Hereford Funds – Firth Asian Value Fund
June 2014
June 2014 Investment Review
In June 2014 the total return of the Fund after deducting all fees and expenses was 0.0%. By comparison the total return of the MSCI AC Asia ex
Japan Small Cap index was 1.8% and the total return of the MSCI AC Asia ex Japan index was 2.3%.
Key Information Hereford Funds – Firth Asian Value Fund
NAV A Shares (30/06/14):
Total Fund Size:
Strategy Assets:
Fund Launch Date:
$113.52
$71 million
$182 million (a)
31/05/11
Performance (%) (net of fees and expenses)
Jan
Feb
Mar
HFFAVF1
2
Small Cap
Asia ex Japan3
HFFAVF1
Small Cap2
Asia ex Japan3
HFFAVF1
Small Cap2
Asia ex Japan
HFFAVF
3
1
Small Cap2
Asia ex Japan
HFFAVF1
3
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2011
-
-1.2
-2.4
-2.3
0.6
2.8
1.1
-8.5
-11.4
-9.9
-12.6
-16.3
-13.2
6.4
10.1
12.0
-5.9
-8.7
-8.3
0.8
-1.2
0.6
-19.7
-26.1
-20.2
-
-
-
-
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2012
6.1
10.0
10.8
12.1
9.0
6.0
-1.4
-3.8
-3.1
-0.9
-1.7
0.0
-5.9
-7.8
-9.6
0.9
1.8
3.0
3.9
0.0
2.6
4.2
2.2
-0.5
3.1
6.7
7.0
2.2
-1.1
-0.3
-0.2
2.9
2.8
3.3
3.5
3.1
29.6
22.4
22.4
Jan
Feb
Mar*
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2013
3.8
3.5
1.7
1.9
1.6
-0.1
2.0
0.5
-2.2
1.0
2.6
1.8
0.4
1.2
-1.3
-4.8
-8.7
-5.7
0.9
0.8
1.8
-1.9
-2.5
-1.5
2.9
6.2
5.4
1.0
2.7
4.4
0.7
-0.9
0.2
0.7
0.2
-1.1
8.7
6.9
3.1
Jan#
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2014
-2.1
-1.7
-4.7
0.9
3.8
3.5
-0.9
1.2
1.0
1.1
0.2
0.7
1.3
3.0
4.0
0.0
1.8
2.3
0.4
8.4
6.4
Since Launch
2
Small Cap
Asia ex Japan
3
Source: Bloomberg, Firth Investment Management
1. Hereford Funds – Firth Asian Value Fund 2. MSCI AC Asia ex Japan Small Cap USD Net Index
* Month end date used is March 28, 2013.
# Month end date used is January 29, 2014.
13.5
4.8
7.2
3. MSCI AC Asia ex Japan USD Net Index (large and mid cap)
Asian markets and the regional small cap indices remained broadly positive in June. Many of the trends which were apparent in the first few
months of this year have continued. In the second quarter large cap stocks outperformed small cap, and most currencies were stronger against
the US dollar, while south Asian markets generated the best returns (India gained 33%).
Regional small cap market returns Apr – Jun 2014
Source: Bloomberg, Firth Investment Management
The performance of the fund compared to its benchmark has been disappointing during this recent period.* The fund is about 8% points behind
the MSCI Asia ex Japan Small cap index since the beginning of this year. The recent period has been the most marked (behind in five months out
of six) but we had noticed some of the effects that have driven this since the middle of last year. It is not the first time there has been short term
underperformance, indeed in 2009 we lagged the market by a much larger amount, but this was as we would expect (in the immediate recovery
from the 2008 crash), whereas our usual experience has been outperformance in falling or more “static” market conditions.
Since last September the benchmark index has rebounded from a short period of depressed returns (May-August) and gained 17%. The Indian
small cap index has gained 95% in US$, including a 10% strengthening in the local currency, while other SE Asian markets have also done well,
whereas small cap stocks in Hong Kong and China have delivered negative returns overall, exacerbated by a slight weakening of the Chinese
Renminbi. We have low overall exposure to South Asia where we have found valuations to be too high, and specifically in India began investing
there last year, but have too little to offset the impact of the Indian bull market on our benchmark index. (The portfolio’s best contributor to returns
was one of the Indian holdings). Not surprisingly the MSCI style indices show that “value” has underperformed “growth” during the period and
indicates a style headwind that has affected our performance. There have been no “blow ups” in particular stocks, and no wholesale collapse in
prices of stocks or sectors in which we invest, but our portfolio has been fairly static whereas one or two markets in the region have been
exuberantly strong.
As a result the valuation of our portfolio on the ratio we prefer – price to book value – appears inexpensive: 1x P/BV compared to our benchmark
and the region as a whole at 1.5x P/BV (and a dividend yield of c.4% compared to 2.2% for small companies generally in this region). There is
considerable potential upside in the portfolio we hold, but we do not know when this will be reflected in returns.
Our largest exposure, and where we have found the most apparently “cheap” stocks over the last couple of years, is to companies operating in
China (mainly Hong Kong listed), and returns from these holdings have been mostly disappointing. We have two main clusters of similar
exposure. Both have proved to be “value traps” so far, therefore remaining “cheap” but lacking positive change in their business results, or indeed
are enduring negative change. The first cluster is export manufacturers based in China. Revenue growth has been weak or negative because of
weak growth in export markets. Local competition, some of it uneconomic but nevertheless supported by financing from vested interests has hit
their pricing power. Also their costs are under pressure as the PRC government pushes up minimum wages. These companies are responding in
a variety of ways. Industry consolidation of competition is underway as are measures to improve productivity via automation, process innovation
and moving production to lower cost provinces and countries. But these measures take time. Value will be unlocked by a combination of self-help
(as above), improvement in end demand and possibly a currency depreciation. To date this year though, business results have been
unsatisfactory. Out of three manufacturers reporting full year results to end March recently, two cut their final dividends. One manufacturer that we
hold announced the sale of its core manufacturing business to one of its largest customers, a North American consumer brand. The sale price at
just above book value crystallises some value for shareholders. Interestingly the vendor is happy to be exiting a difficult business while the
purchaser is happy to be vertically integrating and securing a supply chain in China.
The second cluster consists of consumer brands and retailers operating in China. A rush for exposure to the Chinese consumer in recent years
has led to intense competition and over-supply just as the economy has been slowing down for both cyclical and structural reasons. Further, ecommerce has grown rapidly and threatens traditional business models. Costs have also been rising because of higher property rents and wages.
It appears that many companies have been unprepared for the novel but challenging conditions and have been slow to adjust. In a few cases
early action to improve efficiency and to combat the online threat has already met with success in results and led to positive stock price returns.
Value will be unlocked as companies work through the store restructuring and working capital adjustments in tandem with investment in branding
and new online strategies. Those that have changed will be well positioned for a future cyclical upturn in consumer spending.
Of course, one person’s value trap is another person’s uncrystallised potential gain. As such we still expect high returns from our HK/China
exposure over time. But following a review of a number of these stocks in recent months, some have been reduced where in our judgment positive
change is likely to be delayed or difficult to achieve. This has led to a gradual adjustment lower in our overall exposure. We do not have any
exposure to the financial or property sectors in China, arguably where the stresses of China’s economic transition are likely to be greatest. In
recognition of the nature of the structural challenges facing the Chinese economy and political system we have reduced our investment limit on
this exposure.
India, as ever, is interesting as an investing counterpoint to China. Recent political change has been interpreted favorably by the markets and no
doubt there is very considerable scope for supply-side improvements to the economy and higher quality economic growth. Should persistent high
inflation and large budget deficits be brought under control, the current very high cost of capital for Indian companies would be reduced. Other
things being equal we should expect our exposure to India to rise over time. There are, however, some specific challenges that we face as
investors there and we continue to proceed reasonably cautiously. First, the quality of financial disclosure and data is much lower than we find
amongst Hong Kong listed companies, for example. Listed Indian companies are not obliged to publish consolidated accounts other than annually
whereas the common standard elsewhere in the region is quarterly or semi-annually. Secondly, capital structure and corporate governance
practices including attitudes to related party transactions remind us of Korea in the early 1990s. Indian business groups tend to sprawl across a
myriad of sectors and use high levels of debt to maintain control. Banks appear to be comfortable lending larger amounts to weaker companies
than we find elsewhere in the region. Thirdly, persistently high inflation in India make it likely that asset values on Indian balance sheets are
understated. Earnings and return on equity could thus be overstated. Using cashflow-based metrics and assessing reproduction cost can mitigate
the difficulties in evaluation of such companies.
Perhaps it is no surprise that the world’s two most populous countries, certainly Asia’s key economies, should be the focus of much of our
attention and provide such different investment challenges. We continue, however, to build and manage a portfolio of stocks which we believe
provide tremendous value and from which we expect high long term returns.
*We are conducting an extensive analysis of the portfolio’s returns over the history of this strategy. We will report back with our findings, not least with respect to the disappointing returns in
recent months.
Source: Bloomberg, Firth Investment Management
*Both MSCI benchmark indices (Bloomberg: MSLUAAJN and NDUECAXJ) are net total return indices in USD. MSCI calculates net total return by reinvesting any
dividend income after deducting withholding taxes.
Country breakdown
Hong Kong/China
Indonesia
India
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Others
Cash
% of assets
37
0
5
12
2
1
12
12
1
5
13
Sectoral breakdown
Consumer Discretionary
Consumer Staples
Financials
Health Care
Industrials
Information Technology
Materials
Others
Cash
% of assets
43
7
2
0
11
15
3
5
13
Investment Objective
Hereford Funds - Firth Asian Value Fund is to generate long term capital growth from a portfolio of listed company securities in Asia (ex-Japan). The Compartment will
follow a value-based investing approach and will have a bias towards smaller capitalisation stocks.
The Compartment will directly invest primarily in shares of companies located in, incorporated in, headquartered in, listed on exchanges in or with significant
operations in or significant income derived from Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, the PRC, Singapore, Taiwan and Thailand. The
Compartment may also directly invest in smaller or developing economies in Asia such as Bangladesh, Cambodia, Laos, Pakistan, Sri Lanka or Vietnam. The
Compartment will not invest in China A Shares when investing in the PRC.
The Compartment will directly invest actively in a diversified portfolio of listed equity securities. The Compartment will generally only invest in securities admitted to
official listing on a recognized stock exchange, or dealt in on another regulated market. Although the Compartment intends to invest in a portfolio of not less than 40
stocks and not more than 100 stocks, it is not restricted in or subject to any material concentration or diversification restrictions, and may hold a more limited number of
investment positions.
The Compartment will typically be near fully invested but may hold liquid assets on an ancillary basis. Under normal market conditions, investment in liquid assets and
debt instruments of any kind will not exceed 15% of the Compartment's net assets. In exceptional market circumstances and on a temporary basis only, this limit may
be increased to 100% with due regard to the principle of risk spreading.
The Investment Manager intends to meet the Fund’s objective primarily through stock selection and country allocation. Typically stocks will be bought and held. This is
not a trading strategy and it is not intended to attempt to time general market movements. While portfolio returns will be measured against the Benchmark Index,
portfolio management will not be constrained by reference to the index.
Fund Codes
Bloomberg
ISIN
Reuters
Sedol
Valoren
WKN
HFIRASA LX *
LU0618975774
NA
B64KS81
12853411
A1H9V4
* Share Class A
Fund Details
Dealing Day
Dividends
Investment Manager
Promoter
Fund Administrator
Custodian
Legal Advisers
Auditor
Daily
None - income accumulated within the fund
Firth Investment Management Pte. Ltd. 180 Cecil Street, #13-03 Bangkok Bank Building, Singapore
VP Bank (Luxembourg) S.A., 26 Avenue de la Liberté, L-1930 Luxembourg
VPB Finance S.A., 26 Avenue de la Liberté, L-1930 Luxembourg
VP Bank (Luxembourg) S.A., 26 Avenue de la Liberté, L-1930 Luxembourg
Elvinger, Hoss & Prussen, 2 Place Winston Churchill, L-1340 Luxembourg
Deloitte, 560 Rue de Neudorf, L-2220 Luxembourg
Annual Management Charge
Share Class A
Share Class D
(b)
1.5%
2.0%
Annual Management Charge
Performance fee:
High water mark?:
Hurdle rate:
10%
Yes
MSCI AC Asia ex Japan Small Cap USD Net
Minimum Investment
Share Class A (b)
Share Class D
$100,000 initial / $10,000 subsequent
$10,000 initial / $1,000 subsequent
Order Transmission Information
Original Applications To:
VPB Finance S.A.
attn. Fund Operations / TA-HFF
P.O. Box 923
L-2019 Luxembourg
or, for transmissions via courier service,
26, avenue de la Liberté, L-1930 Luxembourg
Subsequent Applications Only Via Facsimile:
VPB Finance S.A.
attn. Fund Operations / TA-HFF
Fax: (+352) 404 770 283
Tel: (+352) 404 770 260
e-mail: [email protected]
(a) This refers to the total assets to which the Investment Adviser applies the reference strategy.
(b) Share Class A: these shares have UK reporting since launch and are registered with the BaFin for public distribution in Germany from 17/10/12.
Germany – Paying Agent as defined by German Regulation:
Marcard, Stein & Co – Ballindamm 36, 20095 Hamburg; Phone: +49/40.32.099.556, Fax: +49/40.32.099.206
(c) Share Class D: these shares have not yet been launched.
This document is for information purposes and internal use only. It is neither an advice nor a recommendation to enter into any investment.
Investment suitability must be determined individually for each investor, and the financial instruments described above may not be suitable for all investors. This
information does not provide any accounting, legal, regulatory or tax advice. Please consult your own professional advisers in order to evaluate and judge the matters
referred to herein.
An investment should be made only on the basis of the prospectus, the annual and any subsequent semi-annual-reports of HEREFORD FUNDS (the "Fund"), a
société d'investissement à capital variable, established in Luxembourg and registered under Part I of Luxembourg law of 20 December, approved by the Commission
de Surveillance du Secteur Financier (CSSF). These can be obtained from [the Fund, 26, avenue de la Liberté, L-1930 Luxembourg or from VPB Finance S.A., 26,
avenue de la Liberté, L-1930 Luxembourg and any distributor or intermediary appointed by the Fund].
No warranty is given, in whole or in part, regarding performance of the Fund. There is no guarantee that its investment objectives will be achieved. Potential investors
shall be aware that the value of investments can fall as well as rise and that they may not get back the full amount invested. Past performance is no guide to future
performance.
The information provided in this document may be subject to change without any warning or prior notice and should be read in conjunction with the most recent
publication of the prospectus of the Fund. Whilst great care is taken to ensure that information contained herein is accurate, no responsibility can be accepted for any
errors, mistakes or omission or for future returns.
This document is intended for the use of the addressee or recipient only and may not be reproduced, redistributed, passed on or published, in whole or in part, for any
purpose, without the prior written consent of HEREFORD FUNDS. Neither the CSSF nor any other regulator has approved this document.