contrarian moves when our information network provides evidence that markets are acting irrationally.  These opportunities often turn out to be quite lucrative, as was the case in 2019.

Looking forward, we believe that SE Asia (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) offers similarly attractive risk/reward dynamics.  I personally added to my investment in the Asius Fund late last year to build exposure to this opportunity.  We discuss in more detail below why we believe SE Asia could be a once in a generation opportunity.

Emerging Asian Markets Offer Greatest Alpha Opportunities

There is a lively debate going on in the investment community about whether active investment strategies, particularly hedge funds, can outperform passive investment strategies that seek to mimic the market.  Bloomberg Businessweek reported that, from 2009 to 2017, US hedge funds generated an average return of 7.2% annually, which is less than half the S&P 500’s return.   

However, there are two major caveats to using that data to conclude that passive investing is superior.  The first is that in hedge funds, like everything else, there are a few outstanding performers that generate returns far in excess of the average.  The key is to find those managers who are able to generate alpha.  Not investing in hedge funds because the overall average is low is a bit like saying Stephen Curry should not shoot three pointers because the average NBA player makes less than 30% of three-point shots. Whether to take a three-point shot depends on the person doing the shooting, not the overall average.  Same with hedge funds.  

The second caveat is that not all markets are alike, and active investment strategies work best in inefficient markets.  Schroders, a 200-year-old investment manager with $565 billion in assets under management, recently calculated that active strategies generated by far the highest alpha in emerging Asian markets compared to other regions in the world.  

The chart above provides backing to our claims that the inefficient markets of emerging Asia offer unrivaled opportunities to generate alpha, and that leading managers can generate substantial long-term outperformance.  It also provides strong validation for our multi-manager investment approach.  

Emerging Asia is the one region in the world where active strategies have clear advantages. Our funds provide investors with access to managers whose ability to generate long-term alpha make them the Chinese, Indian and SE Asian Michael Jordan’s of the hedge fund world.