This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 11 - 17, 2016.
There are few positive catalysts in the country and the FBM KLCI’s valuation is relatively high. Fund managers say investors with a long-term horizon can look at regional-focused equity unit trust funds for possibly higher returns.
Going defensive with regional REIT and infrastructure sectors
Chen, whose team manages two regional funds — the Eastspring Asia Pacific ex-Japan Target Return Fund and the Dinasti Equity Shariah Fund — says the global economy is expected to experience slower growth with heightened volatility, but it will not fall into a recession.
The US economy is going through a “soft patch”, he adds. This means the risk of a recession is rising, but it is not extremely high. China, on the other hand, is not expected to see a hard landing, owing to its huge foreign reserves.
Nevertheless, Chen is “very neutral and slightly cautious” on Asia-Pacific equities (including Asean) in the short term. He and his team have adopted a defensive strategy in managing their regional funds while looking for investment opportunities.
“I am cautious on Asia. in the short to medium term So, we are adopting a defensive stance this year. We are buying more of the defensive and high-yielding sectors,” he says.
These steady growth counters are mainly companies in the consumer staples and discretionary industry, utilities and, especially, real estate investment trusts (REITs).
“In the case of REITs, you have to distinguish one from another and look at their underlying portfolio. Even in Malaysia, some REITs are doing well but some are not because of the location and tenant or portfolio mix. But generally, we like them because their income stream is fairly resilient and the yield is high,” says Chen.
“Malaysia may provide you with a yield of about 5%. But in the region, you can get 6% to almost 8%. In Asia, some of these good quality REITs’ underlying portfolios are hospitals.”
Another theme Chen is looking at in the region are sectors that are expected to benefit from the government’s fiscal policy. For instance, he prefers Indonesia’s infrastructure sector as the government plans to spend US$500 billion on new projects over the next five years.
“I think monetary policy has almost run its course. You can only pump so much money into the system and bring [interest] rates down so much. Fiscal stimulus may prove more effective and immediate in their outcome. Thus, when investing in a region, look at the sectors that will benefit from government stimulus,” he says.
Looking at the fund fact sheet of Eastspring Investments Asia Pacific ex-Japan Target Return Fund as at Feb 29, the top three countries it invested in are Hong Kong (18.46%), Indonesia (8.35%) and China (7.64%). Sector-wise, financial (15.11%), consumer goods (9.04%) and healthcare (8.25%) had the most allocation, excluding cash and cash equivalents (23.47%).
As at Feb 29, Eastspring’s Dinasti Equity Fund, with investments in China (32.88%), Hong Kong (22.44%) and Taiwan (21.22%), had a high percentage of its assets in cash and cash equivalents at 23.46%. Technology (35.54%), consumer goods (10.61%) and financial (7.31%) were the top three sectors it invested in.
Libra Invest invests in Asia-Pacific through its Consumer and Leisure Asia fund. Lee says he is bullish on the economic developments in the Philippines despite the PSEi Index trading at a PER of 20.7 times as at
April 4. He says this is because its economy is growing at about 6%, buoyed by its young and skilled population of about 98 million.
The sectors he likes include consumer discretionary, as it is expected to benefit from the country’s young and robust demographic, and property — especially low-cost housing developers — which is expected to outperform. This is because a large number of Filipinos work overseas and remit money to their families who then use it to purchase low-cost properties.
Lee also says the Indonesian market has started to look attractive as the country is beginning to implement its infrastructure development plans. Infrastructure-related sectors and companies are expected to be the beneficiaries.
The risks in investing regionally
The Lipper Fund Table shows that while the Equity Asean category has outperformed the Equity Malaysia category over the five-year periods, the Equity Asia-Pacific and Equity Asia-Pacific ex-Japan categories are lagging behind.
As at March 25, the Equity Asean category had an average return of -1.92%, 8.52% and 31.97% in the one, three and five-year period respectively, while the Equity Malaysia category recorded an average return of -0.81%, 18.65% and 30.6%. The Equity Asia-Pacific category saw an average return of -5.23%, 19.09% and 4.69%, while the Equity Asia-Pacific ex-Japan category generated an average return of -4.76%, 13.45% and 10.57%.
Not all funds that invested in the region have been successful. A local fund house is currently looking to close an Asia-Pacific fund that has generated negative returns over the three and five-year periods.
“Regional funds will be facing big challenges this year. While the weak ringgit contributed to the earnings of the funds last year, we don’t see the same scenario happening again this year — plus, the market volatility still persists,” says its CEO.
The CEO says the currency risk is the biggest as it is very difficult to hedge against. “When you are investing overseas, you are buying into the currencies of many countries, and all of them are against the ringgit. It is very hard to hedge against. This is the biggest challenge we have faced over the years.”
The ringgit weakened more than 20% last year and was ranked one of the worst-performing currencies in Asia. Typically, this is good news for regional funds, which earn from the currency spread. However, this fund still provided a negative return over the past five years.
The second challenge the fund faced in the past year was its limited resources and a lack of timely information. Not having a local team on the ground in the respective countries can be a disadvantage, especially in the case of a regional fund investing in small and mid-cap emerging market equities.
“Local fund houses may have disadvantages in terms of information, especially the small and mid-cap stocks in emerging markets. This is unlike big-cap stocks, where information is much more available,” the CEO says.
“In our case, we bought the analyst reports from banks and bought into these companies. But in the end, the results didn’t turn out well. The fund manager based in that particular country may have produced his own report and already decided to take profit earlier.”
The CEO provides an example of a Hong Kong fund house investing in a Penang company. Malaysian fund managers may know the operations of the company better and they can easily visit the company, as and when it is needed.
“Compared with a team, say, based in Malaysia or Singapore, where usually one person looks at hundreds of stocks, the fund house based in that particular country would have its fund managers focusing on fewer stocks and sectors. Adding to that is the fact that they have the advantage of being on the ground, and their ability to spot those gems may be better than yours. This is yet another disadvantage to the internally managed local fund houses.”
The CEO says a local fund house that launches regional funds with a smaller sum under management will also face cost issues as the returns on the fund will not be high and there will be less money for the fund house to hire team members to conduct in-depth and comprehensive research and analysis.
But not everyone agrees that regional funds are the way to go. The CEO of a local fund house says this is because many locally invested funds outperformed the benchmark FBM KLCI last year despite the fact that the Malaysian market is a defensive one.
“Last year, the index was down 22% [in US dollar terms], but the funds gained a lot. The Malaysian market is also more defensive and has captured funds such as KWAP, ValueCap and Tabung Haji, which can’t invest all their money overseas.”
The CEO also says the Malaysian economy has been growing at 4%, but the market was down 22% last year. This shows that the market is undervalued and remains a good place to invest in.
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