Fund Performance In April the Class B shares depreciated by 0.11%. The MSCI Asia Pacific (MSCI AP) gained 1.33% during the month. Year to date, the fund is up 1.05%, whilst the MSCI AP index is up 9.36%. The volatility of the fund is 5.9% since inception and 29.1% on the MSCI AP index level. Fund Performance Share Class NAV MTD YTD ITD 996.71 988.58-0.15% -0.11% 0.89% 1.05% -0.33% -1.14% Market Environment Asian equity markets continued their strong performance of Q1 2017 by moving up 1.3% in April. On a country level the Philippine stock index reversed its weak performance during March moving up 5.2% while the Indonesian index continued to perform well, up 3.1%. The Singaporean and Thai equity indices lagged the broader market with both indices down -0.1%. Sector wise the momentum from March persisted with last month s strongest sectors, IT and consumer discretionary, up another 4.6% and 2.1% respectively. On the other hand, the telecom and materials sectors were down -1.9% and -1.8% respectively. From a style perspective growth stocks outperformed value stocks in Asia by 1.9%. In April, cross asset performance was a story of two halves driven by US Treasury bonds. From the start of the month, the 10-yr U.S. government bond yields moved down sharply from 2.39% to 2.17% on April 18 th. During this period precious metals rallied 2.7%, while industrial metals sold off. However, from the 18 th of April onwards the markets reversed. As the U.S. 10 year government yields moved up, the U.S. dollar weakened and precious metals started to pull back. This market action can be partially explained by positive macro-economic data points. On April 17 th, China released a range of hard economic numbers pointing to stronger economic activity. Moreover, these data points where followed by the results of the first round of the French presidential elections, which eased market concerns of a Marine Le Pen victory. Consequently, these two events led to a risk-on scenario, which resulted in higher yields, a weaker U.S. dollar and precious metals selling off. Top & Bottom Industry Movers Industry Group MTD YTD PB PE IT Consumer Disc. Industrials Industry Group 4.6% 2.1% 1.0% MTD 22.5% 15.8% 13.0% YTD 2.7 1.9 1.4 PB 19.6 19.4 17.3 PE Telcom Materials Consumer St. 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 -1.9% 5.1% 2.0 17.9-1.8% 7.4% 1.4 16.8-0.1% 8.8% 3.1 27.9 Source: Bloomberg 0.8% 1.1% 34 19 50% 26% 7 / 11 0.29 39% Largest Long & Short Holdings Longs Shorts Samsung Electronics Harvey Norman VIP Shop Advantech Co Sk Hynix Mediatek Newcrest Mining Kia Motors Corp Tencent Holdings Cj Korea Express Source: BNY Mellon Fund Services Single Stock Activity Largest Buy & Buy Cover* Largest Sell & Short Sell** Lg Household & H BC China Const Bank S Comfortdelgro Co BC China Railway Construction S Woongjin Coway BC Icici Bank Adr S Amorepacific Cor BC Tencent Holdings S Sk Hynix B Pegatron Corp S * B = Buy; BC = Buy Cover Source: BNY Mellon Fund Services ** S = Sell; SS = Short Sell Performance During the month, performance of the fund was muted with limited outliers on the winning and losing side. Samsung Electronics was the strongest performer during the month moving up 8%. The company released earnings numbers which surprised consensus expectations to the upside. The strength of the earnings was driven by good market conditions in DRAM and NAND which the company expects to persist in the second quarter. Moreover, corporate governance at the company seems to be improving with the company cancelling treasury shares equivalent to 13% of common shares outstanding. Looking ahead the early sales numbers of the newly released Galaxy S8 are encouraging and should boost profits. Consequently, at 8.5x forward earnings we think the company is undervalued. Our second best contributor for the month was Innolux which moved up 12%. The company released unaudited sales numbers which were strongly up. The company is benefitting from favorable large screen LCD panel pricing due to better than expected market conditions as some competitors have shifted LCD capacity towards OLED. In our opinion the company is undervalued 4x forward earnings and 0.5x price-to-book (P/B). 1
Performance On the losing side two stocks stand out, Newcrest Mining and SK Telecom. Newcrest moved down in line with the gold price, but idiosyncratic factors also impacted the stock. One of the company s mines was struck by an earthquake which led to production distortions. Consequently, during the earnings release later in the month, the company had to cut full year production guidance to the lower end of the range. Besides the production set back the earnings release was otherwise constructive with costs surprising on the downside. SK Telecom, the Korean Telecom operator, moved down 6% subtracting 0.18% from portfolio performance. The company released first quarter earnings which positively surprised on the bottom line. This surprise was driven by narrowing losses at their subsidiary SK Planet while another subsidiary, SK Hynix, performed strongly. Despite the subsidiaries positively surprising, the core business of the company remains under pressure. New subscriber numbers grew steadily but were realized through a significant increase in marketing spending. Moreover, ARPU declined 2.9% due to rising numbers of discount plan subscribers. All in all, with the overhang from SK Planet losses waning and the stock trading at book value, 8.5x forward earnings and a 4.3% dividend we view the stock as attractively valued. Top Gainers & Losers Gainers CTR* Losers CTR* Samsung Electronics L 0.3% Newcrest Mining L -0.3% Chimei Innolux C L 0.3% Sk Telecom Adr L -0.2% Tencent Holdings L 0.3% Amorepacific Cor S -0.1% Sk Hynix L 0.1% New China Life-h S -0.1% Harvey Norman S 0.1% Lg Household & H S -0.1% *CTR = Contribution Value Factor Performance* P/E EV/EBITDA P/B Div Yld EV/IC FCF MTD -2.3% -0.8% -2.9% -1.5% -2.0% -0.9% YTD 6.1% 9% 5.4% 3.9% 7.1% 9% 20.0% 0.0% -20.0% 0.10% 0.00% * Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Cumulative Percentage Return 12 month rolling 1 2 3 4 5 Percentage Average Daily Return Per Quintile [YTD] Investment Strategy During the month the net exposure and gross exposure of the fund came down. This was primarily driven by selling in the long book. Our largest sell transaction was in China Construction Bank. In spite of solid earnings, the stock s price momentum continued to fade. Consequently, we managed our risk exposure and reduced the position. Similarly, price momentum in China Railway Construction slowed. However, the structural bull case for Chinese construction companies related to the one belt one road project is still in place. Therefore, to reduce idiosyncratic risk we lowered our exposure to China Railway Construction and partly diversified the proceeds into China Communication Construction. Our largest buy transaction in the long book was in SK Hynix. We rebuilt the position after a period of consolidation in the stock. The company posted strong results during the month and the outlook for the DRAM market remains favorable. Moreover, the company continues to be attractively valued at 4x forward earnings given the beneficial market dynamics. Two of our buy cover transactions in the short book were Korean cosmetics stocks with significant China exposure: Amorepacific and LG Household & Healthcare. Over the course of the last few months both stocks had moved down a lot. This was driven by tensions between the South Korean and Chinese governments. These tensions led to a reduction in Chinese sales for the Korean cosmetics companies and put the expensively priced stocks under pressure. However, during April more headlines surfaced of easing tensions between the two nations causing upside volatility in the stocks to pick up. Hence, this led us to reduce our risk exposure and take profits. Lastly, we closed our position in Comfortdelgro as their earnings outlook started to stabilize. 2
Risk Measurement and Management During the month we reduced the net exposure of the fund from historically high levels, primarily by decreasing our long exposure. Moreover, the gross exposure also came down strongly from around 110% to 88%. As a result, the ex-ante 3-month volatility of the fund remained low at 4.3% while the longer run volatility measure is 6.7%. Both measures came down from last month s reading in part due to our lower net and gross exposure. Positioning wise, the fund remains exposed to cheap stocks with positive 6 and 9-month price momentum and positive earnings revisions. 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -10% Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Long Exposure [L] Gross Exposure [L] Short Exposure [L] Net Exposure [R] 60% 50% 40% 30% 20% 10% 0% Source: BNY Mellon Fund Services * Fund Overview Long Short 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 12.0 4.4 2.6 1.8 1.7 1.3 13.5 15.7 15.8 16.5 13% 0.2 15.4 12.4 3.0 3.9 2.9-0.2-4.9-6.0-11.5-13.9 16% 0.2 Style Exposure Long Short Beta Volatility Debt-to-equity 0.7 8.7% 19.0 0.9 10.5% 53.0 Risk Statistics Delta Adjusted Volatility (ex-ante; 3 month daily data) Volatility (ex-ante; 5yr monthly data) Var (99%, 5 days) Beta (ex-ante) 4.3% 6.7% 1.3% 0.19 Source: Nomura TradeSpecs and UBS PAS Outlook For the next three to six months our view remains that the cyclical risk-on rally in Asian equities will continue. Hence, our exposure towards high quality cyclical stocks with strong balance sheets. However, for the remainder of the year we are skeptical of the current bull run in Asian equities as explained in previous newsletters. In part this is due to excess liquidity drying up globally which usually provides a headwind for risk assets with a 6-12 month lag. The deterioration in liquidity was very visible in China during April as authorities made headlines due to their crackdown on the shadow banking system. Also, U.S. credit growth, per Commercial and Industrial loan data from the FED, is slowing, which bodes ill for the U.S. economy. Hence, for the coming months we expect liquidity to remain fine which reduces the probability of a drawdown in equity markets. However, when liquidity starts to dry up, it is difficult to imagine market participants stepping in to provide liquidity at current equity valuations in the United States. Consequently, looking at markets from a liquidity perspective we remain cautious at these valuation levels. Lastly, the reflation trade of late remains a fact versus fiction narrative. With longer term facts (overcapacity, high debt levels, demographic headwinds) being challenged by short term fiction (better soft economic data points, expectations of tax reforms and infrastructure spending). With daily headlines being dominated by reflation it becomes easy to forget the backdrop in which we currently operate. To become structurally more bullish we would need to see hard economic data points picking up further (wage growth, capex and inflation). Sustainable economic growth, needed for us to become more bullish, needs to be driven by productivity gains and not by further credit fueled fixed asset investment. 3
Historic Fund Performance (Monthly) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 1.29% -1.20% 0.96% -0.15% 2016-0.65% 1.33% -1.87% -0.44% -0.66% 1.76% 2.50% -0.77% 0.67% 0.25% -1.04% -1.08% 2015-1.11% 0.92% 0.51% 5.50% -0.59% -2.80% -3.55% 2.41% 2.73% -3.01% -0.37% -0.09% 2014-0.30% 0.24% 0.13% -1.19% -1.46% 1.46% -0.44% 0.98% -0.87% -0.23% 1.39% 1.28% 2013 2.39% 1.53% 1.16% 0.37% -0.79% -3.32% -0.16% -0.50% -1.05% 1.61% 2.24% 0.17% 2012-1.00% 0.92% -1.67% -0.72% -2.42% -0.51% -0.36% -0.69% 1.81% -0.48% 1.26% -0.53% 2011-1.74% -1.69% 1.39% 0.29% -0.96% -0.84% 1.13% -2.41% -4.53% -1.03% 0.37% 0.82% 2010-1.92% -0.67% 2.95% -1.48% -3.10% -0.07% -0.84% 0.42% 0.81% 1.90% -0.80% 0.79% 2009 0.24% 0.56% -0.80% 0.77% 1.39% -0.84% 3.72% -1.20% 3.56% 0.08% 1.61% 1.43% 2017 1.34% -1.16% 1.01% -0.11% 2016 2014-0.26% 0.28% 2012-0.96% 0.96% 2011-0.61% 1.37% -1.83% -0.40% -0.62% -1.70% 0.18% 2013 2.44% 1.58% 1.20% 2010 2009 2008-1.88% 0.82% -1.66% 1.44% -0.64% 2.99% 0.60% -1.15% 0.41% -1.63% -0.68% 0.33% -1.44% -1.42% -0.75% -2.38% -0.92% -3.06% 1.50% -0.40% 1.02% -0.76% 0.80% 2.24% -1.00% 4.68% -1.44% 1.81% 2.54% -0.72% 0.72% 0.28% -0.99% 2015-1.07% 0.96% 0.55% 5.54% -0.55% -2.76% -3.51% 2.45% 2.77% -2.97% -0.33% 0.00% -0.19% 1.43% 1.33% -3.28% -0.11% -0.46% -1.01% 1.65% 2.29% -0.47% -0.80% -0.31% -0.64% 1.17% -2.36% -0.03% -0.80% 0.47% 0.86% -1.27% -0.83% 1.85% -0.43% -4.50% 0.85% -0.99% 1.94% 4.01% 0.12% -4.91% -0.06% 1.72% 0.22% 1.31% -0.48% 0.41% -0.75% 0.04% -1.04% 0.87% 0.84% 1.54% -1.78% Historic Fund Performance (Yearly) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 0.89% -0.10% 0.17% 0.93% 3.57% -4.37% -8.97% -2.16% 10.89% 1.05% 0.40% 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 120,146,624 Legal Status FGR (fund for joint account) Fund Size in USD $128,509,102 Fiscal Status VBI (tax exempt) Participations Outstanding Class A 243 Dividend Policy Reinvestment Base Currency EUR Participations Outstanding Class B 121,290 ISIN NL0009051879 ISIN NL0001118007 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 223,356,399 Management Fee Class A 1.5% Firm AUM in USD $238,902,513 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 4
Investment Objective Capital appreciation through investing in Administrator BNY Mellon Fund Services long/short positions Accountant PricewaterhouseCoopers Legal De Brauw Blackstone Westbroek N.V. Title Holder SGG Custody B.V. Depositary Bank of New York Mellon Contact Details WTC The Hague, Tower E 7th floor Prinses Margrietplantsoen 43 2595 AM, The Hague The Netherlands +31 (70) 7568030 www.pelargoscapital.com 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