Answering a Thai Question

by Travis Johnson, Stock Gumshoe | June 25, 2013 5:37 pm

I got this question from a reader a few days ago:

“You have promoted TTF in the past. Is the current restructuring a good thing or not? Sounds logical to me, but the market apparently does not think so. I am still UP on my purchases and have bought more as it has declined…..”

I’d quibble and say I haven’t “promoted” TTF, which is a closed-end Thai fund, but I have mentioned it as a play on all of the interest that Myanmar’s re-entry to the world is bringing (Thailand is Myanmar’s natural trading partner and close neighbor, and a lot of Thai companies are already active in that re-emerging nation).

In January this year, I wrote the following:

“I was interested in TTF because I thought the discount would start to narrow and I liked the relatively low expense ratio, but now if I were investing in Thailand to get exposure both to the growing consumer economy there and to their investment in Myanmar I’d go with the THD ETF (Thai companies have an edge in Myanmar, thanks to a long history and a shared border).

“Over the past year TTF has handily beaten the other two funds, and over five years TTF and THD are essentially neck-and-neck (TF is far worse over that time, and has a much higher expense ratio). I’d switch my interest to THD now because I think the portfolio is better positioned for infrastructure growth and energy investment (it looks like THD has good exposure to cement, and more importantly to the giant state-controlled energy company PTT that’s very active in Myanmar, and TTF does not to the same degree), and it’s significantly cheaper. TTF might still outperform, particularly if they do something dramatic with their structure to close that discount (they’ve said they continue to explore options — including open-ending and buybacks, but other than some buybacks there’s been no big change, and it hasn’t altered the discount much). “

TTF’s restructuring is relatively minor and is designed to further narrow the discount, but the restructuring isn’t the reason for the fall in recent weeks — the reason for the fall is Thailand, which is collapsing along with most other frontier markets in the “run away from risk” trade. The differences between TTF and THD, the iShares indexed ETF for Thailand, are minor when it comes to performance — the primary driver is US investor demand for Thai equities, which has been falling pretty hard.

I never ended up owning these myself, and the Thai stocks probably got ahead of themselves on the Myanmar and “global growth resumes” story earlier this year, but with markets reacting badly I’d actually want to look again at the closed-end funds like TTF if you’re bargain shopping in Thailand — that’s because they don’t face the same pressures as the ETFs.

Closed-end funds have a set number of shares, and the capital is locked up, investors can’t redeem the shares, they can just sell them if they want out, so the portfolio managers don’t have to liquidate investments as the market falls. ETFs that are based on indexes create new shares as more new investors buy in and expand, so they have to contract if there are big outflows of investment money, selling the underlying shares in their portfolio just as those shares are dropping.

Both will continue to reflect Thai stocks, so your sentiment about that part of the world (which is dominated by China, not such a good thing this month) will determine how you feel about it … but TTF probably has more opportunity to bounce back a bit faster if things improve in the Thai markets, thanks to their big discount (16% now) and the ability, if management is effective, to buy up some bargains if they see them in Thailand.

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