PYN Elite fund: You don’t have to do everything yourself

Considering to outsource about 10 % of my portfolio to outside manager due to long time period of big cash position due to my inability to find ideas in what I consider my home markets (say Nordics and Europe).

So I stumbled on Petri Deryng / PYN Elite fund and here are my random notes of him.

  • Introduction
    • Petri Deryng, Finnish fund manager
    • Own company / fund PYN Elite
    • Currently focused on Vietnam, also history in Thailand and China
    • Epic history with the fund
      • Decides to start a 390 KEUR fund with friend/family money in 1999 focused in Thailand, after having ended his career as radio entrepreneur
      • Without background in finance, let alone from Thailand / emerging markets, clocks 20 % p.a. 20y returns
      • One of the best long-term track records of last 20 years of (almost) ANY FUND MANAGER ANYWHERE IN THE WORLD
      • The fund grows from the 390 KEUR to ~400 MEUR currently
        • Coinsidently started about same time with similar outsider style as Michael Burry in ~2000s with similar records / investment strategy, except Petri still has business and Michael doesn’t (as far as I know)
    • With the record, should belong to all-time investor hall of fame, yet nobody knows him, at least I didn’t
      • One of the Finnish miracles to the world among other superstars Kimi Räikkönen (F1), Mika Häkkinen (F1), Lauri Markkanen (NBA), Patrik Laine (NHL), Teemu Selänne (NHL), Jens Kyllönen (poker super star, aspiring traderinvestor) and what have we
    • Speaks openly of under-performance and mistakes
    • Speaks sarcastically of himself, seems very smart and to always find right way to frame a problem and what to be focused on (based on my analysis of his writings for investors)
    • Strong opinions on macro, great stock picker

PYN_performance 2009-2018_2

  • Background
    • As a private investor, after recovery of Finnish economy from early 90s depression, sells all his Finnish stocks before end of 90s as they look expensive
    • Goes travel in Thailand in late 90s first time after the Asia crisis and after having studied the economic history of the countries home
      • Believes that studying history tells the future
      • Per his analysis, after the text-book style collapse of Asian markets thinks that the recovery will also be text book style and thus predictable (which was correct)
    • Buys CD-rom from library shop with 15 euros, which included 10-year earnings, balance sheets and stock price data from all Thailand stocks
    • Uses all hist time to research the Thai-stocks, visits and studies all the companies as private investor
    • Starts the fund in 1999 and rest is history
  • Strategy
    • Invests in un-followed small and midcap stocks in emerging Asia, traditional value style (growing low p/e companies, which can be found in emerging Asia)
    • Combines micro and macro analysis, macro in selecting the market where he plays, and micro for exact bets
    • Believes that you have to make “odd” (different) decisions to make high returns
    • Believes that the market and the stock need to be cheap and growing to make high returns, therefore went to Asia in the 90s, instead of trying to find cheap stock in slow-growing and expensive US and Europe
    • Takes big concentrated bets (say 15 % biggest position currently)
    • One of the biggest investors in Vietnam, yet focuses on small and mid caps not megacaps (because the small and mid caps are cheap)
    • Active contacting with management, in selected companies the largest owner
    • Seemingly good contacts in the business community, gets offered good deals before they are public
    • Currency bets
      • Long term view on currencies, hedged the fund currency exposure EUR/USD in 2001-2008
      • Was hedged from EURUSD=0,85 to 1,57 pretty much bottom and top ticked the trade
    • Focus
      • Focused on researching cheap names, and focusing on the best thesis with big potential
      • Has had many years of persisting cheapness in his selections but thinks that they will always turn at some point and value wins
      • Doesn’t focus on index or competitor but shows table of significant outperformance to peers and indexs
    • Vietnam / general Asia shift / value tilt
      • “Leave me alone, I know what I’m doing”, comment for changing the strategy for broader Asian market out of Thailand focus in 2013 or so (some clients questioning the strategy change at the time)
      • The reason for the strategy shift is the goal of the fund, which is to earn outsized returns –> move where the opportunity is
      • The strategy is to follow the disciplined strategy of buying undervalued stocks and markets and SELL when the stocks or markets are fully priced
      • Strong opinion that the strategy choice is the right choice because central to him is the goal to find cheap stock, not to win style points
        • Excited of the new opportunity set
      • The fund will continue to bet on Asia domestic market demand growth, currently from Vietnam and China in small and mid cap sectors with lower analyst covering and with earnings growth potential so that more dividends can be paid
      • These kind of stock have several hundred percent return potential
    • Long term theses
      • Emerging Asia thesis was formed in the late 90s, after the Asia crisis but before the emerging markets got hot again (“BRICS”), still riding it
      • The focus has been on domestic demand, in Thailand and Vietnam, which has manifested itself in big housing, financial and consumer related bets, which he has held for many years (until the theses have been played out)
      • So, hold stocks for long if the thesis is going according to plan
      • Also changes his mind quick if the thesis is not playing out
      • Seems to have balance on sticking with thesis/strategy, but changing his mind when his wrong
        • Attributes this skill for doing lot of mistakes and trying new things, but in my mind probably also in-born talent, at least the letters gives (rare) image of independent thinker
    • Macro views
      • In 2008 was all in Thailand, later changed to China and Vietnam (2013)
      • Looks at country growth, deficits, debt levels, exports, consumer, currencies, consumer confidence, business sentiment, banks
      • Sees at western countries as debt laden, thus more fragile than the strong balance sheet Asian countries
      • In 2008 compared debt and growth figures of different countries and wondered why the better metric Asia dropped more than the worse metric West
      • Looks at market levels with traditional metrics, PE, Forward PE, P/B,
      • Thinks that more growth and less debt in Asia countries should warrant higher P/Es than the west with lower growth and higher debt
    • Style / investing philosophy
      • Seemingly independent thinker views himself sarcastically
      • Thinks that doing differently and oddly is the only way to make big returns
      • Thinks he has a lot of life experience and knowledge and skills because he has done lot of things in life he didn’t know anything about, always has done differently and made the “odd” choice (including the starting the fund with no experience / money)
      • Thinks lot of knowledge and experience goes into investment decision, one must know micro, macro, one must know own finances and neighbors (competitor?) finances, one must be creative and know how to count, one must remember the whole economic history and know the future, one must understand one’s limits and feel the opportunities, one must be brave and fearful, all at the same time (2012/03)
      • Really doesn’t know when or in what time frame his selections or markets will go up, although he writes a lot so he would have at least some crasp when or what time and why they could go up
    • His own explanation for the excellent track record
      • How he made 1000 % on the fund in 12 years (or so)?
      • Thinks it’s very interesting to analyze the track record because it tells how much bad can go into excellent track record
      • “Very good returns have been made in scary and bad markets and very bad returns have been made in good markets”
      • In end of 90s left Finnish home market to totally unknown Asian market, because making good returns in Finland had become difficult –> had to react
      • The stocks were up a lot after growth period 1993-1999, after depression in Finland
      • Left Finland in 1998, after which stocks went up 1,5 years, but he avoided the IT-bubble which was the important think, not missing the last leg of the bull market after he left
      • Selected Asia despite having no experience from the market, the decision was based on knowledge of history, macro and stock exchange correlation analyses (was in Emerging markets before they became fashionable “BRICS”)
      • The gut feeling he had of the opportunities in Asia got verification when he started to research the Asian stock names from the CD-ROM in Thailand
      • The cheap prices combined with macro growth offered good opportunity for excess returns
      • On back of that stock and macro history research, the fund started in February 1999, after which the fund went up 95 % almost immediately “and he became a guru”, despite having no idea when his selections would go up (so it happened that they went up immediately)
      • For the fund the good start was pure luck, could have equally likely go sideways for many years (was good for the fund as a business to have a good start), per his thinking
      • During the 1000 % return years there was lot of bad in Thailand, where the fund invested early
        • IT-bubble 2000
        • 911 attack 2001
        • SARS epidemic 2002
        • Bird flu 2003
        • Tsunami 2004
        • Military coup 2006
        • Currency controls 2006
        • Subprime/global financial crisis 2007
        • Siege of airport 2008
        • Cambodia/temple war 2008
        • Red shirt riots 2010
        • Japan earth quake 2010
        • Euro crisis 2010
        • Thailand floods 2011
      • In addition to macro bad, lot of bad decision by him
        • Tells list of failed stocks, bankruptcies, frauds, optimistic forecasts, bad governance, shareholder wars
      • The conclusion is that if you select cheap market and have tendency for good stock selection, you really must stumble a lot to not make a good return
      • Central is to not allow world’s happening lead to wrong conclusions, but stick to one’s strategy and adjust when it’s necessary
      • Returns always come surprisingly, usually during short periods of times, cannot predict
      • The fund will continue to bet on Asia’s domestic market demand growth, currently from Vietnam and China in small and mid-cap sectors with lower analyst covering and with earnings growth potential so that more dividends can be paid

So that probably gives good view how he sees things in bigger picture.

I have also attached below my (longish) notes on his performance and commentary in 2006-2010 period, the time leading to the biggest financial crisis in history, and subsequent recovery from it.

I think it gives a good view of his thinking and sets expectations of what kind of ride you can expect from him (bumpy, due to strict views (“loosely held”) and concentrated nature of operation).

  • 2006 before the crisis focused on home builder stocks theme in Thailand (fund +22 %, index -4,8 %)
    • Two slow years in Thailand, expects better going forward
    • Currency strengthened 5 %, trading volumes going higher and foreigners net buyers
    • Focused on buying real estate focused stocks, early signs that bet is working, beating index in Q1 after under performing significantly in 2015
    • Biggest bets extreme low P/E construction stocks
      • 18,8 % BAY bank, P/E 7x yield 4,8 %
      • 13,6 % PF home builder, P/E 3,7x yield 6,7 %
      • 9,1 % home builder, P/E 4,6, yield 8,1%
    • Portfolio P/E 6x or something in Q4
  • 2007 Continues construction theme, macro worries, cheap market (fund +5,5 %, index 26,2 %)
    • The market has outperformed due to big caps
      • Small caps not interest of foreign hot return chasing money
    • Portfolio continues with the construction/housing/building sector bet
    • Political situation in the country difficult, which has depressed consumer spending but export sector is performing well (similar to Russia today?)
    • Optimist about the political development despite problems
      • Oil price not increasing, interest rates going down, thinks it’s good for the housing market, elections coming
    • Thinks Thailand one of the cheapest markets in the world
    • Q3: Problems in US housing problems start to emerge and early signs of his construction/housing sector not working, as consumer confidence is low and they are not buying houses, so the 2006 bet on construction market turnaround didn’t seem to work immediately
    • Q4: Thinks Asian currencies will strengthen against euro in coming years, thinks China will revalue its currency, just doesn’t know when. Thinks it’s good for EUR investors.
    • Had four years in a row under performance, due to sector bets that didn’t work, still believes in own strategy and highlights that with his style the returns become suddenly and violently (concentration, sector bets)
      • Explains that they bought the housing sector stocks in 2005-2006 cheap – “and cheap they have staid”
      • Thinks that the decision was good because their performance was dependent of Thailands expected rising consumer demand which was trending up and there was not lot of debt within the consumers and the businesses were very profitable (35 % EBITDA).
      • Says they couldn’t have predicted that the army will take control of the country and the consumer confidence disappears (note the EM risks)
      • Thinks that in 2007 lost to index because was not in oil stocks, thinks that the new government will improve consumer confidence and thus INCREASED BET TO THE UNDER PERFORMING DOMESTIC CONSUMER HOUSING SECTOR BET
  • 2008 Bets the farm in his own fund (Fund -52,9 %, Index -47,6 %)
    • Start of the year thinks the four-year underperformance re the index is due to political uncertainty, hurting business and consumer confidence
      • All growth has been in the export sector
    • Thinks the new government will improve the business and consumer confidence
    • Expected strong earnings from all housing sector bet investments
    • Thinks upside potential in the market level very high
    • Some point thinks stocks are ridiculously cheap
    • Q1 biggest position Sattel 18,6 % (satellite communications, low utilization 8%, expects significant improvement on this) (trade idea very low utilization stocks that have big new orders recently)
    • In Q2 the worry is the subprime crisis that started in end of 2007
      • “Start of longer term weaker stock market performance, where most of the market focus is risk/reward relationship and liquidity)”
      • Background is that when all markets and sectors are going down with different speeds, it takes longer time also to recover
    • In Q2 another worry is the rising oil prices which will slow the economy
    • Thinks that the commodity price boom has some speculative characteristics and thinks that there is big risk for price collapse
      • Thinks that the rising commodity prices either will CAUSE a recession or there will be price drop
    • Gets back to basics of investing in the Asian market (presumably because the market is panicking)
      • Emerging Asia is wobbly market, over reactions to both directions
      • Low external debt, favorable socio-economic structure, internal market demand potential, competitiveness of industrial production and self-sufficiency makes the market have better growth potential than OECD, risks are slowing of growth, not decline
      • The fund has 100 % of the assets in Thailand that as a market has under-performed in last 4 years, while unlike other countries it had good growth expectations at start of 2008.
      • However, rising inflation expectations and continuous bad political situation (as opposite of his expectation) will increase the time frame when the low valuations will translate to good returns
      • Thinks that his investment style resembles VCs as his investments have very high return potential, low price when purchased, waiting time and intensive assessment and reassessment of investment targets constantly, regardless of the market situation
      • Generally, invests in countries which are hurt by rising commodity prices (I have some investments in Russia which benefits from increasing commodity prices, so investing in his fund would have negative correlation/some hedge to the commodity price risk)
      • Thinks that emerging Asia domestic market while perform, despite slower global trade
      • The portfolio valuation levels look “damn cheap” currently
    • Housing bet update
      • All housing developer down in 2004-2007, due to low consumer confidence
      • Companies have been profitable constantly, still significantly below book value
      • Current prices 1/3 of what they were 4 years ago
      • Bought the stock for last two years and hasn’t made any money
      • New easing of housing taxes from government, positive, thinks will be good for the developers if the market doesn’t collapse
      • After similar tax easing in 2002-2003, sector stocks had super increases
      • World sentiment depressing the prices, thinks good fundamentals for the years
      • “We will make money with these but when?”
    • Q3 takes 1 MEUR investment loan to invest in his own funds, gives his cottage/island as security, 5,8 % rate
      • Significant investment for him, took the loan to “profit and goal is to make significant money”
      • Believes that US and Europe will be slow at least for next year and the one after that
    • Q4: Times are bad now, but (still) thinks that countries with a) disciplined countries with low debt levels will be reasonably successful after the “casino years” by focusing on domestic demand and export on their respective core expertise areas
    • Thinks that it’s not meaningful to try to calculate P/E 2009 or dividend sums because he PEs are so low and dividends so high that they are unbelievable
    • Also thinks focusing on defensives at this stage is too late and the most sure way to lose to the index when the recovery starts
    • Thinks that it’s sensible to find opportunities from “collateral damage” , countries that are getting killed in the panic selling pressure, but with sound fundamentals that have no collapsing danger. Countries that have growing exports and are less dependent of debt laden US consumer. Countries that can have low debt and positive current account balance and thus afford to stimulate the economy
  • 2009 Recovery (Fund +109,3 %, index 63,3%)
    • Q1 comments: Apologizes for losing client money (-50 % in last 12 month i.e. in 2008), says he should have better expect recession’s effect in US to Asian markets.
    • Good thing is that the market has somewhat stabilized and there is sense in proportion in the market reactions, unlike earlier in the autumn
    • Reiterates that the economy wont collapse because the country has no debt and it can stimulate the economy
    • Chart shows that economies can improve their debt numbers quickly if they want to (implications for Finland, US and Europe and China)
    • Compares the debt development to US
    • Shows chart of consumer confidence not changing for Thailand, yet stock market collapsing the most
    • Shows table of most and least indebted consumers
    • Case Thai Airways
      • Bankruptcy pricing (P/S 0,06, P/B 0,25 vs. historically P/S 0,55 and P/B 1,41)
        • Reason for low valuation increasing oil price in 2008, siege in Bankog airport, first losing year in 45 years
        • Current market cap 12 mrd. baht, and thinks the company can earn in normal times 5-10 mrd. baht à 1-2x normal earnings
        • Thinks that the company has been badly managed but crisis activities has been started so thinks that there will be improvement
        • Lot of debt, though the airplanes are other side of the balance sheet
        • Majority owned by government, so thinks that the company wont collapse
        • Thinks the company should be trading at 40-45 mrd. baht i.e. 4x from current prices in normal times
        • Short term trend good, airplane utilization 75 and 78 % in last two months, oil price has come down, tourism sector recovering
        • Thailand tourist sector good long-term prospects
        • Short-term prospects OK, competitive pricing re other tourism countries (good especially during though financial times)
        • Special situation in the sector
          • Tourism sector low was in Q4/08 when protestors sieged the airport
          • One can expect low exports, bank and manufacturing sector yet also expect recovering tourism sector from Q408 catastrophe
  • Q4: Thinks there is big upside in the general Thai market
    • Average P/E of the market is 14, Now it’s 11
    • Thinks in good cycle P/E should be 15-20
    • Shows chart of lowest P/E markets, Thailand the lowest with 10,5x PE2010
    • Shows chart of business sentiment index that is rapidly moving up, also consumer confidence index is going up
    • Doesn’t think that there is risk of similar crisis to Vietnam in Thailand because there is no external debt
      • No hot real estate market
      • No current account deficit
      • Not external debt
      • Thinks the Vietnam crisis just beginning and the valuations don’t reflect the risks
        • The currency has been devalued
        • Interest rates have been risen
      • Foreign currency reserves has depleted, increases risk of devaluation
      • Thinks Vietnam long-term prospects are good and already reflecting that the market can offer good investment opportunities in 2010 (later moved to this market)
    • Exits the EUR/USD hedge @ 1,57 (about at the top, pretty good)
    • Someone asks that the fund has been pretty lucky in recent years (currencies, concentrated stock picks, significantly beating the market)
      • Dryly comments “Good luck is beneficial for jobs relating to portfolio management”
      • Still thinks good performance is identifying your limited strengths and sticking with them
      • His other fund Populus fund has under performed but thinks that the time frame is too short for conclusions (one or two years)
      • Only goal they have is stock picks with high expected returns with concentrated bets
      • Only focus is low valued stocks, so it’s clear if they turn out to be right the returns will be big
      • Disappointed to last five-year performance (5 % p.a., beats index but absolutely not good, but gets back to wondering how long their concentrated bet on housing stocks can be not working because the companies are profitable, constantly growing equity and trading at “ridicilious pricing”, last time the strongly repriced was in 2002-2003 and think it will happen again
      • Shows long-term return table since 1999 where he has 525 % return vs. the next best fund with 271 % return
  • 2010 End of crisis era (The fund 47,3 %, index 40,5 %)
    • Q1 back drop
      • Protest in Thailand
      • “China slow down” scare
      • Still thinks Asia looks good
      • Shows table of Asias competitiveness in the world exports (exports in various markets growing 54-67 % vs. Europe and US 9-16%)
      • Shows table of rising car sales , 58 % up in last month
      • Shows chart of rising tourism, up 50 % in last month
      • Shows chart of rising new housing in Bangkok, even in 2009
      • Shows table of whole housing stock sector valuations, below book value, 4x P/E for his selections
      • Thinks EUR/BAHT will go down by 15 % next years à expects 15 % currency gains, no currency hedges currently
      • Shows list of most expensive funds in Finland
        • His owner TER expenses are 7,88 %, almost double the next most expensive funds
        • Explained by good performance and performance fees
        • Hopes to keep the expense ratio as high as possible because it signifies that the fund is performing well (with his humorous style)
      • Thinks that the Thai market is cheap and there is very good return opportunity, just doesn’t know when
        • Shows table of his portfolio with target prices, upside potential about 100 % for all stocks
      • Q2: Thinks good time to buy the fund shares, because cheap stocks (quite often comments attractiveness of purchasing fund shares, little promotive feeling)
        • Nobody knows the timing of when the stocks go up but the basic premise of their operation is that cheap stocks have more upside and expensive stocks have more downside
        • Thinks the market is cheap, stock prices since 1999 have 2xd but dividend sum has 10xd
        • Tells that the Thailand recovery is on going, media marketing is going up, car sales growth continues and export growth continues, home builders are starting new projects
        • Surrounding countries have revised their growth targets up
        • The Thailand and Asia prospects look very promising, according to him
        • Still biggest bet on the housing sector
        • Average P/E of the portfolio 5,8x fwd, 6,9x trailing
      • Q3: Thinks Asia growth will continue for long time
        • Example of Bordeaux wine, which is doubling sales in China every year
        • ASEAN custom/trade union will increase trade within Asia, everybody will benefit
        • Thailand’s private sector investment index at highest level in ten years
        • Long prosperous years ahead in Asia
        • His fund is and will be investing in Asia and the P/Es are very low
        • Started to sell some housing sector bets, but concentrated more on some other housing sector bets
          • Bought more Property perfect, thinks market will be surprised of the earnings in next two years
        • Q4: thinks Asian currencies will strengthen long-term, thus no currency hedges
          • Doesn’t open his thinking why he thinks so
          • Probably the relative growth prospects
          • Thinks short-term is pretty much what is in fashion
        • Thinks the general stock market will go up
          • Low interest rates
          • Growing domestic demand
          • Regional growth in Asia
          • Public CAPEX
          • Low debt in the countries
          • Low market P/E relative to the profit growth and alternative investment
          • Thinks the Thai market can go up significantly in short-term
            • Investment cycle
            • New elections
            • Profit growth
            • Good growth prospects
          • Elite’s portfolio focused on certain sectors and stocks, and if there is wave buying these stocks can go up fast

PYN_performance 1999-2011

Now, that period ended quire well with significant beat against the index and other funds. The subsequent history is also good but includes China investments, which of more than one (I think) ended up being frauds.

It was the time when China frauds became a thing and he was other side of the trades during them. But he has recovered since then, which highlights his style that he can change his mind and that long-term records can include a lot of bad if the good things are better.

PYN_performance 2009-2018

Disclosure: I will probably start investing in the fund some time soon but at this point I don’t have a position.

 

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