Fund Performance In January the Class B shares increased by. The MSCI Asia Pacific (MSCI AP) gained 4.94% during the month. The volatility of the fund is 6% since inception and 22.1% on the MSCI AP index level. Fund Performance Share Class NAV MTD YTD ITD 1,000.67 991.33 0.07% -0.87% Market Environment During the month the MSCI Asia Pacific moved up strongly by 4.94% in US dollar terms. Index performance across countries was dispersed. The Hong Kong equity market was a positive outlier moving up 6.9% for the month. The weaker markets during January were Indonesia and Australia, both moving down marginally. On a sector level, Materials and IT were the strongest sectors moving up 9.1% and 8.7% respectively, while Consumer Staples and Financials lagged. The IT sector was particularly strong in Korea, where memory-related companies moved up strongly, pushing the index higher. Style wise, value stocks underperformed their growth peers. Moreover, the reversal factor in our proprietary quant model was particularly strong moving up 3.9%, typical for the month of January. The strong risk-on equity market moves were in line with cross-asset behavior. The U.S. dollar weakened versus Asian currencies during the month. Moreover, the U.S. 10-year yield remained flat. Also Chinese macro economic data was supportive during the month. All in all, this provided a good backdrop for risk assets to perform. Consequently, industrial metals moved up sharply. In particular copper (up 8.9%) was strong. Top & Bottom Industry Movers Industry Group MTD YTD PB PE Materials IT Health Care Industry Group 9.1% 8.7% 5.9% MTD 9.1% 8.7% 5.9% YTD 1.5 2.5 5.0 PB 21.3 21.1 24.1 PE Consumer St. Financials Consumer Disc. 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 3.6% 3.6% 3.0 26.1 4.2% 4.2% 1.4 12.0 4.4% 4.4% 1.7 17.8 Source: Bloomberg 4.2% 0.9% 37 19 76% 42% 12 / 9 0.60 39% Largest Long & Short Holdings Longs Shorts Sk Hynix Comfortdelgro Co Samsung Electronics Mediatek Chimei Innolux C Lg Electronics Sk Telecom Adr Rea Group China Railway Construction Orion Corp Source: BNY Mellon Fund Services Single Stock Activity Largest Buy & Buy Cover* Largest Sell & Short Sell** Csl BC Wesfarmers SS Commonw Bk Austr BC Newcrest Mining S China Railway Constructi B Lg Display S Amorepacific Cor BC Hollysys Automat S Lg Electronics BC Rea Group SS * B = Buy; BC = Buy Cover Source: BNY Mellon Fund Services ** S = Sell; SS = Short Sell Performance In January, performance of the fund lagged the market when taking into account the fund s net exposure and ex-ante beta. This is primarily due to the strong performance in cyclical material stocks such as steel and non-ferrous metals, where we have limited exposure (our exposure is in gold mines). Also, our Chinese exposure is mainly in old economy names or oil related stocks, whereas financials and property stocks performed well during January. Our biggest contributor for the month was SK Hynix. The Korean maker of memory semiconductors continues to benefit from better than expected supply-demand dynamics in the DRAM market. During the month the stock gained another 20%, adding 0.44% to the fund s performance. We continue to be a holder of the stock, given the improvements in the DRAM market and relatively attractive valuation of the stock. 1
Performance Our second largest contributor was China Petroleum, which moved up 13% adding 0.27%. The stock moved up strongly during January on the back of positive sentiment surrounding a potential IPO of its gas-station and convenience store business in 2017. Moreover, Sinopec has divested a pipeline during December, unlocking the value of its pipeline assets. Given the fundamental improvements driven by the recovery in the oil price, undervalued downstream assets implied by the current share and oil price, record high cash flow and improved balance sheet quality we deem the company undervalued at 1x book and 12x next year s earnings. The main detractors of performance during January were Medusa Mining and CSL. The former, a Australian gold mining company, significantly downgraded its gold production guidance during the month due to problems with the main L8 shaft. The stock sold off sharply, 20%, during the month in part driven by the company s history with disappointing investors. Also the company s cash position is not strong at $20 million. Hence, investors in the company remain skeptical and are quick to sell the stock on bad news. However, at 0.2x price to book and 1.5x next year s earnings much of the overhang is priced in. CSL detracted 0.23% from the fund's performance as the stock had a strong bounce following its surprisingly positive earnings guidance, forcing analysts to upgrade EPS expectations. Top Gainers & Losers Gainers CTR* Losers CTR* Sk Hynix L 0.4% Medusa Mining L -0.2% China Petroleum L 0.3% Csl S -0.2% Nine Dragons L 0.3% Lg Electronics S -0.1% Chimei Innolux C L 0.2% Delta Elect S -0.1% Samsung Electronics L 0.2% Hollysys Automat L -0.1% *CTR = Contribution Investment Strategy Over the course of the month we increased our net exposure quite sharply by 13.1%, while our gross exposure moved up slightly. The increase in the net exposure was the result of covering some short positions as well as adding to the long book. Value Factor Performance* P/E EV/EBITDA P/B Div Yld EV/IC FCF MTD -0.8% -2.2% 0.7% -3.1% 0.3% 0.3% YTD 10.7% 12% 15.2% 10.6% 12.3% 8% 40.0% 20.0% 0.0% -20.0% 0.10% 0.00% * Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cumulative Percentage Return 12 month rolling 1 2 3 4 5 Percentage Average Daily Return Per Quintile [YTD] Our biggest buy transaction was a buy cover trade to close out our position in CSL, which as mentioned had a strong bounce and hit its stop loss. The second largest buy cover transaction was in CBA. The Australian bank s stock continued its post Trump election run, benefitting from the steepening yield curve. Nevertheless, our long standing view remains that the Australian housing cycle is rolling over, while at the same time the banks need to recapitalize further. However, to manage our risk budgets we reduced the position size to limit losses. During the month we added Wesfarmers to the short book. The Australian retail operator, of among others the Coles chain, is fiercely competing with Woolworths. In the long book, we increased our position in China Railway Construction. The company s stock technical profile is looking favorable. Moreover, the company s fundamentals remain solid as the firm is expected to benefit from Private-Public Partnerships in China. The stock is trading at an undemanding 8.3x next year s earnings. In the long book we sold down our position in Newcrest mining taking profits after the recent strong run in the stock. We also reduced our exposure to LG display, the Korean display maker. The longer term story for this stock remains intact. The company has a strong technological position in OLED displays, which are expected to contribute meaningfully from FY18 onwards. Nevertheless, the stock started to sell off in recent weeks and we reduced our position to manage risk. 2
Risk Measurement and Management Given our prior low net and gross exposure, the fund faced primarily upside risks in the short book. Therefore we selectively reduced some short positions to manage this risk in January. The risk exposure, as measured by the ex-ante volatility, stood at 4.8% in line with the previous month. Our ex-ante beta measure moved up with the net exposure and increased cyclical exposure from 0.08 to 0.24. Moreover, the portfolio continues to be exposed to cheap stocks with positive earnings and price momentum. 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% Mar Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Long Exposure [L] Gross Exposure [L] Short Exposure [L] Net Exposure [R] 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 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 11.2 15.7 6.6 15.5 1.6 3.8 2.6 3.0 1.2 3.4 5.8-0.5 9.0-6.3 22.6-2.4 14.1-3.2 8.6-15.8 11% 16% 0.2 0.2 Long Short 0.7 0.8 11.0% 11.4% 33.0 19.0 4.8% 6.1% 1.6% 0.24 Source: Nomura TradeSpecs and UBS PAS Outlook For Asian equity markets the start of the year has been spectacular with investors jumping on the higher inflation, higher growth bandwagon. However, we think the optimism in Asian equity markets is premature for a number of reasons. First of all, sustainable economic growth comes from either rising productivity or population growth (positive demographic trends). Neither are favorable in much of the western world and Asia, except for a few developing economies such as India and Asean countries. Also, the world is still suffering from overcapacity and is overly indebted, both have not disappeared since Trump s election. To summarize, the backdrop for economic growth and inflation has not changed over the past few months. The thing that changed were expectations on the back of policy that is still being drafted. Moreover, conveniently, it seems as if only the positive side of potential policy changes are being priced in. However, the risks of the trade rhetoric of President Trump and the proposed Border Adjustment Tax are real and could impair global trade flows and hence economic growth. The closing of the current account deficit has the potential to push the U.S. dollar higher, exacerbating the deterioration in global credit conditions. Hence, we remain skeptical of the recent risk-on rally on the simple premise that a genuine bull market driven by stronger economic growth and earnings expectations lacks the necessary fundamental backdrop. Consequently, it is difficult for to jump on the bandwagon given that valuations are near historical averages and the above mentioned risks might resurface over the next few months. Consequently, we remain cautiously positioned with our recent cyclical additions being in high quality, industry leaders with solid balance sheets, rather than high-beta stocks in highly geared sectors plagued by structural overcapacity. 3
Historic Fund Performance (Monthly) 2016-0.65% 1.33% -1.87% -0.29% -0.82% 1.76% 2.50% -0.77% 0.67% 0.25% -1.04% -1.08% 2015-1.11% 2014-0.30% 0.24% 0.13% -1.19% 2013 2.39% 2012 2011 2010 2009 Jan 2017-1.74% -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% 2017 2016 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% 2013 2.44% 1.58% 1.20% 2010 2009 2008-0.61% 1.37% -1.83% -0.25% -0.77% 2014-0.26% 0.28% 2012-0.96% 0.96% 2011-1.70% -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% -0.06% 0.41% 1.72% -1.04% -0.19% 1.43% 1.33% 1.31% -0.48% -0.75% 0.04% 0.22% 0.87% 0.84% 1.54% -1.78% Historic Fund Performance (Yearly) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008-0.10% 0.17% 0.93% 3.57% -4.37% -8.97% -2.16% 10.89% 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 127,412,735 Legal Status FGR (fund for joint account) Fund Size in USD $137,401,893 Fiscal Status VBI (tax exempt) Participations Outstanding Class A 243 Dividend Policy Reinvestment Base Currency EUR Participations Outstanding Class B 128,282 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 221,534,229 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