Quest Management (Quest) is a Bangkok-based fund manager with an exclusive focus on Thai stocks. The firm was founded by Doug Barnett in 1990 and currently manages the Thai Focused Equity Fund. The fund typically holds a concentrated portfolio of 8-14 stocks and the investment team works closely with the management teams of investee companies to create value. Since inception, the fund has compounded capital at a mid-teens rate of return – a remarkable track record in its own right, but even more so given that the SET (Thai) Index has been virtually flat over the same period.

Prior to starting Quest, Barnett worked for a family office in Bangkok running approximately US$500m. When the family moved to Russia, he decided to stay on in Thailand and start his own firm. Early investors in Quest include both Julian Robertson and George Soros.

There is an interesting (albeit dated) talk by Barnett at the Agora Vancouver 2012 Conference that has been made publicly available. In the video, he discusses his firm’s investment style and track record and also presents a number of investment case studies. For those who have the time, it’s well worth a watch. In case you prefer an abridged version, below are some highlights / takeaways.

Introduction:

• Introduced his firm as bottom-up, fundamental investors. They basically look for companies that are well-run, inexpensive and have high earnings growth. Typically invest with a 3-5 year time horizon. They run a concentrated portfolio and are not worried by volatility. If things go down, they tend to buy more at a cheaper price.
• Discussed his track record relative to Warren Buffett since 1990. Quest has outperformed by a couple of percentage points, which makes a big difference when compounded over a long period of time. Points out there are both similarities and differences when compared with Buffett.
• Similarities:
  • They both look for great businesses that they can buy with a margin of safety. Barnett has his own (and probably different) definition of margin safety, which is low P/E and high earnings growth.
  • They both like to invest alongside trustworthy management teams in businesses that have a clear and defensible niche.
  • They both own a large portion of the overall funds they manage (skin in the game). Buffett is slightly different as he runs a company and not an investment fund.
• Differences:
  • Buffett is playing in the biggest and most competitive market in the world. By comparison, Barnett is a big fish in a small pond, competing in a market full of “housewives and short-term speculators.” He has been able to find an edge as a value investor in the primarily momentum-driven Thai market.
  • Buffett increasingly prefers to buy whole businesses vs. listed equities, which is largely a function of Berkshire’s size today. This size also means that listed equity investments are difficult for him to sell if they become overvalued or if earnings growth slows over time.
  • Buffett is able to get “sweetheart” deals in times of distress because of his brand and reputation in the market. Very few other investors have this sort of access.
  • Buffett is much larger vs. the US market (~1% of his market) than Barnett is vs. the Thai market (0.05% of his market). This illiquidity probably explains most of the difference in performance. If you are investing small sums, better to go with a smaller manager.

Investment case studies:

• Over Quest’s ~27 year history, Barnett has successfully invested across a wide range of deep value, activist, macro and misunderstood situations. Just for reference, I have included a few of the case studies he presented in the video organised by category.
• Macro example:
  • 1997 currency devaluation: Barnett knew from his own investors (Tiger and Soros) that they were pressing the Thai government to devalue the baht. Did sensitivity analysis to see what would happen to portfolio company earnings at a 20% currency devaluation. Led them to sell all their domestic demand stocks in April 1997 and switch their cash holdings to USD. Eventually started investing in export-led companies whose cost base were in Baht and revenues in USD (such as Thai Union Frozen).
  • For 1997, Quest gained 2.6% while the SET index lost 75.8%. Emphasised their commitment to not losing money. He has seen many hedge funds come and go because they can’t recover from the big drawdown years. If you’re down 90%, you need 1000% upside just to get to break even.
• Activist example:
  • 1996 GSS Array: at the time, the company was one of the 15 largest contract manufacturers globally but traded at a ~50-80% discount to listed peers because Thai investors didn’t understand the business (it wasn’t sexy). Also had a number of operational issues, many of which were ultimately fixable.
  • Quest took a board seat and pushed for various changes including restructuring the management team, designing a new ESOP, selling off loss-making operations and implementing a credit analysis system for customers. Sold out in 2000 when the company was acquired by ACT Manufacturing.
  • Exited at 163 baht vs. 48 baht weighted entry price (+240%).
• “Private equity” approach to public markets example:
  • 1999 Regional Container Lines: Highly leveraged shipping company with strong and positive cash flows. Earned its revenues in USD. At the time of the investment, total enterprise value was THB 14bn with THB 1.2bn in equity (essentially a leveraged buyout). Over time, value started to shift from debt to equity holders as the company paid down debt.
  • Stock price was up ~200% in 3 years.
• “Day trader” example:
  • 1998 Sansiri Real Estate: company was a restructured property developer set up to take advantage of fire sale prices of distressed properties sold off by Thai banks following the currency devaluation. Founder was related to family that owns Kasikorn Bank. Had signed a deal with Starwood to supply development expertise. Quest liked the story so much that they invested 15% of their portfolio, buying on the secondary PO at 5 baht.
  • Ultimately sold out in only two weeks at 10-14 baht because the markets went crazy. Barnett said that a good time to sell out of a frenzied stock is when daily volume drops below the 15 day moving average.
• Misunderstood situation example:
  • 1999 Thoresen Thai Agency: Bulk cargo shipping company but did not invest for the ships – for previous 3 or 4 years, company was only breaking even on their core shipping business. At the same time, they had been growing their (non-cyclical) shipping services business. Bought the shares at THB 1.5 baht per share. Valuation was 4x P/E and 30% earnings growth, solely based on the shipping services business. The company’s 17 owned vessels were essentially a free option on a recovery in shipping prices.
  • Stock price eventually reached 53.5 baht, up ~3567% in the 9 years they held it.
• Deep value example:
  • 1995 Banpu Coal: was once the largest coal producer in Thailand but were actually running out of coal at the time Quest invested. They had moved into building independent power producers (IPPs) to produce electricity and sell to the government. In 2000/1, they sold their stake in Cogeneration Company, the IPP, to Sithe Pacific and Tractabel for THB 4.1bn. As a result, had near-cash sitting on their balance sheet of 30 baht per share while the share price was 13 baht.
  • Eventually went from 13 baht to 454 baht (+3392%) and has also paid out 111 baht per share of dividends (+755%).