Ranking risks & opportunities across Asia


by Carolyn Herbert

Transcription of Finance News Network Interview with Pengana Absolute Return Asia Pacific Fund Portfolio Manager, Vikas Kumra

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Pengana Absolute Return Asia Pacific Fund, is Singapore based Portfolio Manager, Vikas Kumra. Vikas, welcome to Sydney and to FNN.

Vikas Kumra: Thank you.

Lelde Smits: The Asia Pacific region has an abundance of opportunities but what factors are you looking for in potential investments?

Vikas Kumra: If you look across Asia, economic growth is very robust in Southeast Asia and also in North Asia. So Southeast Asia is a market where on a year on year basis, we’ve seen significant increase in mergers and acquisitions. Obviously with increasing deal activity in that region, the opportunity set for the Fund increases as well. Historically, we have looked more closely at markets like Australia and Japan, but increasingly so the focus is on the Southeast Asian region, where deal activity has increased significantly.

Lelde Smits: Why is limiting the Fund’s capacity critical for the Asia Pacific?

Vikas Kumra: If you look at the nature of the deals in Asia, they tend to be concentrated in the midcap space. So we define the midcap range as having a market capitalisation of below $US1 billion. Now if we look at the size of the transactions, 80 per cent of announced transactions in Asia tend to have a market cap range of between $US500 million to sub $US1 billion. And the size of the companies obviously affects the liquidity of those companies. And in constraining our capacity, we are trying to maintain a participation rate in those transactions to as high as possible. If you run a portfolio without any discipline to its capacity, it would significantly reduce the number of opportunities you are able to participate in, in Asia in particular.

Lelde Smits: What are the different risk return trade-offs across the region?

Vikas Kumra: The way we approach transactions is we break it down by geographical segments, specifically Australia, Japan and the rest of Asia. Reason being, each geography offers a very unique resident profile. Australia is the most complex M&A market in Asia, in fact the deal break rates are the completion rates as we see them, are the lowest in Asia. Japan on the other hand, is the safest mergers and acquisitions market. Deals which are announced on the market tend to complete, in fact the completion rates are as high as 100 per cent. The rest of Asia sits in between, the completion rates are in the mid-point of between Japan and Australia.

So looking at that, and taking that into perspective, obviously when we go into a market like Australia, we would expect a higher rate of return to compensate for that risk. Whereas in a market like Japan, the required rate of return based on a lower risk profile of transactions, would obviously be lower. So that’s how we approach risk return and trade-offs, by primarily focussing on completion rates.

Lelde Smits: What is Pengana Absolute Return Asia Pacific Fund’s strategy for managing risk?

Vikas Kumra: We try to manage two risks, one is systematic risk and one is unsystematic risk. As far as systematic risk is concerned, we try to manage the overall point of volatility of the portfolio. We employ hedging mechanisms and the use of derivative contracts to manage the volatility portfolio, for our investors. As far as unsystematic risks are concerned i.e. the deal specific risk, we conduct thorough due diligence around each transaction we get involved in. We maintain an active dialogue with all the stakeholders involved in the transaction, and we try to keep the deal break rates to as low as possible. So we have been averaging a deal break rate of under five per cent, versus market averages of about 20 per cent and that’s a value that we have for our investors.

Lelde Smits: Finally Vikas, the year to date has presented a number of exciting M&A deals. What are you keeping an eye on?

Vikas Kumra: You’re right to say that deal activity has picked up this year; in fact on a year on year basis we are looking at 25 per cent growth. The specific sectors which stand out for us are we’re keeping a close eye on the A-REIT sector in Australia. That has undergone a lot of consolidation in the last couple of years, as evident by the recent acquisition of Australand Property Group (ASX:ALZ). And outside of Australia, we’re looking at a lot of the property developers in markets like Singapore and Hong Kong. Some of these companies are trading at the widest discount to the underlying net assets in a long, long time. And they are becoming increasingly more attractive as potential acquisitions, are vehicles by the controlling shareholders. So yes, basically those are the two sectors which stand out for us at this point in time.

Lelde Smits: Vikas Kumra, thank you for the update from Pengana Absolute Return Asia Pacific Fund.

Vikas Kumra: Thank you.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.