The winning strategy


  • Business
  • Saturday, 04 Mar 2006

LAM KAM YIN CEO Public Mutual Bhd 26 funds totalling RM12.3bil 

STRATEGY: The Malaysian stock market was volatile through much of 2005, amid spiralling oil prices and expectations of the lifting of the ringgit-dollar peg (which came through in late July 2005).  

Nonetheless, the funds outperformed the market due to a combination of effective asset allocations and stock selection strategies. On the asset allocation front, the equity funds remained well invested despite the fluctuations in the equity market.  

As for stock selection, focus continued on companies with attractive valuations and sound earnings prospects. Noteworthy is that the diversification of selected funds into regional markets in the second half of 2005 also contributed to the funds’ outperformance.  

OUTLOOK: We expect the external economic environment in 2006 to remain challenging amid slower growth in the US, high oil prices and tightening liquidity conditions. 

Nonetheless, the Malaysian economy is expected to grow at 5.5% in 2006 compared to about 5.3% in 2005, with private sector spending and investment leading the GDP growth. Bursa Malaysia remains a relatively defensive market supported by reasonable valuations and attractive dividend yields.  

The market is forecast to stay selective this year. In an environment of rising interest rates, companies with captive market shares, competitive advantages, sustainable cash flows and strong balance sheets are expected to outperform. In terms of sectors, selected companies in the transportation, services, plantations, oil & gas and manufacturing sectors are expected to perform well. 

The local market could rise in tandem with a re-rating of global equity markets when US interest rates peak sometime in the second quarter of 2006.  

POSSIBLE CATALYSTS: A decline in crude oil prices to below the US$55/barrel level on a sustained basis could lift global equity markets. The domestic catalysts include stronger-than-expected GDP and corporate earnings growth and renewed momentum in the restructuring of government-linked companies (GLCs).  

POSSIBLE DOWNSIDE: Slower-than-expected corporate earnings growth, slower pace of GLC reform and a severe outbreak of avian flu. On the global front, the downside factors could be higher-than-expected US interest rates, sharp slowdown in US economic growth or a renewed spike in oil prices.  

MICHAEL AUYEUNG CEO and chief investment officer Pacific Mutual Fund Bhd 13 funds totalling RM1.55bil 

STRATEGY: The point of a portfolio, or a fund, is to create a diversified investment vehicle such that single-instrument risk is mitigated. Within any given portfolio or fund, there would be winners and losers; the aim being that the winners more than offset the losers. 

For stock picking in the Malaysian market, we take a very flexible approach. Dogmatic adherence to a particular style does not serve well under all market conditions and is not suitable for all funds and portfolios. A flexible approach is needed to extract returns under all market conditions. This has been a necessary evolution of our mindset that parallels investor objectives these days – looking for absolute returns, regardless of fund types, risk profiles or the underlying market performance. This also folds in nicely with our application of the macro analysis overlay, leading to fairly aggressive tactical asset allocation calls.  

However, “flexibility” of approach should not be construed as having no core strategy or guiding principles. 

At the end of the day, all approaches are premised on fundamental analysis and valuations, which are the primary means to risk mitigation. More often than not, the real risk is not in the analysis or the strategy, but rather in the execution, as human variables such as risk and greed cause execution failure.  

OUTLOOK: This year, we see reasonable possibilities for the local equities market. Downside arising from global events such as higher than expected interest rates, economic slowing in the US, geo-political risks, and high commodities prices may be offset by factors such as domestic resolution of policy issues, fiscal stimulation, and better execution at those companies that the market looks to for leadership.  

The market may surprise on the upside should domestic drivers kick in while the external environment remains benevolent. Meanwhile, as interest rates top out, fixed income may offer better yields while capital would no longer be at risk.  

Diversification into all the latest offshore funds is positive and promising, but investors must understand the risks and learn to live with greater returns volatility of these funds. Remember that many foreign markets have had fairly strong performances over the past few years.  

Thus, they are apt to correct ever so often. That said, a well-managed offshore fund can do much to reduce overall portfolio volatility and enhance returns.  

NIK AZHAR ABDULLAH Chief investment officer Avenue Invest Bhd 10 funds totalling RM1.4bil 

STRATEGY: We adopted a relatively cautious strategy during the year with high cash position and sizeable exposure in quality defensive stocks in independent power producers and plantation sectors.  

At any opportune time, we also capitalised on any market weakness to accumulate sound fundamental stocks at attractive levels, in line with our active tactical asset allocation strategy.  

OUTLOOK: We believe 2006 will be challenging for our equity market due to potential further downside earnings risk, and other external risks, such as escalating crude oil prices. Having said that, values are emerging; Malaysian companies now offer the highest dividend yields in the region, while PER (price earnings ratio) valuation premiums relative to regional bourses have also narrowed. 

Corporate earnings recovery in the later part of this year and a clearer sign that US rates are nearing a top should lift investors’ sentiment. We have a fair value target of 960 for the KLCI based on our bottom-up approach.  

This year will be another one for stock-picking. We expect winners to have high dividend yields, able to deliver strong earnings above market expectations, select government-linked companies (GLC) and some good quality small cap stocks. 

POTENTIAL UPSIDE: Catalysts for re-rating include value-enhancing merger and acquisition (M&A) activities, positive news flow from the ongoing GLC reform, commendable results season, the yuan revaluation and stable crude oil prices.  

POTENTIAL DOWNSIDE: The risks include aggressive interest rate hike in the US and domestically, sharp slowdown in the US economy, escalating crude oil prices and another year of poor corporate earnings. 

OTHMAN MUHAMMAD CEO ASM Asset Management Sdn Bhd 15 funds totalling RM345mil 

STRATEGY: In a very challenging market situation last year, our strategy was a bottoms-up approach and stock selections were more skewed on selected KLCI-linked counters as well as some growth stocks. 

Frankly, the thought of performing better than our peers did not cross our mind. What was more important was to give a reasonable rate of returns to the fund’s unit holders.  

Our fund strategy should be more or less similar to the previous year’s approach. Since the KLCI is expected to perform better this year, ideally, the stock selection should be more skewed to the index-linked counters.  

Nevertheless, we need to stress that the focus should be on companies that still have reasonable growth and meaningful dividend payouts as well as quality second liners. 

When uncertainty reigns, it is only prudent to remain faithful to the “bluest of blue” chips. We still believe that Malakoff, TNB, MISC, Maybank and Public Bank would still do well this year. It is a selective play, particularly on companies that have healthy balance sheets and solid future earnings, and not so much sector-driven.  

So the selection is more on a selective play, particularly those that have healthy balance sheets and solid future earnings, and not so much on sector driven 

OUTLOOK: We believe this year will continue to be a challenging year in view of the high oil prices, which will ignite inflationary pressure and further increase in interest rates, although gradually. 

Nevertheless, there are areas where we can capitalise on, to cushion any adverse impact that may come about due to the high inflationary situation. 

POTENTIAL UPSIDE: We are upbeat about the Ninth Malaysia Plan (9MP) to be announced this month. We believe the Government would focus on sectors, or areas, to ensure that the economy continues to chug along well in the next five years. 

This include the continuation of earlier planned development of under-developed areas, improving healthcare infrastructure, improving knowledge and education facilities, modernising and upgrading downstream activities of the agriculture sector by, say, setting up more plants for bio diesel and gearing up for the set-up of the Bio Valley. 

The Government may also try to revive the construction sector that has been in the doldrums for the past two years. Thus, most sectors of the economy are expected to perform better in the next five years. As far as interest rates are concerned, the rise is expected to be gradual and should still be supportive of growth. 

The ringgit could strengthen further this year and this could make our market more attractive to foreign investors. Thus, on the whole, GDP growth for this year is expected to be slightly higher than last year. With this in mind, we believe market outlook should be better this year. 

POTENTIAL DOWNSIDE: There are elements that could temper the market with uncertainty. If oil prices were to rise higher than the US$70 per barrel mark, due to whatever reasons, meaning that if oil prices break new territories, this could rekindle fear of runaway inflation, not only in Malaysia but the whole world. 

Should this happen, monetary authorities may push interest rates higher. This could curb spending and investment, which in turn will scuttle economic growth and drag down the market. 

Last but not least, there is the emergence of global viral epidemic infections such as SARS and avian flu which may have far-reaching consequences such as lower (profits), or maybe losses, on companies in farm-related and food sectors, not to forget a possible drop in tourist arrivals which could affect tourism-related sectors.  

YVONNE PHE Chief investment officer, fixed income AmInvestment Services Bhd 21 funds totalling RM5.3bil 

STRATEGY: We bought long tenure bond papers and overweighted bonds for the first nine months of 2005 as we were bullish for the bond market.  

Yes, indeed we expected the overnight policy rate to be gradually increased due to the inevitable higher inflation. However, the impact was on the short-term bonds where prices dropped due to expectation of interest rate hikes and long term bond prices went up. 

Also, the bond selection was focused on high-grade bonds, where liquidity is high and we can trade in and out easily to enhance returns.  

It is a trading market due to a potential further rate hike. With the higher yield environment, total returns on yield will be better, but due to higher volatility, trading gains will be lesser.  

We will be neutral on the benchmark duration. We will trade on spread valuation where cash levels will swing. This is to take advantage of the volatile market.  

Credit selection is very crucial for this year. We will focus on high-grade bonds. It will be sector driven whereby we will skew towards utilities and power.  

OUTLOOK: Some of the catalysts I see would be a slower GDP growth as interest rate hikes will not be too aggressive.  

The hike of 25 basis points with slower Q405 GDP growth of 5.2% is not a good sign for the economy going forward, especially since the manufacturing sector contributed the most in 4Q05.  

Whether this is sustainable going into 2006 is a big issue. Also, a full year of 5.3% is below the 5.5% per annum, target. 

The major contributor of fourth quarter GDP was from the government spending. This might not be sustainable as the government is on a fiscal consolidation mode where they are targeting 3.5% budget deficit for this year. If private spending slows down, to achieve a sustainable growth for 2006 will be a tough call. 

The hike of 25 basis points and CPI of 3.2% means real returns of 5 basis points, something the market can live with since it is in positive territory. However, the re-base of 2000 to 2005 translated to 3.5% for CPI for January 2006 actually.  

Hence, there might be pressure to hike interest rates again. However, the quantum will be minimal as a higher interest rate environment will slow down private spending. 

Another catalyst is the currency strength: rapid appreciation of the ringgit will choke export and we are in the view that Bank Negara will intervene in the market. No doubt a stronger ringgit will reduce imported inflation. The balancing act on growth versus inflation again is the dilemma. 

Buyers are collecting bonds whenever there is a dip in price. As we said before, market has priced in the rate hike. Our strategy is to have a neutral duration and cash level will swing as we will trade on spread valuation. We will continue to accumulate MGS and high-grade bonds as liquidity premium is low and demand is high. 

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