Please read the following case

Management

On August 8, 2012, Lim and his two partners launched AAM with a starting capital investment of US$87 million, which included US$60 million seed capital from Lims previous fund. Helped in part by a strong market, Lim and team delivered very strong performance for the first several years and attracted a lot of attention from international allocators. As a result, AAM experienced steady inflows in its first five years and, by 2017, the firm had US$420 million worth of assets under management (AUM), which then rose to US$500 million in the beginning of 2018.

When they launched, the AAM portfolio consisted of 30 to 40 high-conviction positions. As their assets grew, however, they added more positions to the portfolio such that, by the end of 2017, the fund comprised of 50 to 60 stocks, of which 10 to 20 were likely to be short positions at any given time. Stocks could come from any Asian market and could be included in the fund as long as there was sufficient trading volume in the stock in a way that AAM could build and exit positions without unduly influencing the share price. Consistent with this policy, the maximum position size was capped at a maximum of 4% of capital in the fund. The only exceptions were if an investment was so successful that capital appreciation took the size above 4% of capital, and even then the expectation was that Lim would sell shares on the way up to avoid unnecessary concentration risk.

Lim followed a very deliberate investment process that included three separate components: top-down screening of countries and industries to identify the most compelling opportunities for end- market growth; bottom-up fundamental research to identify superior companies; and ascertaining attractive entry and exit points through a combination of identifiable catalysts and technical analysis. This process required a lot of deep fundamental analysis, as well as meeting companies and their competitors, suppliers and customers. While each member of his analyst team was responsible for only one or two sectors (e.g., industrials and commodities), Lim prided himself on being a generalist and made the final decision on every stock that went into the portfolio.

Long Position

Telstra, one of the major cellular companies in Australia, looked likely to start another move higher in June 2016.22. There were a number of positives in favour of the stock: the Australian market was growing; the National Broadband Network initiative looked to be a net positive; and the stock was big (in terms of market cap), liquid, and inexpensive, and appeared to be turning a corner.

Lim had done much of the work on this opportunity himself, including speaking with multiple analysts and meeting with the management team several times. There appeared to be plenty of data growth on the horizon, and with the long-anticipated switch to 5G technology, Telstra was expected to be one of the primary beneficiaries. While Lim wasnt necessarily looking for yield, the stock did have a strong yield and enjoyed consistent retail support as a result (which was important in the Australian equity market). Lim had started building a position in late June 2016 below AUD5.50 (US$3.87), and took it to the maximum position size (4% of capital, per AAMs policy) on weakness through the following year.

Unfortunately for Lim, competition among telecom companies had turned more intense than anyone expected, and promotional activity had exceeded even the most pessimistic analyst projections. Telstras management offered substantial cost-cutting programmes throughout 2017; and even though they delivered on those programmes, it still wasnt enough to compensate for top-line weakness. As of April 2018, the picture was decidedly mixed. The stock was trading at AUD3.15 (US$2.21), the position consumed 1.85% of capital and AAM had lost over US$9 million. Although Lim believed there were several potential growth catalysts predicted for later in the year, especially where all-important data usage was concerned, these same catalysts had been expected now for several quarters.

Steps taken

After a long day locked in the conference room with his team, Royston Lim, co-founder and chief investment officer of Asia Alpha Management Pvt. Ltd. (AAM), leaned back and contemplated the decisions they had taken on some troublesome positions that were damaging the AAM Funds performance. While it was hard to know if the decisions would prove to be right or wrong, Lim felt better now that he had a clearer picture of how he was going to proceed with these difficult positions.

First and foremost, the AAM team needed to get clarity on the timeframe for the rollout of 5G technology their research pointed towards late 2Q18 or early 3Q18, but theyd been waiting for an announcement for months already. If their research was correct, however, the stock should be well on its way to the teams updated fundamental price target of AUD7.00 (US$4.93), more than double its current price. That said, Lim believed that the prudent thing to do would be to manage some of the near-term risk of further weakness. He trimmed the position to 1.25% of capital and set a hard stop at AUD$3.00 (US$2.11), at which point it was agreed that he would close the position and revisit

Q) Which behavioral biases are exhibited in the case? (Behavioral Finance)