AIMS ASSET MANAGEMENT SDN BHD

AIMS ASSET MANAGEMENT SDN BHD (Co.Reg. 395862-P)
Suite 10.3, 10 th Floor, West Wing, Rohas PureCircle, 9 Jalan P. Ramlee, 50450 Kuala Lumpur, Malaysia
Tel: +603-2381-1660 / 2161-8722 Fax: +603-2381-1770 / 2161-8730
14 October 2016
Kuala Lumpur
Market & Portfolio Review
During the third quarter of 2016, the Panah Fund’s NAV increased by +3.24% to $135.28 per Share,
bringing Panah’s year-to-date gains in 2016 to +16.16% (net). Since the start of the year, the MSCI
Asia Pacific (MXAP) and MSCI Asia Pacific ex-Japan (MXAPJ) indices have advanced by +5.88% and
+9.62% respectively. Most of the gains for these Asian indices came in the third quarter of the year,
although Panah did not match the Q3 surge in markets. Despite good performance in July, several
of the fund’s larger positions (strong performers during the first seven months of the year)
underwent a share price correction in August before fund performance picked up again in
September. During the third quarter of 2016, the Panah Fund also celebrated its third anniversary.
We would like to thank investors, old and new, for their support over the last three years.
In the third quarter of 2016, most Asian equity markets enjoyed strong performance. The best
performers, driving regional equity performance, were Hong Kong-listed stocks (+12.0% Hang
Seng; +10.0% H Shares). These equity markets bounced back after a poor first half as concerns over
Chinese growth subsided, which also helped to boost industrial metal prices (+18.7% lead; +17.5%
tin; +13.0% zinc; +12% nickel; +7.8% iron ore). Vietnamese and Indonesian equity indices also
advanced strongly (+8.5% VN Index; +6.9 Jakarta Comp), building on their gains for the first six
months of the year. Japan and Taiwan had solid performance (+6.1% Topix; +5.6% Nikkei; +5.8%
Taiwan SE), while most other Asian equity markets made gains of between +1% and +4%. Of the
major markets, only Malaysia and the Philippines saw negative local currency returns (-0.1% KLCI;
-2.1% Philippines Comp), which were further compounded by currency depreciation in these
countries (-2.7% PHP; -3.3% MYR). Other than these two countries, most Asian currencies actually
made strong gains in the third quarter of 2016, further boosting Asian asset prices against the US
Dollar as expectations of Federal Reserve tightening were pushed out. The biggest advances were
from the North Asian currencies (+4.6 KRW; +3.0 TWD; +1.8% JPY) and the Antipodeans (+2.9%
AUD; +2.1% NZD). Despite general US Dollar weakness during the third quarter, precious metals
were unable to build on their gains during H1 2016 (+2.5% silver; -0.5% gold). After a volatile two
years, hydrocarbon prices were finally flat over the quarter (-0.2% WTI; -0.6% natural gas).
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Panah’s +3.24% gain in Q3 2016 was achieved while running a net market exposure 1 of ~70-85%.
This was slightly higher than has been the case historically, primarily because of a relatively large
position in a Papua New Guinea LNG stock which was subject to a takeover bid (the investment
case for this stock is described in the Q2 2016 letter to investors). This LNG company contributed
around one-third of Q3 gains for the fund, as did the fund’s long-term holding in a Korean semiconductor
equipment. Stocks in Vietnam also made a strong contribution to performance in the
third quarter. Panah’s positions in Japan in aggregate made no overall contribution to returns over
the quarter: smaller gainers were offset by a steep though healthy correction in one of the fund’s
larger Japanese holdings (to which we added on weakness). The fund trimmed some of its
outperforming gold stock positions earlier in Q3 (reallocating capital to less popular companies),
so despite the violent sell-off in many gold stocks over the summer, Panah’s gold losers offset
winners almost exactly over the quarter. The fund lost some money in HK-China, where the fund’s
long value holdings came under pressure while short positions were squeezed.
During the third quarter of the year, we made incremental rather than dramatic adjustments to the
fund’s positioning. Early in Q3, Panah exited a modest position in a Hong Kong-listed value stock
operating in the China retail sector; our divestment followed the resignation of the CEO and a loss
of confidence in the company’s strategy. We also exited a small investment in a Thai financial
company where we judged that management had been slow to deliver on turnaround plans, and
that it would still take quite some time to set the company back on the right path. Although these
stocks seemed cheap, the outlook for both was uncertain nonetheless, and we simply saw other
investment opportunities as more compelling. We continued to add to core Vietnamese stock
positions as lines of stock became available, increasing our position in a jewellery retailer after a
correction in the stock price (this firm is described in our Q2 2016 letter to investors). We also
doubled the size of our position in a well-managed Vietnamese conglomerate which operates in
several sectors: as a mechanical and electrical engineering contractor, an air-con manufacturer, a
real estate developer and landlord, and an investor in power and water infrastructure.
In Japan, we continued to trim back the fund’s real estate stock holdings as the property cycle
approaches a peak (as set out in our Q1 2016 letter to investors). Instead, we added to a
longstanding holding in a Japanese consultancy company which also leverages its business
expertise to make early-stage investments in smaller firms. Over the last year we have met several
representatives of the company (in Japan and abroad), and are impressed by the ‘strength-indepth’
of this firm’s employees, as well as their planning and execution ability. We also added to the
fund’s largest Japanese holding, a power plant service company (described in the Q2 2016 letter to
investors); the share price tumbled in August as the scandal-ridden parent company sold down
part of its 60% stake in the firm. Although the market reaction was negative, we saw this partial
divestment as good news, so added to our position at more attractive valuations.
Later in the third quarter, after extremely strong liquidity-driven rallies in Asian and Emerging
Markets, which seemed to be driven to a large degree by passive equity flows, 2 Panah increased its
short positions in Hong Kong- and Japan-listed stocks. Many of these single stock shorts are on
companies which operate in sectors subject to cyclical pressure and increasing competition, or
with aggressive accounting policies which distort the economic fundamentals of these firms. (We
have shorted several of these stocks before, in 2014 and 2015, before covering the positions in late
2015 and early 2016 as stock markets fell.) As market volatility subsided towards the end of the
third quarter, Panah also bought several cheap, out-of-the-money put options on individual stocks
and indices with 3-6 months to expiry; this puts at risk ~80bps of NAV in return for substantial
downside protection for the portfolio during a period when the market faces numerous risk events.
1 Market exposure is stated in net ‘Equity-Equivalent Exposure’ (EEE) terms, which aggregates equity positions
and adjusts non-equity positions (i.e. commodities, bonds, FX) for volatility and correlation to equities, to give a
risk measure showing the Panah Fund’s equivalent exposure to equity markets.
2 EM fund inflows hit a 58-week high in August: https://www.ft.com/content/4ff6670a-65c3-11e6-a08ac7ac04ef00aa.
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Portfolio Positioning
In the Q1 2016 letter to investors we introduced the ‘Panah Portfolio Mind Map’, designed to help
investors visualise the fund’s portfolio exposures. This received a positive reception, so we have
updated the diagram and have appended it to the end of this letter. The fund’s three largest
positions (each accounting for 6.5-8.5% of NAV) were described in the fund’s Q2 quarterly letter to
investors: a Papua New Guinean LNG explorer; a Vietnamese jewellery retailer; and a Japanese
plant service company. The top five holdings for the fund are rounded out by a Vietnamese
conglomerate, and by a Japanese home centre retailer. We expect the LNG explorer will exit the
portfolio sometime in the next month as a result of a successful takeover bid, although we do not
anticipate any other major changes in the fund’s top holdings in the near future.
At the end of the third quarter of 2016, there were no significant changes to the Panah Fund’s
largest country exposures: Japan (34.2% gross, 26.4% net; consisting of ten stocks long and two
stocks short), and Vietnam (33.8% gross + net; consisting of long positions in seven stocks and two
closed-end funds). We presented the investment case for Japan in our Q1 2016 letter to investors…
In summary, we think that despite an unenviable macro-economic backdrop – exacerbated by
unpredictable and experimental monetary policy 3 – Japan has various redeeming features for
equity investors. First, Japanese stocks tend to be less-widely covered by the sell-side compared to
other countries in Asia, leading to more inefficiencies and thus opportunities for stock-pickers.
Second, we think that the most important contribution of Abenomics might well have been the
company stewardship and corporate governance codes; while progress has been slower than
hoped, there have nonetheless been real improvements. Third, although foreigners have tended to
be the swing equity market investors over the last decade, there is now much more involvement
from domestic buyers, including the Bank of Japan and pension funds. Going forward, we expect
this domestic constituency to provide more of a stabilising influence at times of market weakness,
and also to get more involved in corporate governance issues. Finally, equities in Japan are cheap,
and positive corporate governance pressure should help to unlock this value in coming years.
The macro and investment outlook for Vietnam was set out in our Q2 2016 letter to investors…
After runaway inflation, a credit bust followed in the period 2010-12; the bank recapitalisation
process is now well underway, and Vietnam’s credit cycle is at a much earlier stage than in larger
neighbouring SE Asian countries. Favourable demographics, cheap labour costs, and a good
location near well-established trade routes mean that Vietnam is well placed to capture market
share in low-end manufacturing. The recent surge in FDI and trade exports underline that over the
coming decades, the country is well-placed to pursue the ‘Asian tiger’ export-manufacturing
growth and urbanisation model. Vietnam’s recently signed international trade treaties provide a
solid base, but it will be necessary for external conditions to remain stable in order for the country
to fulfil its potential. Vietnam has been prone to boom-bust cycles in the past, and policymakers
will have to work hard to maintain monetary and financial stability in the future.
The size of Vietnam’s fiscal deficit is a concern, but the willingness of the new government to
embrace reform is encouraging. In particular, we are impressed by the recent government
decisions to divest of its 45% Vinamilk stake (shortly after the Foreign Ownership Limit for this
stock was lifted), and to sell its stakes in the two SOE beer companies (Sabeco and Habeco) to the
highest bidder. 4 This will not only reduce the fiscal deficit, but these brewers should also be run
3 The latest policy initiatives from the Bank of Japan (announced on 21 September) involve: further equity
purchases; enhanced ‘yield curve control’ (i.e. holding short rates negative but the 10yr bond at ~0%, presumably
to reduce pressure on financial firms); and the removal of a time constraint for hitting a 2% CPI target (the
monetary base will keep expanding until such time as the CPI target is exceeded). There has been a fairly subdued
market reaction to such a radical announcement, perhaps because these initiatives present an uncertain path for
monetary policy. Indeed, one could imagine a scenario of unlimited bond purchases (i.e. if bond yield rise) which
might threaten currency stability, or even the tapering of bond purchases (e.g. in a higher inflation environment).
4 http://www.scmp.com/business/companies/article/2012798/vietnam-sell-stake-prized-beer-companiessabeco-and-habeco.
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more efficiently with involvement from professional managers. Vietnam’s stock market valuations
were extremely low last year; after a strong rally, multiples have now increased towards average
valuations for Asian regional markets. Although certain areas of the Vietnamese market now do
look frothy (e.g. real estate and certain small caps), the secular growth outlook remains strong.
Given limited market liquidity and availability of stock, it makes sense to retain positions in
attractive franchises with good long-term growth potential. New IPOs and SOE divestments will
likely mean a reasonably strong supply of new stock hitting the market in 2017, which will require
new investors to step up. If handled properly, increased liquidity should attract more international
institutional investors, and help move Vietnam from MSCI Frontier status towards the MSCI
Emerging Market Index. A virtuous cycle?
With around one third of the portfolio in Japan, and another third in Vietnam, investors may be
forgiven for asking whether Panah is pursuing a “barbell” strategy of ‘Japan value’ v ‘Vietnam
growth’? This might seem a slick description of Panah’s allocations, though in reality this is not an
accurate characterisation of portfolio positioning. In Japan, Vietnam, and indeed throughout our
investment universe, we prioritise investing in well-managed companies with solid balance sheets,
strong cash flows and respectable long-term growth prospects. Low valuations provide a necessary
though not sufficient margin of safety, as it is also important to have an appreciation of why such
market inefficiencies exist. While we favour ‘compounder’ companies which are able to reinvest
their cash flows at a high rate of return over the long-haul, Panah also occasionally makes ‘deep
value’ investments in companies with substantial ‘balance sheet protection’ (e.g. when net cash or
net-net working capital exceed market cap) and where we are also fairly confident that a catalyst is
imminent. We have made such deep value investments in various markets, including Japan,
Vietnam, Taiwan, Hong Kong, and Papua New Guinea, and have also invested in compounders
throughout the region. (On the Panah Fund Mind Map, dark green circles indicate stock positions
with a deep value-catalyst investment thesis, whereas lighter green circles represent the similarly
geographically-diversified ‘compounders’. However, note this classification is not always clear-cut!)
There are no other major country concentrations in the portfolio; most other holdings are spread
fairly evenly across other Asian markets. There is one notable sector allocation towards a selection
of precious metal companies (accounting for 7.1% of NAV at end-Sept 2016, in five stocks). Since
Panah started investing in the gold sector (in late 2015), we have become increasingly disillusioned
with the quality of management in the sector. The managers of many gold-miners apparently find it
hard to resist the siren song of avaricious investment bankers, hurrying to issue shares after any
significant rally in their stock price, almost regardless of whether this is necessary or advisable
from a business perspective. For long-suffering shareholders, all too often this means unnecessary
dilution. As one experienced gold investor so memorably commented: “Gold companies issue more
paper than the Fed!” Or, for that matter, any of the G3 central banks.
We have little patience for weak gold mine managers and their ballooning share counts. Of the
seven precious metal companies in which Panah has invested in 2016, the managers of three firms
have displayed symptoms of premature issuance. In each case, our response has been to make our
displeasure known, and then reduce and eventually divest of each holding, reallocating our profits
towards positions in companies with a more attractive outlook, run by managers who demonstrate
more restraint (we hope). As always, it helps if management also owns a reasonable amount of
stock to give them ‘skin in the game’. Despite recent volatility in real interest rates and gold prices,
we believe that there is a strong valuation and macro case for allocating a small part of the fund to
precious metal stocks. However, we do not anticipate that the fund’s total allocation towards this
sector will exceed the size of a single ‘conviction holding’ within the portfolio (i.e.

China: How I Learned to Stop Worrying and Love the Debt
China is currently undergoing a brief cyclical upturn amid a longer-term structural slowdown in
the economy. The most salient features of this upturn have been a sharp spike in real estate prices,
and aggressive credit growth since the economy bottomed out in Q1 2015. After critical comments
from an ‘authoritative person’ in May concerning unsustainable debt accumulation driving
investment and growth, 5 foreign investors questioned whether the authorities would move to
tighten macro policy, thereby crimping growth and increasing the probability of volatility in
financial markets. A few months on, however, it is clear that President Xi Jinping’s ambitious 6.5%
GDP growth target is intact. Apparently the most certain way to reach this goal is by keeping the
credit taps turned on, regardless of the long-term costs of such a policy. Indeed, credit growth is
still running at ~2.5x the pace of GDP growth, and so aggregate debt levels continue to increase. It
is now widely accepted that China’s debt-to-GDP ratio has reached ~250%, a rise of more than
100% since 2009. 6 There is no deleveraging in sight. Interest rates are being held at low levels to
keep debt service costs under control.
In the past we have likened the debt game in China to ‘whack-a-mole’, with the authorities
struggling to keep up with the latest innovative forms of credit which pop up everywhere. Over the
last two years, there has been a rapid increase in ‘non-loan assets’ on the balance sheets of the city
commercial and joint stock banks, and in many cases these now exceed the size of these banks’ loan
books. 7 These non-loan assets mostly take the form of ‘investments’ and ‘receivables’, and have
often been created with help from Trusts and other Non-Bank Financial Institutions (NBFIs).
Although these ‘non-loan assets’ might not be loans by name, by nature they are remarkably similar
to loans. Unsurprisingly, the regulatory-mandated levels of disclosure regarding these quasi-loans,
as well as recognition of impairments and required provisioning, are much less than for official
loans. This presumably explains why China’s lower tier banks have been so keen to reclassify loans
as instruments such as ‘Trust Beneficiary Rights’ and ‘Directional Asset Management Plans’. As a
result, China’s weaker banks seem to be presenting a flattering view of their own asset quality,
which also has implications for system-wide Non-Performing Loan (NPL) numbers.
While China’s ‘big four’ state-owned commercial banks do not appear to have significant issues in
this regard, many lower tier banks do appear to have problems. We recently identified one small
bank with a shrinking loan book and an NPL ratio as low as 0.5%, but which has seen runaway
growth of +73% in financial investments over the last year (exposed to real estate and resources in
the north-east of China), which now account for ~50% of total assets (i.e. larger than the loan
book). At the same time, this city commercial bank is experiencing funding issues and was recently
forced to access an emergency liquidity line from the central bank. Despite these red flags, this
institution (listed in Hong Kong) was recently trading at a price-to-book ratio of more than 1.0x. No
matter what happens to the broader banking sector in China, we expect that it will be necessary for
this bank to raise significant equity in the near-term, likely causing a substantial dilution for
existing shareholders. The Panah Fund has recently established a short position on the stock.
The Market-Cycle Diaries
In previous letters to investors, we noted that China’s real estate cycle bottomed out in early 2015.
So far this year (to the end of August), a record 875m sq m of property floor space has been sold in
China, a year-on-year increase of +25.5% (this growth rate was as high as +36.5% at the end of
April). House prices in Tier 1 cities, where supply has been tightest, have been rising at an average
pace of ~30% year-on-year (with even more rapid rises in certain cities such as Shenzhen and
Shanghai), while house prices in Tier 2 cities have been approaching double-digit average y-o-y
5 This ‘authoritative person’ (presumed to be Liu He, an advisor to President Xi) published an article in the
People’s Daily on 9 May. For highlights, see: http://www.bloomberg.com/news/articles/2016-05-09/china-sauthoritative-warning-on-debt-people-s-daily-excerpts.
6 The experts differ on the exact numbers, but all of them now seem to agree that there is a problem:
http://ftalphaville.ft.com/2016/10/12/2177069/in-search-of-chinas-hidden-credit/.
7 Jason Bedford at UBS has been the most assiduous analyst of such developments within China’s banking system.
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gains. The price advances in Tier 3 cities have been much slower, only just creeping into positive y-
o-y territory in Q2 2016, apparently reflecting higher inventory levels in China’s regional cities.
During the last month there have been targeted tightening announcements in some Tier 1 cities
where price advances have been most extreme (e.g. higher down-payments, and restrictions on
buying second and third properties), but not across the entire country.
Given elevated inventory levels in China’s lower tier cities, the rebound in housing starts has been
much slower compared to previous real estate cycles, which in turn has been reflected in lacklustre
demand for raw materials. Indeed, this seems to have been one of the main reasons that Chinese
growth has been so slow to pick up despite the massive credit impulse over the last 18 months.
Policymakers are still actively promoting inventory destocking across the country, and households
have been encouraged to take on more debt to buy housing. More than 70% of new bank loans
made in July and August were for new mortgages. 8 Such developments seem to imply that China’s
authoritative person and his concerns over rapidly rising debt are being disregarded. Indeed,
statements from other policymakers have emphasised that deleveraging is too risky, and even if
corporate indebtedness seems high, there is still room for the central government and households
to pick up the slack. 9 With such a view apparently gaining ascendancy, we see no reason that
China’s credit-driven stimulus should stop any time soon.
Even if China’s real estate market is now past its peak (with selective tightening measures being
implemented in the frothiest regions), economic activity still seems likely to pick up in coming
quarters in a ‘delayed reaction’, as property inventories finally fall and real estate developers get
back to work. This should support demand for raw materials and support Chinese growth in the
coming months. To some extent – given high valuations in onshore stocks, as well as the recent
rally in HK stocks and most industrial metals – it might be said that China-related markets are
already pricing in a cyclical rebound scenario. Indeed, the rally in commodity prices this year does
seem to reflect a tighter supply-demand dynamic, and we would be unsurprised to see resource
stocks make further gains in coming months. However, China’s wild stock market gyrations have
seemed increasingly detached from fundamentals in recent years –how much sense does it make to
ask whether equities reflect underlying economic growth and liquidity conditions?
China’s domestic equity markets went on a tear from mid-2014, rallying aggressively for the next
12 months even as most measures of Chinese activity and credit fell precipitously into early 2015.
Towards the peak of this bubble, domestic markets also exerted a gravitational pull on Hong Kong
stocks, which spiked in Q2 2015. Note that this does not seem to have been a case of equity prices
moving ahead of the economy: stocks in China and HK peaked at the end of Q2 2015 before
plunging over the next nine months, even as economic growth turned up. Part of the collapse in
stock prices reflected a sudden loss of confidence in policymaker competence, given their role in
inflating and supporting the 2015 stock bubble and then their notable lack of communication
during the sudden Renminbi devaluation. Nonetheless, all too often China’s domestic stocks are led
by sentiment and speculation (driving multiple expansion and contraction), rather than by
earnings and fundamental data. Perhaps this is unsurprising given that broader monetary
aggregates still dwarf the country’s equity market capitalisation, allowing money flows to reign
supreme. Will Hong Kong now have to get used to this ‘casino’ dynamic as more channels open up
for onshore capital to flow south? Maybe, but we hope that over time, the growing onshore
institutional investor base will succeed in taming the market’s wildest excesses.
Apocalypse When?
Those predicting an imminent debt bust and a financial crisis in China have been frustrated by
recent developments. When will the unsustainable debt accumulation come to an end? What will
force a ‘final reckoning’? In most debt crises, it is not just the absolute level of debt which causes a
8 http://www.reuters.com/article/us-china-economy-loans-idUSKCN11K15T.
9 http://www.bloomberg.com/news/articles/2016-06-23/china-rapid-deleveraging-can-bring-new-risks-says-
government.
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meltdown, but rather a rapid increase in debt over a short period of time, funded by liability
positions which prove to be unstable and trigger a crisis when they are unwound. Many Emerging
Market debt crises have involved a massive rise in external liabilities (i.e. foreign currency debt),
but when these lenders realise that this debt cannot be serviced, the withdrawal of foreign capital
causes a collapse in the exchange rate and domestic asset prices (e.g. the 1997 Asian Crisis).
Although China’s authorities came close to triggering widespread capital flight early in 2016, on
balance this sort of crisis seems less likely for China in the near-term given the substantial fall in
the country’s cross-border net liabilities from late 2014 to early 2016, 10 as well as the substantial
tightening of capital controls since earlier this year. 11 (However, that is not to say that banks and
other financial institutions in US Dollar-pegged Hong Kong won’t suffer as the credit quality of their
cross-border debt exposures to mainland China deteriorates, and as the Renminbi weakens.)
Another flavour of debt crisis involves an unsustainable build-up in domestic debt, increasingly
funded by short-term and unstable liabilities, until a ‘Minsky Moment’ arrives to trigger the crisis
(e.g. the 2008 Lehman Crisis, characterised by a mismatch between longer-term poor quality
mortgage-assets, and short-term wholesale financing liabilities). We would not rule out such a
crisis in China at some point, given the recent proliferation of short-term liabilities within NBFIs,
together with their complex and growing links to China’s lower tier banks. A lack of reliable data
means that it is difficult to predict in advance exactly when a crisis of this sort might occur, and so
we think it makes more sense to focus on early-warning signs. 12 Real estate serves as collateral for
most loans, so property prices are an important determinant of asset quality. Given the vital role
that debt plays in greasing the wheels of the economy (and allowing property prices to levitate), a
contraction in credit presents serious risks, and we are extremely sensitive to potential policy
errors arising from ‘overtightening’. It is thus important to keep an eye on broader credit
aggregates and regulatory initiatives (e.g. to rein in NBFIs or bring quasi-debt back on bank balance
sheets), and monitor the more vulnerable and opaque parts of the system, e.g. corporate bond
yields and default rates, as well as asset quality and funding stress among weaker banks and NBFIs.
If these are the risks, we also see plenty of things to be optimistic about as long-term equity
investors in the Greater China region. The opening up of the Shanghai and Shenzhen stock markets
to foreign investors should, over time, provide numerous interesting investment opportunities. The
Shanghai-Hong Kong Stock Connect currently allows northbound investors to access 686 stocks
with a total market capitalisation of US ~$3.9t, while the Shenzhen-Hong Kong Connect launch,
slated for late 2016, will bring more investment opportunities. 13 We have started to do our
homework on various China domestic-listed stocks that match the fund’s quality criteria. It is still
early days, but as yet we have not found any quality domestic China stocks trading at sufficiently
attractive valuations for us to get involved. Our work continues nonetheless, and we are cautiously
confident that in the coming months and years we will be able to find good quality domesticallylisted
China stocks trading at valuations which also provide a sufficient margin of safety.
In the meantime, our long exposure to China consists of two ‘deep value’ positions in China stateowned
enterprises (in shipping and telecoms) where we are also hopeful of imminent stockspecific
catalysts. We also have a small position in a niche Taiwanese consumer company which has
10 Many Chinese companies paid down their US Dollar loans over this period, exchanging them for Renminbi debt.
For more details, see: http://www.bis.org/publ/qtrpdf/r_qt1603u.htm.
11 Despite the tightening of capital controls, it is interesting to note that capital outflows still continue (albeit in
smaller size since the Renminbi panic subsided). China has a current account surplus and should be accumulating
US ~$250b in foreign exchange reserves a year. However, forex reserves have been flat (rather than rising) since
the Renminbi panic subsided in Q1 2016, which suggests that outflows continue, albeit in smaller size.
12 Some commentators have predicted that a crisis is still many years away, as the Loan-to-Deposit Ratio (LDR) for
China’s financial system is substantially lower than for other countries which have experienced debt crises in the
past. However, we do not have strong confidence in this approach, not least because there is wide variation in the
figures for system-wide LDRs calculated by different economists (presumably because of data issues), and since
China also has somewhat unusual and convoluted financial market ‘plumbing’.
13 This compares to 3,905 listed stocks in Japan with a combined market cap of US $5.8t.
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ecently launched what we anticipate will be a successful expansion to Mainland China. Offsetting
these long positions, we have various single stock shorts on HK-listed firms which we think will
come under pressure as the credit cycle progresses, and which in some cases have also adopted
aggressive accounting policies which we think do not reflect the underlying economic
fundamentals of their businesses.
Thoughts on the last three years, and what to expect for the next three…
Panah’s recent birthday has been a time for reflection on what has changed in the markets and in
our investment approach over the last three years. I moved to Malaysia to set up the Panah Fund in
May 2013, which was also the month when Asian equities tumbled by ~15% – the so-called ‘Taper
Tantrum’ – as investors panicked that the Federal Reserve was about to tighten monetary policy
aggressively. By the time that Panah was born in September 2013, Asian equity markets were in
the midst of a sharp rebound. Since that time, the Fed has only succeeded in raising interest rates
on one occasion (by a meagre 0.25%), and the regional MSCI Asian equity index is flat. Instead, the
big global investment stories have instead been all about the dominance of US Dollar-denominated
assets, as well as the extraordinary central bank-fuelled rally in G3 bonds. That’s not to say it has
been impossible to make money in Asia during this period. Since 2013, the notable Asian equity
market outperformers have been the Indian stock market (from late-2013 to early-2015), China’s
Shenzhen index (from mid-2014 to mid-2015), and Vietnam (in 2016), all of which have returned
more than 35% in USD-terms. In an uncertain world, it pays to be selective.
One of our recurring concerns over the last three years has been that overly loose monetary policy,
in all so-called Developed Markets and many Emerging Markets too, has managed to inflate asset
prices and also perpetuate excess capacity in numerous industries by delaying the exit of
overleveraged and uncompetitive firms. Looking out of the window here in Kuala Lumpur as I
write, this point is forcefully illustrated by the preponderance of empty tower blocks and cranes
dotting the horizon. It is also true of other sectors in other countries. But this has been the case for
quite some time, so when will these imbalances correct? What to expect for the next three years?
Perhaps the best investment scenario we can hope for is ‘more of the same’, with loose monetary
allowing equity valuations to drift slowly higher, even if growth disappoints. However, there are
various reasons that such a benign outlook might prove to be too optimistic. Even if the current US
expansion approaches the length of the previous longest post-war expansion on record (1991-
2001), a US recession at some point in the next three years does not seem unlikely. Such a
downturn might well be triggered by more monetary tightening from the Federal Reserve, which
seems likely to increase interest rates again within the next couple of quarters. A resurgence in
stagflation (i.e. a combination of higher inflation and lacklustre growth) would present serious
challenges to monetary policymakers, with the potential to trigger a more aggressive tightening
cycle than markets are currently expecting. The fragile nature of China’s debt-fuelled expansion
raises the stakes, and increases the likelihood of a global downturn when imbalances do start to
correct. More generally, increases in inequality around the world are fuelling scepticism about
globalisation. Increased geopolitical tensions further increase uncertainty.
Whereas the response to the Great Financial Crisis of 2008 has been dominated by aggressive
action from central banks, there is now a growing perception that the negative side-effects of their
policies are unacceptable. The response to a future downturn will likely involve more heavy-lifting
from G3 fiscal authorities (if indeed this does not begin before the next recession), with a
reasonable chance of seeing an attempt at coordinated fiscal and monetary policy. The key question
would then be whether sovereign bond markets respond favourably to such developments, which
will probably vary country-by-country depending on perceptions of fiscal sustainability.
Given the uncertain and potentially hostile investment outlook, we reaffirm Panah’s bias towards
investing in well-run companies with solid balance sheets, strong cash flows, respectable long-term
growth prospects, and reasonable valuations. Over the last three years, it has struck us how hard it
is to find firms which genuinely fit these criteria. When we do find such companies, and as we get to
8

know management better and build conviction in our investment thesis, we have become
increasingly comfortable to build larger position sizes. As for stock-specific shorts, Panah has had
mixed success since inception. We have made money from ‘capital cycle’ shorts on companies
operating in excess capacity industries. However, we have lost money by shorting expensive stocks
with strong investor followings; even negative catalysts rarely seem to do much damage for long, as
these stocks tumble briefly before trading back up to higher multiples. Over the last year, we have
put more effort into finding single stock shorts on companies with questionable accounting
techniques which we think misrepresent the economic realities of the business. We have had some
initial modest success in this area, and will continue to persevere in the expectation that the size of
the ‘bezzle’ 14 will become apparent in the next downturn. The fund’s small allocation towards gold
stocks should be seen as a tail-hedge with substantial portfolio utility. Finally, we have found that
well-placed macro hedges not only provide capital protection, but can also pay off at just the right
time, allowing Panah to reinvest hedging profits into core long positions during a market
correction when many of these core holdings are trading at more attractive valuations.
No matter what the next three years hold, we have little doubt that the investment journey will be
an interesting one with plenty of unexpected twists and turns along the way. Panah will proceed
with prudence.
Andrew Limond
Disclaimer… This document contains general information on AIMS Asset Management Sdn Bhd (“AIMS”) and the Panah Fund (“the Fund”). This
presentation is not an offer to sell nor a solicitation of an offer to purchase interests of the Fund. AIMS reserves the right to change any terms of the
offering at any time. Offers and sales of interests in the Fund will be made only pursuant to a confidential Private Offering Memorandum, complete
documentation of the relevant Fund and in accordance with the applicable securities laws, and this presentation is qualified in its entirety by reference
to such documentation, including the risk factors and conflicts of interest disclosure set forth therein. This presentation is strictly confidential and
intended exclusively for the use of the person to whom it was delivered by the Manager. This presentation may not be reproduced or redistributed in
whole or in part.
The content of this presentation is for information purposes only and is directed at institutional, professional and sophisticated investors able to
understand and accept the risks involved. It has been prepared using publicly available information, internally developed data and other sources
believed to be reliable. It does not constitute an offer or solicitation to any person in any jurisdiction to purchase or sell any investment, nor does it
constitute investment advice. Whilst AIMS has used all reasonable endeavours to ensure that the information in this presentation is accurate and up-todate,
it gives no warranties or representations as to the reliability, accuracy and completeness of any such information. AIMS accepts no liability for
any damage or loss, whether direct, indirect or consequential, in respect of any use of or reliance on the content of this presentation. The views
expressed and the information contained in this presentation may be subject to change at any time without notice. This document is intended for the
sole use of the intended recipients and its content may not be copied, published or otherwise distributed.
Investment risks… An investment in the Fund is speculative and involves a high degree of risk. Past performance of a fund is no indication of future
performance. Investment results may vary substantially over time and there can be no certainty that the investment objectives of the Fund will be
achieved. The Fund discussed in this presentation may not be suitable for all investors. The value of investments and the income from them cannot be
guaranteed. Investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. The assets of the
Fund mentioned in this presentation may be in a variety of currencies and currency fluctuations may therefore affect the value of an investor’s holding.
Please refer to the Private Offering Memorandum for a more comprehensive statement of risks associated with the Fund. If you require information
about the suitability of the Fund, you are advised to seek independent financial advice.
Jurisdictional notice… The material in this presentation is directed only at entities or persons in jurisdictions or countries where access to and use of
this information is not contrary to local laws or regulations. It is the responsibility of each individual investor to be aware of and to observe all
applicable laws and regulations of any relevant jurisdiction.
Information for investors in the United Kingdom… In the UK, this communication is only available to and directed at persons who are “investment
professionals” or “high net worth companies, unincorporated associations, etc.”, as defined in Article 19 and Article 49 of the FSMA 2000 (Financial
Promotion) Order 2005 (as amended). Only persons falling within these definitions are able to invest in the Panah Fund. If you do not fall within these
definitions, you should alert AIMS Asset Management of this, and should not place any reliance on this communication or act upon it. This
communication has not been approved by an authorised person in the UK.
Information for investors in Switzerland… Representative: The representative in Switzerland is PVB Pernet von Ballmoos AG, Bellerivestrasse 20,
8008 Zurich.Paying Agent: The paying agent in Switzerland is Neue Helvetische Bank, Seefeldstrasse 215, 8008 Zurich. Reference point of important
documents: The fund’s legal documents (e.g. private offering memorandum, articles of association) as well as its audited financial statements may be
obtained free of charge from the representative. Place of performance and court of jurisdiction: In respect of the units sold in and distributed from
Switzerland, the place of performance and the court of jurisdiction have been established at the registered office of the representative. Domicile of the
fund: Cayman Islands.
14 https://www.project-syndicate.org/commentary/asset-bubbles-price-boom-by-john-kay-1-2015-
10?barrier=true.
9

Panah Portfolio Mind Map
Q3 2016
Digitalisation
of automobiles
Smartphone
Commoditisation
TECH
Ageing
society
JAPAN
Corporate
governance reforms
Retail
Power
Electricity market
liberalisation
Closedend
Funds
VIETNAM
Power &
Utilities
Trade treaties
Construction
& Real Estate
FDI
Infrastructure
Investment
Semi-con
Evolution
Security
concerns
Real Estate
Consulting
VC
IT
Positive
demographics
Japan QE & NIRP
Shipping
CHINA
SOE reform
Telco
Long position
DM Monetary
Policy
Precious Metals
Real Estate, Banks,
Retail
Pharma
Jewellery
Retail
Long (deep value)
SINGAPORE & HK
Short position
Size of bubbles represents
approximate size of position
Consolidation
in oil and gas
LNG
M&A
RESOURCES
Renminbi
China Structural
Slowdown
US Interest
Rates
Thematic
stocks with
problems
EM GROWTH
Mature
credit cycle
Consumption
growth