NT Asian Discovery Fund discovers value in small caps

The NT Asian Discovery Fund was launched in April 2006. A bottom-up stock-picking fund, it focuses on small and mid-size companies in the Asia-ex Japan region.  

It was established by John Thompson and Kenneth Ng, who are both research veterans of ING Barings where they developed their expertise at examining small companies.

Their fund started with $8 million and it is now managing $150 million. In the year-to-date it is up 36% and has risen 77% since inception, at an average of 13% per year.

“In the past 10 years, average returns for small to mid-caps have been extremely high,” says CEO Kenneth Ng. “Though people often think that a small cap is a high-risk investment, actually it's only high risk if you don’t know what you’re doing.

"If you do the groundwork you can find low-risk, higher-return investments. We use a shotgun approach to start out with as there's not much research or coverage on the companies we looking at – at least initially. It means a lot of leg-work.”

Thompson and Ng have visited 900 companies since the 2006 inception. There are 25 holdings in the NT portfolio. There is a low asset turnover, with stocks on average being held for three-to-five years on the rationale that it takes that length of time for the process of growth to get the companies into a situation where people will sit up and take notice.

“70% of investments are focused on domestic consumption, that’s our big theme,” says business director John Thompson. “Not much in the way of exporters. Event driven catalysts are an ancillary interest, but we want that buffer of buying in at a good valuation, which gives downside protection even in difficult times. We like to take concentrated positions and it makes sense because we do such a lot of research into those companies.”

For example, they bought Thai nappy manufacturer DSGT at seven-times earnings. Three years later the stock is still at seven-times earnings but has tripled and they’ve paid a lot of dividends in between. Additionally the firm has potential to sell its nappies elsewhere in Asia. This fund likes to see an ability to grow into countries in which a firm is not active.

Their fees are 1.25% to 1.75% for management and 10-15% for performance over a 10% hurdle with a compounding feature (that aggregates performance) and a high-water mark. Unless an investor came in at the top, the fund is back over that mark even though it was down 57% in 2008. The fund is now 10% in cash, which is used to manage liquidity rather than a hedge for volatility.

“Even though I am Thai, there is a slight disadvantage in our office being in Bangkok as it isn’t such a hub for investors," says Thompson. “But if it’s a niche strategy the investor wants, then it is quite easy for them to pay a visit while routing through Asia.  We see a lot of people at weekends.”