August 25, 2020
Dear Unitholders of Chou Asia Fund,
The net asset value per unit ("NAVPU") of a Series A unit of Chou Asia Fund at June 30, 2020 was $17.18 compared to $17.25 at December 31, 2019, a decrease of 0.4%; during the same period, the MSCI AC (Morgan Stanley Capital International All Country) Asia Pacific Total Return Index in Canadian dollars decreased 1.6%. In U.S. dollars, a Series A unit of Chou Asia Fund was down 4.7% while the MSCI AC Asia Pacific Total Return Index decreased 6.2%.
The table shows our one-year, three-year, five-year, 10-year and 15-year annual compound rates of return.
| June 30, 2020 (Series A) | 1 Year | 3 Years | 5 Years | 10 Years | 15 Years |
| Chou Asia Fund ($CAN) | 2.0% | (0.9%) | 1.0% | 4.3% | 5.5% |
| MSCI AC Asia Pacific TR ($CAN) | 5.5% | 5.3% | 6.3% | 9.2% | 6.9% |
| Chou Asia Fund ($US)1 | (1.6%) | (2.4%) | (0.7%) | 1.7% | 4.8% |
| MSCI AC Asia Pacific TR ($US) | 1.5% | 3.7% | 4.5% | 6.5% | 6.1% |
Rates of return are historical total returns that include changes in unit prices, and assume the reinvestment of all distributions. These annual compounded returns do not take into account any sales charges, redemption fees, other optional expenses or income taxes that you have to pay and that could reduce these returns. The returns are not guaranteed. The Fund's past performance does not necessarily indicate future performance. The table is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual funds or returns on the mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing.
Factors Influencing the First Six-Month Results
The major positive contributors to the Fund's performance in the first half of 2020 were the equity holdings of China Yuchai International (CYD, Financial) , BYD Company Limited, and BYD Electronic (International) Company. The Canadian currency depreciated against the Hong Kong dollar, which also positively affected the Fund.
The largest decliners in the same period were the equity holdings of IDFC Limited (IDFC, Financial), AirAsia Group (XKLS:5099, Financial), Shriram Transport Finance Company, and POSCO (XKRX:005490).
During the period, the Fund reduced its holdings in BYD Company Limited. The Seaspan Corporation preferred Series H shares were converted to Atlas Corporation shares as a result of a holding company reorganization.
The Fund did not make any new investments or sell any covered call options in the first half of 2020.
Portfolio Commentary
BYD Company Limited and BYD Electronic Company
BYD Company Limited (HKSE:01211, Financial), together with its subsidiaries, engages in the rechargeable battery and photovoltaic, handset components and assembly, and automobile businesses worldwide. We first heard about the story of Wang Chuanfu, a person who combines two traits that are extremely rare in business: a brilliant chemist with a great business acumen. So, we kept track of the two companies that he founded –– BYD Company Limited and BYD Electronic Company (HKSE:00285, Financial). The latter is an investment holding company that manufactures, assembles, and sells mobile handset components and modules. As it happens in the stock market, we felt that at some point in time, his two companies would fall out of favor and a buying opportunity may present itself with an undervalued price. The opportunity came in late 2011 and in 2012, we were able to buy 250,000 shares of BYD Company Limited at $11.70 HKD per share and one million shares of BYD Electronic Company at $1.58 HKD per share. You will not believe that we bought BYD Electronic at a discount to its net-net working capital. Both have worked out well since our purchase. On June 30, 2020, BYD Company Limited and BYD Electronic Company were trading at $59.85 HKD and $17.74 HKD per share, respectively.
We are quite happy to hold them for the long-term, but the over-concentration of securities over 10% of the Fund can be frowned upon by regulators. As a result, we have reduced the Fund's position of BYD Company Limited in early 2020. We may reduce our holdings in BYD Electronic Company for the same reason in the future.
India
As mentioned in previous letters, we have started to look closely at the market in India. With a current population of 1.3 billion, India is the world's second most populous country. It has one of Asia's youngest populations with the median age of 27.3 compared to China at 37.6 and Japan at 47.1.
In recent years, the Indian government has enacted reforms to further support the growth of India's economy. India's performance on the World Bank's Ease of Doing Business index, which ranks countries on parameters such as regulations for businesses and protections for private property, has increased from a rank of 132 out of 190 in 2016 to 63 out of 190 in 2019.
As with any foreign ventures, the investments in India will face the risk of negative currency movements. As a result, we are awaiting further developments and remain cautious of the market. Compared to other markets, the Indian stock market has not recovered anywhere close to the pre-COVID levels. In addition, we are also looking at the South Korean, Japanese, Singaporean, and Taiwanese markets for any potential bargains.
Caution to the Investors
Investors should be advised that we run a highly focused portfolio, frequently just three to five securities may comprise more than 50% of the assets of the Fund. In addition, the Fund has securities that are non-U.S. and could be subjected to geopolitical risks, which may trump or at least negatively influence the financial performance of the company. Also, we may enter into some derivative contracts, such as credit default swaps when we feel that the market conditions are right to use those instruments. Because of any or all of these factors, the net asset value of the Fund can be from time to time more volatile than at other times. However, we are not bothered by this volatility because our focus has always been, and continues to be, on how inexpensive we believe the Fund's portfolio holdings are relative to what we believe to be their intrinsic value.
Also, the Fund's cash position was approximately 13% of net assets as at June 30, 2020. This large cash position may depress returns for a while as we hunt for undervalued securities. Obviously, if there is a severe correction in the market in the near future, it will cushion the Fund against losses while providing us with the wherewithal to find good investment opportunities. But for now, it could be a drag on returns. If we cannot find any bargains, the large cash position may stay for a long time.
Other Matters
FOREIGN CURRENCY CONTRACTS: None existed at June 30, 2020.
U.S. DOLLAR VALUATION: Any investor who wishes to purchase the Chou Funds in U.S.
dollars may do so.
REDEMPTION FEE: We have a redemption fee of 2% if unitholders redeem their units in less than 3 months. None of this fee goes to the Fund Manager. It is put back into the Fund for the benefit of the remaining unitholders.
INDEPENDENT REVIEW COMMITTEE: The Manager has established an IRC as required by NI 81-107. The members of the IRC are Sandford Borins, Peter Gregoire and Joe Tortolano. The 2019 IRC Annual Report is available on our website www.choufunds.com.
As of August 25, 2020, the NAVPU of a Series A unit of the Fund was $19.86 and the cash position was approximately 12.9% of net assets. The Fund is up 15.1% from the beginning of the year. In U.S. dollars, it is up 13.4%.
Except for the performance numbers of the Chou Asia Fund, this letter contains estimates and opinions of the Fund Manager and is not intended to be a forecast of future events, a guarantee of future returns or investment advice. Any recommendations contained or implied herein may not be suitable for all investors.
Yours truly,
Francis Chou (Trades, Portfolio)
Fund Manager
- The alternative method of purchasing Chou Asia Fund in $US has been offered since September 2005. Performance for years prior to September 2005 is based on the $US equivalent conversion of the results of the Chou Asia Fund ($CAN). The investments in the Chou Asia Fund ($CAN) are the same as the investments in Chou Asia Fund ($US) except for the currency applied.
