Timing on when to go in and out of market crucial
IT is almost impossible to time the market and future returns cannot be predicted by looking at past performances.
The US-China trade war is taking centre stage and causing topsy turvy months for the global market.
In Malaysia, the price of small and mid cap stocks have significantly retraced to multi-year lows on the back of heavy selling that doesn’t really make sense, albeit a strong rally in the benchmark FBM KLCI.
Affin Hwang Asset Management Bhd managing director Teng Chee Wai (pic) shares his views with StarBizWeek on how he would position his investments in the present volatile market.
Teng, who manages RM47bil, was also founder and CEO of Hwang Investment Management where he built the company into one of the fastest growing and the only independent asset management house ranked in Malaysia’s top five with assets under management in excess of RM30bil.
Prior to that, Teng was general manager of investments at Overseas Assurance Corporation where he was responsible for the investment function of the Overseas Assurance Corp Group. He has more than 20 years’ experience in the asset management industry. Teng graduated with a Bachelor of Science from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University, London. Below are excerpts:
What are some of the changes you see happening in the Malaysian capital market?
The market has been exciting. It is getting difficult to read and keeps everybody on their toes. Interestingly we don’t see redemptions. That is the interesting thing about Malaysia.
The lack of redemption isn’t just happening to us. We don’t get the sense that redemption is coming, which is really rare considering that volatility is so high. Why is this so? Probably investors in the unit trust industry are now taking on a much longer investment horizon.
Investing in funds must come from an asset allocation perspective, suitable to the risk profile, so that fund managers don’t chase the so-called top performing funds.
Hence, they don’t put 100% allocation on a top performing fund, but diversify according to the risk profile, by currency, or by asset classes.
So, I think those messages have been going to the ground over the last few years and it probably explains why redemption in this cycle has been relatively muted. It is a very healthy environment. We were preparing for redemptions, because we grew significantly especially in 2017. Our assets were RM36bil. We ended 2017 with RM47bil.
So your fund grew by RM11bil last year? Was it mainly because the market was good and market participants wanted to be part of it?
Largely because of the market. I don’t think Affin Hwang is the only one that grew. Everyone grew, just that we grew stronger. The marketplace has been healthy and that helped drive investor confidence.
The fixed income funds would have returned roughly 5% to 6% last year, while the equity funds would have done double digit returns averagely. Some about 12%, some about 18%. The small caps would have done better.
We tend to look at performance from a longer term perspective. We look at it from a 3 year rolling average perspective. We guide our clients to see the return consistency over that period.
On the fixed income side, we would guide clients with a return of 5% to 6% per annum, while for equities, we would guide between 8% to 12% per annum. On a low risk balanced fund, we will guide 7% to 8% per annum. We try to deliver higher from that guidance.
Out of the RM47bil, what are the allocations?
Out of the RM47bil, about RM14bil is in money market funds. Equity would account for about RM15bil of total assets, and the rest is in fixed income and other assets.
How much of your assets are allocated outside Malaysia?
About 30% of our assets are outside of Malaysia. We have some RM15bil invested largely in Asian markets. Mostly are in fixed income assets compared to equities.
Affin Hwang has a sizeable position overseas. Do you have external fund managers to manage these investments?
It depends on where we are invested in. There are certain skill sets we develop in Malaysia. We are a big believer in developing talent in Malaysia. That is one of the corner stones for our business. If we were to outsource a mandate to an external fund manager, the money would flow out to Hong Kong or Singapore, for example. Then no Malaysian will ever learn those investing skill sets beyond investing in Malaysia.
But we told ourselves to do it differently. We recruited Malaysians fresh from school and train them to manage Asian fixed income and equities.
Prior to 2007/2008 financial crisis, Affin Hwang was only managing assets in Malaysia. Back then Khazanah convertible bonds were trading at double-digit yields in US dollar. I was telling my guys to buy these bonds. Malaysia would not default during this crisis. None of my guys could do it.
It was then we decided to develop Asian experts in Malaysia. To do so, we hired two of my ex-colleagues from Singapore and gave them three-year contracts. It cost me a fair bit because we paid them in Singapore dollars.
Their task over the three-year period was to build a Malaysian team that can manage fixed income and equities in Asia. Their contract ended in 2011. Since then, the local team has taken over.
With competition from countries such as Hong Kong and Singapore, what do you do to retain people?
I admit that we have lost people over the years. This year we lost two to Singapore. This is something that we have to accept.
But we also have to learn to retain people, and in my view is we must pay them competitively. We will at some point, as we continue to develop our business, peg our compensation to Singapore. Of course we are not there yet, but that is our aspiration.
Considering your assets under management are quite substantial, are you looking at alternative assets?
Yes, we are looking at the private equity (PE) space. Actually, we already started the process, and hopefully we will have a team for this asset class. We have been planning this for the last three years.
For a start we want to do it on our own, but we do not rule out the possibility of tying up with PE players from Singapore. This is because we want to look at deals not only in Malaysia but throughout Asean.
Is investment in private equity the main target for Affin Hwang in 2018?
For 2018, our intention is to move one step further into alternative investments. We will start with equities and eventually we hope to move into properties and infrastructure.
The first eight years, we grew from RM20mil. At the end of 2008, we had RM6bil. That growth was driven by Malaysian fixed income and equity strategies. In 2008, we decided to embark into Asian fixed income and equities. Ten years down the road, our asset grew to RM47bil.
It is a baby step for us. We see this as being beneficial for us as we build our wealth management platform and alternative investments. Investment in PE is a natural progression.
When you speak to your clients now, what is their risk appetite?
At the moment, it is about risk averseness. Some clients want to invest, but they are not sure on the timing. However, they are not panicking and feel the need to redeem. They are just not putting in fresh capital to the market. They are prepared to wait a bit longer.
What is your opinion on this?
I feel we can never judge or time the perfect entry in the market. When I look at some of the small and mid cap stocks in Malaysia, they have experienced a meltdown in the past few months. Question is how much more downside in the market?
Is this a start of a bigger correction? Just like a typical 10-year cycle. Is there any crisis around the world that might happen that can cause a global recession?
If I look at economic data, I can’t see that we are heading into a recession. However, the market has gone up a lot, hence a meaningful correction is warranted. This is because from a valuation perspective, the markets were all trading above one time standard deviation. Thus a correction is due anyway. And we are now seeing a meaningful correction globally.
In Malaysia, if you look at the small and mid cap space, it was a meltdown.
Do you think now is a good time to buy, especially with the expectation that the economic growth going to continue?
Right now there are two factors influencing the market. One is the upcoming general election, and the other is geopolitical risk. The geopolitical risk would no go away so easily, unless at some point the US President Donald Trump comes out to say that there is a deal and the trade war is over. Should that happen, then the market would have a more sustainable rally. Right now the short-term reaction is too much. As such, you must take not be disturbed by short-term market noises.
In my opinion, these guys (China and the US) want their economies to grow and the last thing they want is a global fight that would derail growth.
I am very tempted to buy at dips, but it can be scary when the declines happened. Hence, it is not easy even for fund managers. When you wait for the dust to settle, you still have time to buy.
What are the key factors that would make you stay or exit the market?
I am very mindful of the earnings cycle, especially the earnings revision, which means I am looking at the market anticipation on the earnings growth. I have seen throughout years that the Asian market reacted to earnings revision. For example, although earnings are growing but earnings revision are down, the market would not do well.
We saw from the start of last year there was a consistent upward revision in corporate earnings, and it turned out to be a good year for the market. So this year I am looking at earnings revision.
The other indicator is the US yield curve. I expect the yield curve in the US will be flattened this year, which is not bad because it could reflect that the environment is adjusting. But once the yield curve inverts, we would be more concerned whether it is a reflection of a recession to come.
What are your core themes and beliefs for 2018? What are the sectors that you are looking at?
This year, the key market we are looking at is China. Currently, our investment in China accounted for 45%-50% of our Asian equity portfolio (RM6bil). Within the Asia portfolio, we like the financial sector because of the increase in interest rates. In the last two to three years has been difficult for the banks because rates were low. It is clear that the interest rates will rise over time and the banks are the beneficiaries.
The other sectors that we like are insurance within China on new products and expansion of network agencies.
What are your thoughts about the tech sector?
We have exposure in the e-commerce technology sector such as Alibaba and Tencent. We have also taken position in Microsoft on its cloud business. The valuations in these tech stocks are not cheap, but they exhibit resilient growth and earnings profile. In my opinion, five years from now, these companies will be bigger than they are today. If one were to take that view, any corrections would be an opportunity to buy.
I see these companies going beyond China to become Asian e-commerce players. There are no comparable players in the region that can compete with them because they are very dominant.
What is your theme in Malaysia this year?
The banking sector has done well along with the trend in Asia. We expect the banking sector to continue to announce good sets of results for the rest of the year.
Also, we are thinking of going back to the tech sector, especially shares in Globetronics and Inari which are coming down to an attractive valuation. There was disappointment in the sales of iPhone last year despite the launch of iPhone X and iPhone 8. I think all of those are already priced in and we see a recovery coming.
We see a selldown in VS Industry Bhd , SKP Resources Bhd and Denko Industrial Corp Bhd. At some point they were expensive but these counters have gone down to a fair valuation and are expected to benefit from the growing electric and driverless car industry.