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Interview with Justin Kendrick, Binjai Hill Asset Management
Eurekahedge

August 2004

Justin Kendrick is one of the three Principals and the Head of Business Development at Binjai Hill Asset Management (BHAM), based in Singapore. BHAM will advise the BINJAI HILL ASIAN ACORNS FUND, an Asian ex-Japan long/short equities fund with a long bias and focused on smaller-to-mid cap stocks. The BINJAI HILL ASIAN ACORNS FUND is scheduled to launch on August 10th and is aiming for moderate volatility and an absolute return of 20-25% per annum.

The investment team is led by Syed Adlan who will be responsible for the management of the fund, supported by Steven Wong, BHAM's Head of Research. Justin will focus on marketing, client relationships and risk management and prior to co-founding BHAM, he was Head of Regional Sales at ABN AMRO Asia Securities in Singapore.

  1. How long have you known Syed and Steven and why did the three of you want to start Binjai Hill?

    Steven and I used to work together at ABN AMRO and we have known each other for over 12 years. I started broking to Syed in 1997 when he was in London and Steven more recently; we got to know Syed on a more personal level when he moved to Singapore three years ago.

    About 18 months ago, Steven approached me and we started thinking about how we could start a fund of our own. We spent a considerable amount of time meeting a number of industry players and service providers. Both of us felt that while we had the marketing and research skills between us, we needed a successful fund manager with a track record to round off the team. Right from the start, we talked about focusing on smaller-to-mid sized companies. Steven and I had worked for CLSA and Crosby respectively, both leading smaller company brokers in Asia; so it seemed natural for us to leverage off this experience.

    When we looked at who could join us, Syed's name came up almost immediately. Not only did he have an excellent track record with managing a smaller-to-mid cap fund, but more importantly, he was someone we both felt we could work with and whose views we respected. Many more months - mainly evenings and weekends - were spent thrashing out the bones of the strategy but once we felt we had nailed it down we were eager to move ahead; in mid-February this year, both Syed and Steven resigned from their positions at Deutsche Asset Management and the Singapore Government Investment Corporation (GIC).

    Three reasons drove our interest in setting up BHAM. Firstly, we believe in Asia's structurally superior growth that provides a wealth of under-researched companies that are relatively undervalued. Binjai Hill's strategy is based on the philosophy that it can achieve absolute-performance through a rigorous, bottom-up investment process resulting in long/short strategies, referenced to major macro and political themes.

    Secondly, we felt that our complementary professional and cultural backgrounds were an excellent fit and would give us an 'edge' in running this strategy. We think a combination of 35 years of investment experience and an intimate knowledge of Asian markets is quite rare and distinguishes us. In addition, we have all held senior positions at leading 'best practice' institutions and have excellent contacts in the industry.

    Thirdly and most importantly, Syed, Steven and I felt that it was a fantastic opportunity to create something from scratch. I have previously been involved in the setting up of two financial start-ups and nothing beats the thrill and satisfaction of making a go of something you believe in. There are no half-measures when you build something from the ground up; you've got to be fully committed and as an indication of our commitment, we are putting substantial amounts of our own money into the fund.

  2. You have spent a lot of time marketing the BINJAI HILL ASIAN ACORNS FUND over the past four months. Do you have an idea how much the fund will officially launch with on August 10th? What is your goal for asset size by the end of the year?

    We have undertaken four global marketing trips since January targeting institutional investors, high net worth individuals, fund-of-funds and family offices. We are looking at between US$5-$10 million by the end of August. It has been a more difficult time to raise assets given global macro concerns and reduced inflows to fund-of-funds but hopefully a better time to start investing! Ideally, we would like to increase this to over US$30 million within the first year and ultimately to around US$300 million depending on sufficient market liquidity.

  3. After your initial screening process of the Asian stock universe, how does the investment process work?

    We are very much a bottom-up, value driven fund. Our investment processes looks for strong company fundamentals, a viable business model, management quality and good corporate governance. When analysing financial statements, we focus on valuation measures (PE, dividend yield) and free cashflow through the business cycle and growth prospects. In a sense, we are looking for stocks that are capable of doubling in three years. We require hard catalysts to take place within 3 to 6 months for "long" positions and within 1 month for "shorts" to enable re-rating/de-ratings. We also place a strong emphasis on in-house proprietary research and company visits and expect to visit between 250-300 companies in a year. Given the relatively low turnover of stock names and concentrated portfolio, this suggests that for every 10 visits we make, we may find one company that makes it into our portfolio.

  4. Japanese small capitalisation stocks have had a great run during this year, would you ever consider expanding your investment mandate into Japan?

    We have no plans to do so currently. The market dynamics are very different and we do not have the expertise or experience in the Japanese market.

  5. How actively will the investment team short individual stocks, or will most of the short exposure be index futures to mitigate specific market risk?

    Short borrows will not be a main strategy for the foreseeable future due to availability, cost and event risk but we will be opportunistic when we see the chance to do so. This is driven by our view Asia provides considerably greater opportunities on the 'long' side but should Asia become overvalued we may well have a much greater number of individual stock shorts. Pair trades will be more common and we will be much more aggressive with index futures to manage our net position and minimise volatility.

  6. The team will be using the TRADAR system for its risk management. Can you explain how the system works and how it will lower the fund's volatility?

    TRADAR is an operational desktop solution catered specifically for the hedge fund industry to aid in execution and risk management. The heart of the TRADAR solution is a position-keeping engine with a built-in interface with Bloomberg. We looked at numerous systems before we settled on TRADAR; it is easily the most user-friendly system we have come across and is able to track positions, reconcile trades and generate all the necessary reports.

  7. Long-biased investors in Asia are often particularly vulnerable to macro events which can cause unexpected market meltdowns with correlation convergence within and across sectors. How will the investment team protect capital in the fund from these 'macro' risks?

    Turning the equation around, our main focus is to deliver absolute returns. We aim to achieve that by identifying and extracting alpha at the stock level through a rigorous bottom-up research process. We use beta and volatility in the markets to our advantage for our entry and exit points on individual stocks. We also pay close attention to top-down macro, political and socio-economic events in each country, in the region and globally in order to move our net exposure between 0-100%. This is achieved through use of index futures and cash to protect the fund against volatility and downside in order to deliver our ultimate aim of absolute returns.

    To assist us in understanding what is happening on the macro side, we have an investment advisory committee chaired by a well known economist and comprising of a regional strategist, a regional micro strategist and a recently retired regional CIO. We consult with the advisory committee every quarter and it advises us on global macro developments and their implications for Asia, down to the individual country level with an explicit focus on potential political risk.

  8. You mentioned in the firm's June monthly letter that easy money in Asia has been made this year but there still exists many opportunities at the fundamental, stock-picking level. Where and what are you focusing on now?

    We are very aware and do take advantage of thematic trends globally and in the region. Asia is at the beginning of a sustained period of structural growth and this is particularly evident in domestic sectors which have been through a long restructuring and recovery period since the Asian crisis.

    In the next 12 months, we see the largest gains coming from the 'forgotten' South-East Asian equity markets and this will probably have a relatively high weighting in our portfolio. India has very attractive dynamics but the market over-extended itself last year and is going through a consolidation phase with concerns over a cyclical slowdown and a weak coalition government. Fundamentally China has, and will continue to be, a dominant growth driver in the region. However, the equity markets there are relatively underdeveloped and volatile and we prefer to capitalise on China plays listed elsewhere in the region. We can find considerable value in Korean consumer plays but they could well provide cheaper entry levels later in the year or in 2005.

Contact Details
Binjai Hill Asset Management
Tel + 65 6438 4158
Fax + 65 6438 4156
Email: justin.kendrick@binjaihill.com
www.binjaihill.com


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