Ms. Esther Teo, head of Fixed Income; and Mr. Chow Kar Tzen, Portfolio Manager, of Affin Hwang Asset Management shed lights on topics such as their team structure, how various risks have affected their investment decisions, and the major portfolio changes over last year.
Category Winner: Best MYR Allocation Fund - Affin Hwang Select Income
Key Stats
Inception Date: 2005 Jan 06
Morningstar Rating (as of 2015-02-28): 
Total Net Assets (Mil, as of 2015-02-27): 299.86 USD
Manager: Esther Keet Ying Teo, Chow Kar Tzen
Manager Start Date: 2011 Jul 18 / 2013 Jul 18
M: Morningstar; A: Affin Hwang Asset Management
M: Could you highlight any major changes you made to the portfolio over the course of 2014? Were there any particular holding that drove the fund’s performance for the year?
A: As part of the investment mandate, a minimum of 70% of the funds needs to be allocated to fixed income. During the period, we have maintained the fixed income investment levels between 70%-73%. The portfolio is mainly comprised of investment grade bonds and certain high quality unrated securities. In terms of currency denomination, US dollar bonds formed the bulk of the investments followed by ringgit, Singapore and Australian dollar bonds. In view of the tapering and US interest rates moving higher, we have kept the portfolio duration relatively short during the first half of 2014. However, with the expectation of monetary policies divergence by the major central banks; with the Bank of Japan (BoJ) continuing to conduct quantitative easing (QE) and the European Central Bank (ECB) voicing its intention to do so (ECB announced a QE program worth $1.3 trillion in Jan 2015), we were of the opinion interest rates could stay low over the short term. As such, we have extended the fund’s bond portfolio duration towards the 4Q2014.
There was active asset allocation re-balancing throughout 2014 for the equity portion. The equity exposure was lower in the beginning of 2014 due to the cautious positioning from the QE taper tantrum scare of second half 2013. We subsequently raised equity exposure in the second quarter as the taper tantrum effects was fully priced into the markets and bond yields remained low. The low bond yield environment again forced investors to go in the “search for yield” to generate returns. The Fund’s equity exposure remained high till the end of the third quarter and was subsequently reduced due to the collapsing oil prices. We sensed that there would be spill over effects from the fall in oil prices. The darling oil and gas sector would be sold down, Malaysia’s economic position would deteriorate and would lead to a weaker Ringgit, and in turn foreign investors would turn cautious and reduce their Malaysian market exposure. As such we reduced our Malaysian equity exposure at that point of time.
One of the key success factors for our conservative income centric funds is our stock selection strategy for dividend stocks. We believe that the dividend strategy which searches for stocks which offer not only an attractive dividend yield (e.g. yields between 3 to 5%) but also decent earnings growth (e.g. above 10% p.a.) would outperform a pure high dividend strategy (e.g. yields above 5%) without a corresponding growth angle. This lies in the total return mind set whereby investors obtain returns from both the dividend received as well as the growth in earnings. This we believe is an evergreen investing strategy which has withstood the test of time and has been shown to outperform most investing strategies. Some of the holdings with the features described which helped drive the fund’s performance include Sunway REIT, Westports Holdings Bhd, Tenaga Nastional Bhd, AIA Group Ltd, Airports of Thailand PCL and Telekomunikasi Indonesia Persero Tbk Pt.
M: What is your economic outlook for 2015 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
A: We think that this year will see even more pronounced dispersion of returns between regions, countries, sectors and asset classes. On the positive side, we expect improving economic growth in developed markets, and in emerging Asia due to increase in exports and decline in commodities prices. Headwinds however persist for emerging markets reliant on extractive industries. Valuations too, are above long-term averages hence multiples rerating is unlikely to occur and equity markets will have to be driven by earnings growth. In addition, there’s the impending rate hike by the US Fed which may destabilise financial markets globally.
We have consistently advocated a strategy of diversification both in terms of asset classes as well as geography. A combination of growth, yields, cash and turnaround plays would be how we have positioned our equities portfolios.
On the fixed income side, rates are already very low and while they may remain low or rise gradually, it is unlikely that they will move significantly lower from current levels. As such, getting one’s country calls right is crucial in the current year. We maintain a shorter than benchmark duration strategy. However, relative yields are still attractive compared to developed markets and with most Asian central banks on hold or in easing mode, we could still see further decline in yields. We however are mindful of how financial markets would behave as we approach the period when Fed starts to hike rates. In order to reduce volatility for our regional fixed income funds, we employ interest rate and FX hedges.
M: Can you comment on the macro risks facing the global economy, including potential US rate hikes, QE programs in the Eurozone and Japan, and the growth headwinds facing the emerging world? How do these risks affect your investment decisions?
A: The current economic outlook continues to be one of slow global growth and low inflation. This has led to monetary easing by central banks (China) and/or more QE (BOJ, ECB).
We have increased our equity exposure to the Asian markets given the headwinds for the Malaysian market. We are positive on the Asian markets given the liquidity from QE, monetary easing and lower oil price environment. Most Asian markets are net oil importers and thus lower oil prices will be a windfall to them; current accounts will strengthen leading to stronger currencies, petrol prices are reduced boosting consumer consumption, stronger government balance sheets from lower oil imports support government spending, inflation remains low leading to continued low/lower interest rates. All these are supportive to drive growth in the emerging Asian countries like Thailand, Philippines, Indonesia and China, which is where our focus is.
With the end of QE in October 2014, we expect US Treasury yields to reverse after being a big positive surprise for the credit market. Our focus remains on the US economic recovery and how this will influence Fed policy decisions and capital flows to Asia. As such, we maintain a moderately cautious outlook for Asia credit in 2015. Nonetheless, we do not expect a severe selloff as we expect global disinflationary pressures to result in further easing bias outside the US. For the fund, the Manager will continue to maintain a shorter duration bias. Policy divergence and uncertainty over when exit from zero rates would cause more volatility in FX – we think USD strength will continue and Asian currencies will come under pressure.
M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?
A: The investment team is led by David Ng, Chief Investment Officer of Affin Hwang AM. There are nine (9) portfolio managers and five (5) research analysts on the equity side while on the fixed income side; there are six (6) portfolio managers and seven (7) research analysts. The investment team hold an impressive resume across different investment specialties, coverage and geographies.
Over the course of the year, we expanded the investment team as we broaden and deepen our market coverage. In addition, the merger between Hwang Investment Management and Affin Fund Management has also grown the team.
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The responses were prepared by Affin Hwang Asset Management. Please click here to see the associated disclaimer.
