Paul Joseph Garcia runs the largest equity fund in the Philippines, where the market is so small that the value of stocks bought and sold in a day, $83 million, is only 5 percent that of Microsoft Corp.'s turnover.
He has to be careful his trades don't influence share prices, since big orders have a disproportionate effect in a thinly traded market, Garcia said. His 6.7 billion-peso ($146 million) Philippine Equity Fund is twice as large as the country's No. 2 fund. It also can be hard to find buyers or sellers for large purchases.
``The size of the fund is a problem we have been dealing with since we became the biggest equity fund in 2005,'' he said over lunch in Manila. ``It is difficult to move when you are bigger than the market's turnover.''
Garcia, who is chief investment officer at ING Investment Management Philippines, surmounts that challenge by sniffing out what he calls ``unpopular'' companies among the market's largest. He bought Manila Electric Co., the biggest power retailer, in 2003 when the shares were languishing at a 10-year low after a court ordered the company to refund 30 billion pesos it overcharged. The shares, among the fund's largest holdings, have gained 12 times since then.
The Philippine Equity Fund has a total return of 78 percent over 12 months, the third-best performance among 133 Philippine funds, according to data compiled by Bloomberg. The Philippine Stock Exchange Index, the fund's benchmark and the nation's main equities measure, has returned 71 percent including reinvested dividends in the period.
Limited Choices
The country's top fund is the 1.1 billion-peso Banco de Oro Peso Equity Fund, which returned 89 percent in the past 12 months. It is followed by the 500 million-peso iFund Large Cap Philippine Equity Portfolio, which is up 85 percent. The second- largest by assets under management -- the 3.5 billion-peso GSIS Mutual Fund, run by the local unit of insurer AIG Corp. -- is up 66 percent.
``The stock market is one of the smallest in Asia, if not the world,'' said Garcia, 38. ``Our choices become more limited once we screen stocks for market cap, liquidity and earnings growth prospects.''
The nation's $97 billion stock market value is about half that of Thailand's, Asia's next biggest by market capitalization after the Philippines. Only markets in Pakistan, New Zealand and Vietnam in the Asia-Pacific region are smaller.
Garcia has continued to add underperformers, including construction company Holcim Philippines Inc. and power producer First Gen Corp. Both have some of the smallest gains in the composite index this year.
Shrinking Deficit
``We have to diversify the stocks in our portfolio and recognize undervalued shares ahead so the size of the fund will not work against us,'' Garcia said.
He does get rid of stocks that aren't doing well. He has been shaving his holdings in Philippine Long Distance Telephone Co., citing the industry's ``limited growth prospects.'' The stock is the third-worst performer in the benchmark this year.
A decline in interest rates to record lows combined with the government's shrinking budget deficit and rising remittances from Filipinos working overseas have made the nation's main stock measure Asia's seventh-best performer this year, after benchmarks in China, Pakistan, Vietnam, South Korea, Malaysia and Indonesia.
The Philippine index, which is headed for its fifth straight year of gains, closed at a record on July 5. The measure had almost tripled in the previous four years.
President Gloria Arroyo and her allies won more than two- thirds of the House of Representatives seats in mid-term elections in May. She plans to balance the budget in 2008 and contain the gap this year to 63 billion pesos, 1.2 percent of gross domestic product.
`Political Instability'
That's not enough for Jay Moghe, who prefers shares in Malaysia, Singapore and India, where governments are stable and stocks cheaper.
``The Philippines' history of political instability is among the overriding concerns that make it difficult for investors to look at this market in detail,'' said Moghe, who oversees $150 million as chief executive at Opes Prime Asset Management Pte. in Singapore. ``The market's earnings multiple also doesn't make it necessarily attractive.''
The Philippine Stock Exchange Index is trading at 19 times estimated earnings, on a par with India and the most expensive after Taiwan in markets in Asia outside of Japan and China.
Still, Garcia is finding value. He is adding to his shares in First Gen, the third-largest Philippine power producer. The initial share sale of smaller rival Aboitiz Power Corp. will further lift First Gen's shares, he said. The stock has gained 18 percent this year and trails the main stock measure.
Bond Trader
Garcia graduated with a master's degree in industrial economics in 1992 from the University of Asia and the Pacific, a Manila-based school founded by Opus Dei members.
ING Groep NV, the Netherlands' biggest financial-services firm, hired him in 1999 as chief investment officer and strategist of its Manila unit, which then had less than 700 million pesos in assets under management. That has grown to 76 billion pesos.
Previous stints included a banking analyst at SG Securities, the local unit of Societe Generale, and three years as an economist and bond trader in Metropolitan Bank's treasury group, experience he credits with helping his investment decisions.
The Equity Fund had 16 percent of its assets in telecoms in May, down from over 28 percent in June 2006. Property and banks were cut to 11.8 percent and 10.7 percent, respectively, from 12.5 percent and 15.1 percent.
Garcia says he remains positive on the outlook for banks and developers, though he is paring some of his holdings in Banco de Oro-EPCI Inc. and Robinsons Land Corp. after recent rallies. Banco de Oro is the fourth-best performer this year in the main index.
``We are taking some money off the table,'' said Garcia, who sold shares when the index was climbing to records in the past month. ``We are plowing back those gains into our favorite stocks and those that will give us better returns.''
source:bloomberg.com
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