Pelargos Asia Alpha Fund September 2016

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1 Fund Performance In September the Pelargos Asia Alpha Fund Class B shares increased by 0.72%. The MSCI Asia Pacific ex Japan (MSCI APxJ) gained 1.53% during the month. Year to date, the fund is up 2.18%, whilst the MSCI APxJ index is up 9.62%. The volatility of the fund is 6.1% since inception and 22.6% on the MSCI APxJ index level. Fund Performance Share Class NAV MTD YTD ITD 1, % 0.72% 1.80% 2.18% 0.67% -0.43% Market Environment During September the MSCI APXJ oscillated around 1% to end the month 1.5% in the plus. The sector rotation into cyclicals continued with the strongest sectors being IT, materials and consumer discretionary (up 3.7%, 2.3% and 2.6% respectively). Defensive sectors were weak with telecommunications and utilities performing poorest. Divergence in performance was also visible on a country level with the North Asian countries outperforming their Southeast Asian counterparts. Across asset classes we witnessed a strong month for oil and copper prices. Oil moved up 8%, driven at first by rumors of an OPEC production cut, which subsequently occurred at the end of the month. The industrial commodity copper had been a laggard so far this year and started to perform recently, supported by stronger economic growth, especially in China. Precious metals were flat for the month, consolidating their strong year-to-date price performance. September was an eventful month adding to asset price volatility (especially in precious metals). The month started with disappointing U.S. economic data releases which supported equity markets, precious metal prices and weakened the U.S. dollar. This was followed by hawkish comments from FED members yielding the opposite effect. Moreover, the first U.S. presidential debate added to volatility especially in currency markets. In the FX markets in Asia performance was mixed and driven by country specific factors. The Philippine peso was weak versus the U.S. dollar, in part due to concerns regarding the new and outspoken president Duterte. Whereas, Indonesia saw its currency strengthen driven by portfolio inflows. Top & Bottom Industry Movers Industry Group MTD YTD PB PE IT Materials Consumer Disc. Industry Group 3.7% 3.3% 2.6% MTD 22.7% 24.5% 7.5% YTD PB PE Telcom Utilities Industrials General Statistics % Return long book % Return short book # Long stocks # Short stocks % Long stocks % Short stocks # Up days / Down days Daily Correlation with MSCI AP ex JP Turnover as % NAV -1.8% 6.3% % 6.3% % 1.5% Source: Bloomberg 1.9% -0.3% % 18% 12 / % Largest Long & Short Holdings Longs Shorts SK Telecom Commonw Bk Austr Shenzhen Express Cj Cgv Evolution Mining Westpac Banking Pegatron Corp Malayan Banking Perusahaan Gas Lg Electronics Source: BNY Mellon Fund Services Single Stock Activity Largest Buy & Buy Cover* Largest Sell & Short Sell** United Overseas BC Hermes Microvision S Perusahaan Gas N B Rea Group SS Sk Telecom Adr B Amorepacific Cor SS JD.com BC Delta Elect SS Infosys ADR B Guangdong Investment S * B = Buy; BC = Buy Cover Source: BNY Mellon Fund Services ** S = Sell; SS = Short Sell Investment Strategy During the month the positioning of the fund did not materially change. We added 0.2% in the long book while in the short book we reduced net exposure by 0.7%. Worth mentioning is the addition to SK Telecom. The Korean telecom market has been changing following the ban on mobile phone subsidies by carriers. This has provided the market with more transparency. Moreover, given the oligopolistic nature of the market, this transparency has eased competitive pressures meaning that the Korean telecom operators have stopped undercutting prices. Also, capex for the coming years looks to remain stable at Sk Telecom. Given these developments, attractive valuation and 4.5% dividend yield we have added to the position. One potential negative development for the company is the ongoing overhang from the loss making SK Planet. Our largest buy cover trade was in United Overseas Bank. We timely opened the position in August last year after which the stock rapidly tumbled to a multi year low due to deteriorating asset quality. Since then the stock has been stabilizing for a few months. Moreover, the recent global cyclical up turn in economic growth has eased pressure on the bank. Hence we covered the position. 1

2 Investment Strategy Our largest sell transaction was in Hermes Microvision. The Taiwanese wafer inspection company is being taken out by ASML. As the stock price is trading near the takeover price we have decided to close the position and reallocate the capital. Another sell transaction we conducted was in China Mobile. The Chinese telecom operator had a nice run up during July after which the stock traded sideways. During September the stock s volatility picked up during which we reduced the position size to lock in profits. We also introduced a new short position to the portfolio: REA Group. The Australian based company operates property related websites. The company is currently richly valued at 26 times next year s earnings and 10x price to book. Strong expectations of future profit growth have been baked into these valuation numbers. Earnings revisions have come down since mid-2015, however sell side analysts are expecting earnings growth to pick up over the next two years even though listing volumes have been weak recently. Moreover, the Australian property sector has been overheating for a while and politicians have become more vocal with regard to issues like negative gearing. All in all, given the high valuations and deteriorating fundamentals we entered our short position. Top Gainers & Losers Gainers CTR* Losers CTR* Evolution Mining L 0.3% Lg Display L -0.2% Sk Hynix L 0.2% China Railway ConstrucL -0.1% Medusa Mining L 0.2% PTT foreign L -0.1% Lg Electronics S 0.1% Guangzhou Auto H L -0.1% Pegatron Corp L 0.1% Icici Bank Adr L -0.1% *CTR = Contribution Performance During the month, volatility of the individual positions in the fund were subdued with no strong outliers in contribution terms. The top five winners contributed 1.1% to the fund whereas the top five losers subtracted 0.6%. Hence, two thirds of the performance of the fund during September is attributable to the top five winners and losers. Value Factor Performance* P/E EV/EBITDA P/B Div Yld EV/IC FCF MTD 1.7% 0.3% 1.7% 1.3% 1.5% 0.8% YTD 7.4% 5.2% 9.1% 7.6% 6.2% 4.6% 20.0% 10.0% 0.0% -10.0% 0.10% 0.00% * Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Cumulative Percentage Return 12 month rolling Percentage Average Daily Return Per Quintile [YTD] On the contributing side two gold miners recovered some of their losses from last month as gold stabilized during September. Together, Evolution Mining and Newcrest mining, added 0.53% to the fund s performance. SK Hynix continues its strong run as of late adding another 0.24% to the fund with the stock being up 10%. DRAM prices have continued to improve with September contract prices up 7%. Moreover, sell-side analysts have, in light of this, been revising their target prices for the stock up. Another Korean stock that has contributed this month is LG Electronics. The stock moved down 7% which led to a positive contribution to the fund of 0.15%. During the month the company launched a new phone, the V20. Even though the phone is set to have a high average sales price, the volumes will be low and will not significantly help to reduce the smartphone losses the company has been suffering. Looking ahead, there are currently no visible catalysts lined up for the stock. Also, due to their cost restructuring, visibility will only start to improve next year, leaving the stock in limbo in the mean time. On the losing side, losses were very much contained during the month with the largest loser of the month, LG Display, only subtracting 0.15% from the fund s performance. LCD pricing has been improving driven by capacity reductions and replacement demand. The improvement in LCD pricing and hence profitability is timely for LG Display, which has been allocating CAPEX on OLED to improve the production yields on their OLED tv-screens.the company is well positioned to be a dominant player in the more 2

3 Risk Measurement and Management During the month we did not materially alter the risk exposures of the fund with both our net and gross exposure remaining at similar levels as last month. Our risk measures also have not changed significantly with our exante risk, calculated using our short term risk model, at 5.1%. Also, our exante beta stands at a low level of 0.1. Given our exposure to Australian and Malaysian banks, the portfolio is sensitive to any steeping of yield curves in these countries. Moreover, we have concentrated exposure in more cyclical tech. Overall, the portfolio has a positive value, price and earnings momentum exposure 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -20% Oct Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Long Exposure [L] Gross Exposure [L] Short Exposure [L] Net Exposure [R] 40% 30% 20% 10% 0% -10% Source: BNY Mellon Fund Services * Fund Overview Price to Earnings (PE) EV/EBITDA Price to Book (PB) Dividend Yield EV/IC 1 month momentum 6 month momentum 9 month momentum Earnings momentum (1M) Earnings momentum (3M) CFROI Cash/MarketValue Style Exposure Beta Volatility Debt-to-equity Risk Statistics Delta Adjusted Volatility (ex-ante; 3 month daily data) Volatility (ex-ante; 5yr monthly data) Var (99%, 5 days) Beta (ex-ante) Long Short % 14% Long Short % 13.4% % 6.1% 1.6% 0.10 Source: Nomura TradeSpecs and UBS PAS Outlook The FED has maneuvered itself into a corner. As explained in the last newsletter they are desperately trying (and perhaps wanting) to turn more hawkish and raise rates. However, each time they try doing so, they are confronted with either a financial market reaction or weaker than expected economic data that persuades them to stay put. This, in turn raises the hurdle to raise rates in a later stage as financial market expectations of a FED induced put are reinforced. Looking ahead then we can see the heightened risks of a rate hike for financial markets and a heightened probability of the FED staying put. To elaborate on the former statement, from a financial market perspective, we can see a few measures of strain and/or stress in the system. Correlations between asset classes have jumped to crisis level highs. Consequently, any shock to the system has a larger chance of resulting in financial market instability as assets start moving in sync and diversifying becomes more difficult. Moreover, funding costs for the global reserve currency, the U.S. dollar, have increased for overseas borrowers as shown by the negative cross currency basis spread for the yen and euro. This all the while, European banks are struggling with their own solvency issues. All in all, from a financial markets perspective a rate hike runs the risk of being met with heightened financial market instability. Combining this financial market perspective, with the continuing sluggish growth of the U.S. and global economy (as most recently displayed by the weakening of the Atlanta Fed GDPNow forecast, weak core retail sales and poor global trade numbers), you can imagine the difficulty the FED faces in raising rates. Nevertheless, (wage) inflation in the U.S. is creeping up and unemployment is reaching low levels, hence the problematic position of the FED. As a long/short Asian equity fund we need to be mindful of macro forces that influence the Asian equity markets but are agnostic to whether the FED hikes or not. What is important for us is to consider potential risk factors that impact Asian equity markets and position the fund accordingly, preferably by finding uncorrelated alpha opportunities. However, the U.S. dollar and U.S. economic growth tend to have a large impact on Asian economies and equity markets. One can easily see how an environment in which U.S. growth is weak and the FED is contemplating a rate hike (due to inflation picking up) is one of the larger risk factors facing Asian equity markets (together with weakness in Chinese growth). Combining this with the historically average valuation of the MSCI APxJ, we do not feel the risk-return balance favors aggressive long risk positions. However, we remain on the lookout for uncorrelated stock picks to add to the portfolio. Moreover, using our gold positions we are able to partially shield the portfolio in case this stagflationary environment results in a rate hike by the FED. 3

4 Historic Fund Performance (Monthly) % 1.33% -1.87% -0.29% -0.82% 1.76% 2.50% -0.77% 0.67% % % 0.24% 0.13% -1.19% % Jan -1.74% -1.92% 0.24% Feb Mar Apr May Jun Jul Aug Sep Oct Nov 0.92% 0.51% 5.50% 1.53% 1.16% 0.37% -1.00% 0.92% -1.67% -0.72% -1.69% 1.39% 0.29% -0.67% 2.95% 0.56% -0.80% -1.48% -0.59% -1.46% 1.46% -0.44% 0.98% -0.87% -0.23% 1.39% -0.79% -2.42% -0.96% -3.10% 0.77% 1.39% -2.80% -3.32% -0.16% -0.51% -0.36% -0.84% -0.07% -0.84% -0.84% 3.72% -3.55% 2.41% 1.13% -0.50% -0.69% -2.41% 0.42% -1.20% 2.73% -3.01% -0.37% -0.09% -1.05% 1.81% 0.81% 3.56% 1.61% -0.48% -4.53% -1.03% 1.90% 0.08% 2.24% 1.26% 0.37% -0.80% 1.61% Dec 1.28% 0.17% -0.53% 0.82% 0.79% 1.43% % 2.54% -0.72% 0.72% % 0.96% 0.55% 5.54% -0.55% -2.76% -3.51% 2.45% 2.77% -2.97% -0.33% 0.00% % 1.58% 1.20% % 1.37% -1.83% -0.25% -0.77% % 0.28% % 0.96% % -1.88% 0.82% 0.60% 0.18% -1.66% 1.44% -0.64% 2.99% -1.15% 0.41% -1.63% -0.68% 0.33% -1.44% -1.42% -0.75% -2.38% -0.92% -3.06% 1.50% -3.28% -0.11% -0.46% -1.01% 1.65% 2.29% -0.47% -0.80% -0.40% 1.02% -0.31% -0.64% 1.17% -2.36% -0.03% -0.80% 0.47% -0.76% 0.80% 2.24% -1.00% 4.68% -1.44% 0.86% -1.27% -0.83% 1.85% -0.43% -4.50% 0.85% -4.91% -0.99% 1.94% 4.01% 0.12% -0.19% 1.43% 1.33% -0.06% 1.31% -0.48% 0.41% -0.75% 1.72% 0.04% 0.22% 0.87% 0.84% 1.54% -1.78% Historic Fund Performance (Yearly) % 0.17% 0.93% 3.57% -4.37% -8.97% -2.16% 10.89% 2.18% 0.72% 1.44% 4.10% -3.88% -8.52% -1.67% 13.96% -7.02% Fund Facts Fund Facts Investment Manager Pelargos Capital Fund Size in EUR 127,994,533 Legal Status FGR (fund for joint account) Fund Size in USD $143,801,857 Fiscal Status VBI (tax exempt) Participations Outstanding Class A 243 Dividend Policy Reinvestment Base Currency EUR Participations Outstanding Class B 128,307 ISIN NL ISIN NL Minimum Subscription Class A EUR 10,000 Inception Date January 2009 Minimum Subscription Class B EUR 10,000 Inception Date July 2008 Dealing Day First business day of each month Subscription Any dealing day, 5 business days notice Company Facts Redemption 15 business days notice Firm AUM in EUR 218,250,624 Management Fee Class A 1.5% Firm AUM in USD $245,204,576 Management Fee Class B Performance Fee Class A 1.0% 20% subject to High Watermark Portfolio Managers Performance Fee Class B 15% subject to High Watermark Angus Chiang Early Redemption Fee max 1% (accrues to Fund) Richard Dingemans Lock-up Class B 1 year Fund Description Investment Strategy Equity Long/Short Service Providers Investment Style Value with a twist Prime Brokers UBS AG, Goldman Sachs International Investment Objective Capital appreciation through investing in Administrator BNY Mellon Fund Services long/short positions Accountant PricewaterhouseCoopers 4

5 Legal Title Holder Depositary De Brauw Blackstone Westbroek N.V. SGG Custody B.V. Bank of New York Mellon Contact Details WTC The Hague, Tower E 7th floor Prinses Margrietplantsoen AM, The Hague The Netherlands +31 (70) Disclaimer Pelargos Capital B.V. has compiled this publication. Pelargos Capital B.V. is a management company and in that capacity avails of a license pursuant to section 2:65 of the Act on Financial Supervision of the Netherlands (Wft) as that section reads following the incorporation of the AIFM Directive in the Wft]. Although the information contained in this publication is composed with great care and although we always strive to ensure the accuracy, completeness and correctness of the information, imperfections due to human errors may occur, as a result of which presented data and calculations may vary. Therefore, no rights may be derived from the provided data and calculations. All information is provided "as is" and is subject to change without prior notice. Pelargos Capital B.V. does not warrant the adequacy, accuracy or completeness of any information and expressly disclaims any liability for errors or omissions therein. The recipients of this publication are responsible for evaluating the accuracy, completeness or usefulness of this information. The information contained in this publication does not constitute any recommendation, investment proposal, offer to provide a service, nor a solicitation to buy or sell any security or other investment product. The publication of this information may be subject to restrictions imposed by law in some jurisdictions. Pelargos Capital B.V. requests any recipient of this publication to become acquainted with, and to observe, all restrictions. Pelargos Capital B.V. accepts no liability for infringement of such restrictions. The recipient shall not distribute, forward or publish this information. No rights may be derived from the provided information, data and calculations. Also by risks inherent to this investment fund, the value of the investments may fluctuate. Past performance is no guarantee or guide to future performance. 5