Stock market professionals moan that valuations are so high there are no bargains left but the problem with that statement is who is making it.
Opportunities still exist in small- cap stocks in out-of-favour sectors, according to hedge fund manager Roland Thng, and that will be the focus of a new value activist fund he is launching by August.
"If everyone says that valuations are rich, first and foremost, we must look at who is the 'every one'," Mr Thng told The Straits Times yesterday.
Large financial institutions and analysts make such comments based on benchmark equity indices like the Straits Times Index, but this approach is flawed because the index components are all capitalisation-weighted.
"So when they say market valuations are rich, basically they are saying the large-cap companies within the in-favour sectors - those valuations are rich," he said.
The yet-to-be-named fund has raised $30 million so far and will target Singapore and Hong Kong- listed small and mid-caps that suffer from a lack of analyst coverage.
Targets will be picked from the commodities, mining, shipping and marine sectors, where many companies remain undervalued despite having survived the commodities downturn. One target has already been engaged.
QUIETLY DOES IT
If you surprise the management, over the long run, the investors will like you, but no management team wants to work with you.''
HEDGE FUND MANAGER ROLAND THNG, saying subtle, behind-the-scenes persuasion works better in Singapore.
Mr Thng, a former trader, set up Dektos Investment, a financial advisory and fund management firm, in 2009. During the past two years there he ran EVA Capital, a small value activist fund that delivered gross returns of 18 per cent a year, before fees.
He left Dektos last week after selling his stake in the firm. His new fund aims to generate returns of more than 12 per cent a year. It will take a 1.5 per cent management fee and 20 per cent performance fee.
As an activist investor, Mr Thng's playbook is different from the likes of American titans Bill Ackman and Carl Icahn.
Aggression is not his tool of choice and he has never penned an open letter to a board before.
In Singapore, "subtle, behind-the- scenes" persuasion works better, he has found. "Because if you surprise the management, over the long run the investors will like you, but no management team wants to work with you," Mr Thng said.
That was the approach he took with Indonesian coal miner Geo Energy last year.
"We urged the board to change the management team. They did. Now they have a very, very capable CEO and they have been doing all the right things."
EVA Capital, which had been accumulating Geo Energy stock since mid-2015, cashed out after the turnaround late last year and began buying Geo Energy bonds at about 74 cents to the dollar.
"The share prices came back higher and the coal prices were coming up yet the bond market was slow to react. So we seized that opportunity," Mr Thng said.
Geo Energy is now calling its bonds early, giving EVA's investors a return of 30 to 40 per cent on that trade alone, he said.