This article first appeared in Wealth, The Edge Malaysia Weekly on March 25, 2024 - March 31, 2024

Manulife Investment Management (M) Bhd was again the biggest group award winner at the LSEG Lipper Fund Awards 2024, where it took home three group awards for the second year in a row. It won the awards for Best Equity Group (Malaysia), Best Equity Group (Islamic) and Best Mixed Assets Group (Provident).

Manulife CEO Jason Chong says key to the firm’s wins was its anticipation of the US Federal Reserve’s interest rate decisions and the corresponding investment strategies that were executed.

“In 2023, we upheld our view that interest rates would peak during the year, but stay elevated for a long period. With that, we reduced our growth stock positions, especially our technology exposure, and repositioned into sectors such as property, oil and gas, utility and construction,” he says.

Some of the stocks Manulife invested in were trading at multi-year lows, with their valuations in the trough for a long time. For instance, some property stocks the firm invested in were trading at a book value of just 0.2 times, says Chong. This implies that Manulife bought into those companies at an 80% discount to their net asset value. “Selected property stocks that we liked were backed by strong unbilled sales and increased property launches.”

On the oil and gas sector, Chong and his team believed that oil prices would remain elevated due to the tight supply and demand recovery after the pandemic. Oil producers were just starting to invest in their business after many years of underinvestment. “So, our focus was on [companies] exposed to [oil and gas] maintenance and services.”

On utility stocks, Chong says these are defensive in nature and provide decent dividend payouts to its portfolios. Construction stocks, meanwhile, were expected to benefit from the government’s initiatives to revive local infrastructure projects. “The ‘overweight’ call on both property, and oil and gas sectors contributed positively to our performance in 2023.”

One of the best calls Manulife made last year was on a premier jack-up rig service provider in Malaysia that was still in a loss-making position when the firm started to build its position in the company.

“In the fourth quarter of 2022, we noted that the jack-up rig market was getting tighter with stronger demand from the Middle East, which contributed to the global market utilisation rate surpassing 90%, a level not seen since 2014. Based on the development, we expected daily charter rates to trend up over time and contract durations to increase, as most [oil and gas] operators were looking to secure jack-up rigs,” says Chong.

“Meanwhile, the supply situation was tight and the cost of building a new jack-up rig was not feasible based on the prevailing daily charter rates. On top of that, the demand in Malaysia from Petronas activities was strong, which increased the jack-up rig order book visibility.

“Given such a bullish outlook, we believed that there was room for further upside to the company’s share price once all the catalysts start to materialise. Our conviction was validated when the stock gained 53% in 2023 alone.”

Chong also attributes the firm’s outperformance and sustainable returns to a disciplined approach to stock selection and a rigorous investment process.

Manulife has an internal investment framework based on GCMV, meaning growth, cash flow, management and value. In line with this, the firm invests in companies with solid and scalable business models, good earnings potential, strong cash flow generation capability and strong and driven management teams.

Valuation is key. “We always seek valuation gaps between the fair value of the stock against the market price and identify potential catalysts for a rerating of the stock. ESG factors are taken into consideration too in our investment framework. We aim to be close to being fully invested at all times while maintaining a well-balanced portfolio to deliver superior return,” says Chong.

From an asset allocation perspective, Manulife followed its tried-and-tested approach of tweaking its portfolio in a dynamic manner. It was necessary as the market was challenging and volatile last year, mainly due to the possibility of a mild recession in the US with ongoing debt concerns.

Other risks that were on Manulife’s list were the elevated global inflation rate, geopolitical tensions, the fragility of local political stability and slower-than-expected corporate earnings recovery.

“However, we continue to believe that we should stay near fully invested via a bottom-up approach. Hence, generally we hold about 5% to 6% cash,” he says.

Hence, Manulife will continue to stay invested as it believes the local equity market has a good chance of staging a comeback this year vis-à-vis its regional peers. The local equity market seems to be in a sweet spot in this region, with catalysts such as clarity in policy direction from the unity government and stimulus projects in the pipeline, says Chong.

These projects include the Johor Bahru-Singapore Rapid Transit System; Kuala Lumpur-Singapore high-speed rail; New Energy Transition Roadmap and Johor-Singapore Special Economic Zone.

He adds that the Malaysian equity market is trading at an attractive valuation, currently near one standard deviation below its five years price-earnings ratio (PER) band. The overall dividend yield of Malaysian stocks is 4.5%, which is relatively high.

Moreover, Malaysian companies are appealing to foreign funds due to the potential of the ringgit strengthening moving forward and the low cost of doing business locally.

In the meantime, global market growth is expected to improve on the back of interest rate normalisation, which could happen in the second half of the year, as inflation risks should taper.

Chong believes 2024 will continue to be a year of stock picking. Manulife will continue to focus on stocks with a compelling valuation, strong cash flow (preferably in a net cash position), strong management, consistent dividend payout and proper ESG (environmental, social and governance) consideration.

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