The straight-talking James Hay, manager of the Pangolin Fund, was a recent guest on BFM (an independent radio station in Malaysia). He discussed his outlook for Malaysia, positioning of the fund and the rise of passive investing. You can listen to the full podcast here.
Some highlights below:
- He struck a cautious tone overall. Said that more market commentators and investors have been turning bullish on Malaysia recently (here is one such example). He’s not so sure whether there really is a bullish case or if people are finally looking at Malaysia because it’s underperfomed relative to the run up in all other markets.
- He says that some of the reports he is seeing from foreign fund managers about Malaysia are clearly written by people who don’t understand the place and haven’t been there. He cited some European fund manager’s thoughts on the recent cigarette tax as an example.
- He is more worried about the broader macro environment and recent geopolitical tensions. Said the risk of a potential conflict in Asia seems to be a lot higher than before (and after a long period of peace for the region).
- Also concerned about the growing risk of a potential terrorist event in Malaysia as well as rising interest rates. Feels that Malaysia has very little room to increase interest rates meaningfully given the high levels of household and government debt.
- He stressed they are not a macro fund but that one has to be more aware in today’s environment. When everything is going right, everyone tends to disregard the bad news. People don’t worry about the stuff they should be worried about.
- He tends to get his macro insights primarily from the managers of companies they own. For example, they get data on how the US economy is doing well via the results of a furniture manufacturer that exports primarily to the US.
- Regarding the upcoming Malaysian election, he thinks a change of government could be worrying despite issues with the current administration. An opposition victory would be unprecedented and his guess is that it would have negative impact on the Malaysian stock market.
- On the rise of passive investing: Feels we are getting into a big boom with index / ETF products. You are effectively buying companies based on market capitalisation, not on fundamentals. Most people might not even be aware of what the underlying holdings are.
- In Malaysia, if you buy the index, you are buying mostly large cap, government-linked companies. Most index products don’t accurately capture the growth opportunity in Malaysia. It’s very similar in theme to what Desmond Kinch discussed in his last annual letter.
- Too much of the conversation is focused solely on the fee advantage of passive vs. active investing. Fees alone don’t matter, returns after fees matter. You’re not better off paying low fees on low returns.