2016 Awards Winners - Best Malaysia Large-Cap Equity (Syariah) Fund - Public Ittikal Sequel

Key Stats
Inception Date: 25 April, 2011
Morningstar Rating (as of 2016-02-29):
Total Net Assets (Mil, as of 2016-01-31): 515.20 USD
Manager: Not disclosed
Manager Start Date: 30 June, 2011

M: Morningstar K: Ken Goh, Acting Chief Investment Officer, ASEAN Region, CIMB-Principal Asset Management Berhad & CEO of CIMB-Principal Asset Management (S) Pte. Ltd

M: Could you highlight any major changes you made to the portfolio over the course of 2015? Were there any particular holding(s) that drove the fund’s performance for the year?

K: Ever since in 2013 when the US Federal Reserve (Fed) announced that it will begin to ease off its asset purchases and their recent decision to tighten credit, global equity markets have become significantly more volatile. Prior periods of lower volatility have created elevated valuations, and intensified worries of capital misallocation into inefficient/nonperforming assets. All of this has caused markets to swing more wildly. On the back of a surging US dollar against all major currencies over the years (we do expect it to level off in the near term), Asia ex-Japan unfortunately lagged during this period as capital flows shifted out of emerging markets to developed ones. This elevated level of volatility really tested our longer term convictions and fundamental views.

2015 saw market volatility spiking to Global Financial Crisis levels, and it was a roller coaster ride for China A-share markets. Asian currencies depreciated, capital flowed out of emerging markets, and the Fed hiked its policy rate for the first time in nearly a decade. Low global inflationary pressures persisted as major central banks maintained accommodative policies in an attempt to spur growth and battle disinflationary stress.

With oil prices continuing to be under pressure due to over-supply, our regional funds were underweight commodities exposure. In addition to devaluation stresses against the China Renminbi, we also reduced our exposure to China. In anticipation to the further turmoil in China, our regional funds increased its cash holdings in August, and favoured hard currency countries. Our global fund continues to favour Europe and Japan because their central banks will continue to ease.

Fortunately, given the weakness of the Malaysian Ringgit, our investors have benefited from strong returns from our global and regional equity funds last year.

M: What is your outlook for 2016 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

K: As we have anticipated, 2015 has ended as a beta-poor and alpha-poor year. From a market perspective, we saw flat to negative returns from all asset classes in USD terms. It has also become very challenging to pick the right securities given the macro headwinds and elevated volatilities.

We are not as sanguine as the market that the oil price will improve in 2016E. Our 2016E oil price target is now USD$25-35 per barrel (vs USD$35-45 previously), with oversupply highly likely to persist, and potential for oil price moving towards cash cost (USD$5-$25) from demand and supply mismatch.

Although we still believe there is downside risk to the Ringgit, we do not foresee the same drop in magnitude we saw last year as a lot of negative sentiments have been priced in. We do, however, remain slightly guarded about Malaysia's economic growth rate, and the government's commitment to fiscal rationalization.

2016 is likely to be a year with continued slow economic growth coupled with low inflation and interest rates. We expect volatility to remain elevated, and the US dollar strength to have peaked as it appears the Fed was premature to hike last December. Hopefully, this should lead to lessen pressures against emerging market currencies and the Renminbi.

We are neutral on Asian equities as they are likely to remain range-bound as long as the China Renmimbi is not allowed to depreciate meaningfully (to our fair value range of 7.20-7.50). Overall Asian corporate earnings in 2016 have a bit more downside to go and our bottoms-up analysis suggests zero growth vs. consensus estimates of +3%. After the large correction in January, we are selective in Technology and Financials as they appear to have been overly punished, and continued portfolio outflows will remain a headwind during the year. Thereby we continue to be cautious on value and cyclical stocks as there are over-capacity and over-leveraged in many industries. Betting on a reversion to mean would not be a great idea in a world that is experiencing accelerated change.

Given the sluggish outlook, we expect flattish returns from local and global financial markets this year. We prefer international markets over local markets given the current structural challenges and currency weakness that the Malaysian economy faces. Our Malaysia funds are defensively positioned, and we think that the current strength in the Ringgit is not sustainable. Hence, we continue to like Exporters, but will rotate into lower price/earnings (PE), high growth names. We like Construction companies for infrastructure plays.

M: Can you comment on the macro risks facing the global economy, including the US rate hikes, weaknesses in commodity prices and the significant headwinds facing the emerging world? How do these risks affect your investment decisions?

K: With the US manufacturing sector shrinking for the second straight month in December -- ISM Index in December was the lowest mark since June 2009 -- concerns of the Fed hiking prematurely are surfacing. With the Bank of Japan and European Central Bank signalling intent for more drastic monetary stimulus, the Fed is likely to put its rate on hold. However, central banks in Asia have the option of cutting interest rates to boost growth. Indonesia has cut rates without causing weakness to the Rupiah. Thailand, Philippines, Singapore, India, Korea should be easing their monetary policies this year.

China growth has weakened but growth forecast is still relatively impressive at 6-7% for the year. As the government reforms wend through the economy, we expect the People’s Bank of China (PBOC) to address economic imbalances while aiming for a soft landing; and minimizing collateral shocks.

We expect volatility swings to be more frequent and extreme. Given the uncertain market environment and heightened earnings risk, we stay risk averse and careful in our investment decisions. We maintain that bottom-up-stock-selection will be the key driver to performance in flat markets, and prefer countries with policies that have room to further ease. 

We position our funds with a focus on absolute returns in the long term as opposed to having a short term time horizon. By doing so, we expect market fundamentals to prevail while in the meantime we are pro-active in minimizing downside risks. Losing less in the short term, and gaining more in the long term is the investment guideline we pursue.

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?

K: Our investment team is organized along asset classes and country expertise, with a single focus to generate potential returns for our clients, according to market conditions. From a "wall-less layout” between our fixed income and equity teams as well as closely knitted teamwork within our regional platform, we leverage on our talent to be early and ahead of the markets in our investment decisions.

For 2016, our priority remains to deliver consistent outperformance to our clients. We intend to further strengthen our investment process by sharpening our focus, adding the right resources, and building on our culture of investment excellence.

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