Fund Performance In November the Pelargos Asia Alpha Fund Class B shares decreased by 0.99%. The MSCI Asia Pacific ex Japan (MSCI APxJ) lost 2.43% during the month. Year to date, the fund is up 1.46%, whilst the MSCI APxJ index is up 5.15%. The volatility of the fund is 6% since inception and 22.4% on the MSCI APxJ index level. Fund Performance Share Class NAV MTD YTD ITD 998.72 988.56-1.04% -0.99% 0.99% 1.46% -0.13% -1.14% Market Environment During the month the market continued to move down, with the broad Asian index (MSCI APxJ) down 2.4%. Nevertheless, the relative outperformance of the cyclical sectors continued. Materials (+0.6%), Financials (0.3%), and Energy (-2.6%) were the strongest sectors, while Telecommunications (-5.2%), Consumer Staples (-4.8%) and IT (-3.9%) lagged. Country index performance was very dispersed and idiosyncratically driven with Singapore (5.1%) and Australia (2.6%) up strongly, whereas Indonesia (-9.1%), India (-7.3%) and the Philippines (-6.8%) were down sharply. From a style perspective the recent value outperformance continued with the MSCI APxJ Value stocks outdoing their growth peers by 2.25%. Moreover, this style environment was also visible in our proprietary quant model in which the value factor was up 2.9%. The big surprise during November was the election of Donald Trump to be the next president of the United States. The response of investors across asset classes was decisive in the weeks post the election. Anticipation of higher economic growth and inflation fueled by Trump s pro economic growth rhetoric pushed yields in the U.S. up from historically low levels. In turn, this caused upward pressure on the U.S. dollar versus Asian currencies, with the Malaysian Ringgit (6.5% weaker) and Indonesian Rupiah (3.9% weaker) hit hardest. Moreover, the election result prolonged the cyclical outperformance of late. Industrial metals outperformed precious metals by 18%, with copper up almost 20% during the month. Top & Bottom Industry Movers Industry Group MTD YTD PB PE Materials Financials Energy Industry Group 0.6% 0.5% -2.6% MTD 26.2% 3.4% 11.8% YTD 1.4 1.2 1.1 PB 59.0 11.0 65.5 PE Telcom Consumer St. IT 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 -5.2% -3.4% 1.9 15.7-4.8% -0.3% 2.8 28.7-3.9% 16.6% 2.2 19.6 Source: Bloomberg -2.7% -1.5% 32 20 34% 60% 11 / 11-0.30 34% Largest Long & Short Holdings Longs China Railway Construction Sk Telecom Adr Sk Hynix Icici Bank Adr Shenzhen Express Shorts Lg Electronics Amorepacific Cor Jb Hi Fi Csl Commonw Bk Austr Source: BNY Mellon Fund Services Investment Strategy In October we aggressively reduced our net exposure to manage our risk exposure surrounding the upcoming U.S. elections. During November, the net exposure moved back up to 29% from a low of 14%. This was mainly driven by buy cover transactions in the short book (18.2% of NAV). The increase in net exposure can be divided in two broad categories. On the one hand, we reduced our financials shorts due to the steepening of global yield curves. On the other hand, we added to our cyclical exposure in the long book. Single Stock Activity Largest Buy & Buy Cover* Largest Sell & Short Sell** China Petroleum B Comfortdelgro Co SS Regis Resources B Amorepacific Cor SS Malayan Banking BC Infosys ADR S Nine Dragons B Hengan Intl SS Commonw Bk Austr BC Perusahaan Gas N S * B = Buy; BC = Buy Cover Source: BNY Mellon Fund Services ** S = Sell; SS = Short Sell Our largest buy transaction was in CNOOC, which we newly introduced to the fund. The company, active in exploration, production and trading of oil and gas, has a strong balance sheet and solid cash flow generation with an all-in production cost of $35 a barrel. The improvement in free cash flow generation by the firm is partly due to cut costing efforts by management over the last year. In our view the market is overly bearish on the production profile of the company, citing increased CAPEX needs and low remaining asset life as risks. Given the attractive valuation and negative sentiment surrounding the stock we initiated a long position. 1
Investment Strategy During the month, we closed our position in Infosys. In previous newsletters we spoke about the headwinds facing the company (Brexit, weak overseas sales) and poor guidance from management. Given the persistence of these headwinds we closed out the position. Lastly, we reduced our exposure to PGAS. The stock continues to be faced with headwinds relating to government interference regarding the spread the company makes on gas distribution. In the short book we reduced our banking exposure given the recent steepening of global yield curves. Moreover, we took profit in two names that sold-off strongly recently: CJ CGV and Comfortdelgro. The former, has lost over a third of its market cap since we started shorting the stock. During November, the Korean based cinema operator, released its latest set of earnings numbers. The disappointing numbers caused the stock to move down further. Given the sharp sell-off, the risk-reward on the stock deteriorated and we decided to take profit. The latter, Comfortdelgro, moved down strongly after its most recent earnings numbers which disappointed on the top line. We timely traded the stock, adding to our short position early in the month. After the sharp move down in November we decided to lock in part of our profits. Top Gainers & Losers Gainers CTR* Losers CTR* China Railway ConstruL 0.4% Pegatron Corp L -0.3% Amorepacific Cor S 0.2% Newcrest Mining L -0.3% Brilliance China L 0.2% Evolution Mining L -0.2% Lg Electronics S 0.2% Medusa Mining L -0.2% Cj Cgv S 0.2% Commonw Bk Austr S -0.2% *CTR = Contribution Performance Despite of our defensive positioning going into the month, the fund lost 0.99%. In part this was due to the quick and sharp reversal in the markets post the US election result. This resulted in our put protection expiring worthless post the election. During the month our top contributors were a mix of longs and shorts, contributing mostly due to idiosyncratic reasons. Our losing positions were more concentrated with our long gold, short financials trade subtracting 1% from the fund s performance during the month. This trade proved to be particular costly in the first few days following U.S. election. Value Factor Performance* P/E EV/EBITDA P/B Div Yld EV/IC FCF MTD 2.3% 2.3% 4.5% 4.2% 3.9% 2.0% YTD 5.3% 10.8% 8.1% 10.9% 7.2% 9.6% 20.0% 10.0% 0.0% -10.0% 0.05% 0.00% -0.05% * Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Cumulative Percentage Return 12 month rolling 1 2 3 4 5 Percentage Average Daily Return Per Quintile [YTD] Our top contributor for the month was China Railway Construction, which moved up 13% adding 0.35%. The company released earnings late October, which proved the catalyst for November's performance. The order book growth remained strong. Moreover, management was bullish on future growth, in particular in the Urban Rail Transit segment where the Chinese government is set to double operating mileage. On the negative side, profitability has been under pressure and the recent VAT hike makes comparability pre and post the hike difficult. All in all, given the favorable growth profile of the company and attractive valuation, 8.3x NTM earnings, we continue to have a positive outlook for the stock. On the short side, Amorepacific, the Korean cosmetics company, contributed 0.21% after moving down 9%. As anticipated the recent toothpaste recall adversely impacted the company s earnings. Even without this one-off the company missed consensus EPS expectations. Besides this the stock is faced with ongoing negative sentiment related to deteriorating Chinese, Korean diplomatic relations. Looking ahead, high expectations and high valuations warrants our continued short exposure. 2
Risk Measurement and Management During the month our reduced net exposure helped to mitigate downside risk on U.S. presidential election day. Unfortunately, the sharp reversal that occurred in the days following hurt our performance, primarily driven by our gold mining exposure. This was the reason we lost more during the month than one would expect given our low ex-ante beta going into the month. Nevertheless, due to our muted gross and net exposures, losses were limited and downside moves in the fund s performance muted. Currently, the fund still has a very subdued risk exposure with ex-ante volatility at 4.6% and ex-ante beta at 0.09. Our fund s style exposure is biased towards value factors and has positive earnings and price momentum. 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -20% Dec Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 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 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 11.4 6.4 1.7 2.9 1.3-1.2 13.8 25.1 8.9 13.1 13% 0.3 15.6 16.7 4.6 2.7 3.8-2.3-5.8-2.1-27.1-25.7 21% 0.2 Style Exposure Long Short Beta Volatility Debt-to-equity 0.7 13.2% 18.0 0.9 16.0% 25.0 Risk Statistics Delta Adjusted Volatility (ex-ante; 3 month daily data) Volatility (ex-ante; 5yr monthly data) Var (99%, 5 days) Beta (ex-ante) 4.6% 5.2% 1.5% 0.09 Source: Nomura TradeSpecs and UBS PAS Outlook For the next three to six months our outlook remains cautious as expectations of revamped U.S. economic growth, under Trump, are high, while uncertainty surrounding his policies is also high. Financial markets have been quick to price in these expectations of stronger economic growth however reality might be slow to catch-up. Hence, the effect of a stronger U.S. dollar and higher U.S. rates are felt now, while the economic growth to back this up might arrive later. Consequently, higher rates and a stronger U.S. dollar might impair the fragile global economic growth recovery of late. This due to the dependency of global liquidity conditions on the U.S. dollar and U.S. rates. This dependency works through two channels. On the one hand, a stronger U.S. dollar puts pressure on local currencies. This pressure can lead to a tightening of local credit conditions if central banks try to defend the currency. On the other hand, countries and companies dependent on U.S. dollar funding are faced with higher funding costs. Neither is a positive development for Asian economies, which have been increasingly dependent on strong credit growth post Lehman. Moreover, given the late cycle of economic expansion in the U.S. and the relative tightness of the U.S. labor market any pick-up in fiscal spending by the U.S. government has the potential to push inflation up further. In turn, this would add to U.S. dollar strength and subsequently putting more pressure on Asian economies and equity markets. And finally, the geopolitical risks as a consequence of the political regime shift taking place in Washington have risen meaningfully, but it is too early to (try to) quantify these. Time will tell how these risks will play out. Hence, plenty of uncertainty around going into the new year. Reading the above one would expect turbulent financial markets. However, financial markets seem to be quite tranquil about all this, shrugging off recent risk-off events (Brexit, Trump, Italian referendum) like nothing has happened. Moreover, U.S. equity markets are at an all time high, Asian local bond yield spreads versus the U.S. yields are stable and the MSCI Asia ex Japan is trading at historically average valuations. Consequently, we retain our reduced risk exposure. 3
Historic Fund Performance (Monthly) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2016-0.65% 1.33% -1.87% -0.29% -0.82% 1.76% 2.50% -0.77% 0.67% 0.25% -1.04% 2015-1.11% 0.92% 0.51% 5.50% -0.59% -2.80% -3.55% 2.41% 2.73% -3.01% -0.37% 2014-0.30% 0.24% 0.13% -1.19% -1.46% 1.46% -0.44% 0.98% -0.87% -0.23% 1.39% 2013 2.39% 1.53% 1.16% 0.37% -0.79% -3.32% -0.16% -0.50% -1.05% 1.61% 2.24% 2012-1.00% 0.92% -1.67% -0.72% -2.42% -0.51% -0.36% -0.69% 1.81% -0.48% 1.26% 2011-1.74% -1.69% 1.39% 0.29% -0.96% -0.84% 1.13% -2.41% -4.53% -1.03% 0.37% 2010-1.92% -0.67% 2.95% -1.48% -3.10% -0.07% -0.84% 0.42% 0.81% 1.90% -0.80% 2009 0.24% 0.56% -0.80% 0.77% 1.39% -0.84% 3.72% -1.20% 3.56% 0.08% 1.61% Dec -0.09% 1.28% 0.17% -0.53% 0.82% 0.79% 1.43% 2015 2014-0.26% 0.28% 2012-0.96% 0.96% 2011-0.61% 1.37% -1.83% -0.25% -0.77% -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% -0.19% 1.43% 1.33% -3.28% -0.11% -0.46% -1.01% 1.65% 2.29% -0.80% -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% 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% -0.47% 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% 0.87% 0.84% 1.54% -1.78% Historic Fund Performance (Yearly) 2016 2015 2014 2013 2012 2011 2010 2009 2008 0.99% 0.17% 0.93% 3.57% -4.37% -8.97% -2.16% 10.89% 1.46% 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 127,081,059 Legal Status FGR (fund for joint account) Fund Size in USD $134,566,134 Fiscal Status VBI (tax exempt) Participations Outstanding Class A 243 Dividend Policy Reinvestment Base Currency EUR Participations Outstanding Class B 128,307 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 220,303,591 Management Fee Class A 1.5% Firm AUM in USD $233,279,473 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
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 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