The 2022 winners of the annual Morningstar Fund Awards–Malaysia have been announced.
The awards recognise the best of the Malaysian fund management profession, with winners selected by the Morningstar team.
The winning Malaysia Large-Cap Equity Fund is Kenanga Growth Fund Series 2 (USD). In 2021, the fund returned 11.0%, compared with the Morningstar Category average loss of 0.87%.
We spoke to the managers and asked them about their strategies. Here is an edited excerpt:
How was the portfolio positioned to navigate the market volatility in 2021? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?
Half recovering from the pandemic-stricken crisis, 2021 presented both challenges and opportunities. One of the biggest challenges was having to grapple with the lingering impact of the pandemic, as persistent waves of Covid resurgence triggered intermittent lockdowns and containment measures, which when happened pulled the markets down with them. Although such corrections became less intense as vaccination gathered pace, new sources of fear took shape in the form of worries over rising inflationary pressure attributed to severe supply chain disruption, talent and component shortage, and power rationing which impacted our investments to varying degrees. We navigated through these speed bumps by constantly reviewing our investment theses to make sure they stayed relevant, and identified the “relative winners” from sectors that were deemed resilient, consistently growing, and reasonably priced. The tech sector was one key sector that ticked most boxes and contributed immensely to our outperformance last year.
Against the backdrop of the (i) ongoing pandemic, (ii) talks of rising interest rates, and (iii) geopolitical tensions, what is your outlook for 2022, and how are you expressing these views in your funds?
The global economy is likely to continue on its path to recovery this year with Bloomberg consensus forecasting global GDP to expand at a decent pace of +4.3% in 2022 after an expansion of +5.9% in 2021. Despite this, the growth dispersion between countries could be high as the leaders of 2021 take a step back while the laggards catch up. Emerging markets look set to pick up while developed markets such as the United States slow from a high base of growth in 2021. On the topic of inflation, prices have been rising driven by recovering demand, issues in the supply chain, and rising commodity prices. If this proves to be non-transitory and persists well into 2022, it might have a detrimental impact on growth and markets. Inflation affects the market negatively via rising cost pressures for companies and also prompts central banks to tighten monetary policy. Hence, the current market focus is on the quantum of the first rate hike by the US FED and guidance for the future pace of hikes and pace of balance sheet reduction. Market-wise, we expect higher volatility in global markets as growth slows while central banks embark on a tightening phase. Region-wise, we favor emerging market equities that are earlier in the recovery cycle. Considering that lockdowns persisted in several emerging Asian economies throughout 2021, these nations (such as ASEAN) should recover quicker when the re-opening prompts a resurgence in economic activity. Additionally, China’s challenges in 2021 such as growth slowdown, policy tightening, property defaults, and power shortages should improve in 2022. China’s government policy has also shifted to an easier bias as leaders assess the slowing growth data. As a result, we are more positive about Asia and ASEAN (including Malaysia) overall for 2022.
What are the top risk factors that could impact your portfolio, and how are you positioned to mitigate these potential risks?
Tighter monetary policy stance by the Federal Reserve is the key risk to the equity markets. Due to high inflation and the Fed’s hawkish stance, the market is now projecting a rate hike in each FOMC meeting in the remainder of 2022. The Fed may also start to reduce its balance sheet soon after the 1st rate hike in March 2022. The rate hike cycle and balance sheet run-off will withdraw some liquidity which is generally negative to the markets. In addition to tighter monetary policy, persistently high inflation is another risk to the markets as it may prompt central banks to over-tighten to tame inflation, whilst hurting corporate earnings and consumer spending. Corporate earnings are negatively impacted by higher wages, and increased raw material and logistics costs; whilst consumer purchasing power gets eroded especially when income growth lags that of general prices. Lastly, the markets face renewed risk of geopolitical tensions over the Russia-Ukraine conflict. Russia is a major energy and metals producer, while both Russia and Ukraine are major exporters of agricultural products like wheat and corn. Escalated tension, coupled with sanctions on Russia has sent energy and commodity prices higher, adding to even higher inflation pressure. To hedge against rising inflation, we tilt our portfolios slightly to reduce overweight in tech and increase weighting to “reopening themes” including consumer staple and discretionary, as well as energy and commodity in view of the robust prices.
How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
Our investment team consists of both fund managers and analysts whose responsibilities include portfolio management and performing regular fundamental research on all our investments domestically, regionally, and globally. Our investment approach involves a comprehensive research process, which includes understanding industry dynamics, individual company business models, and drivers of ROE, amongst others. In formulating a company’s investment thesis, we place consistent emphasis on areas such as management quality, sustainable business model, industry dynamics, and balance sheet strength. Over the years, our staff strength has been enhanced by the longevity of the core team, as well as the additions of fresh talents to cater to the increased growth in our assets under management.
With the increasing awareness and demand for ESG investing, how have you been incorporating ESG considerations into your investment process?
We view ESG as part of our responsibility, on behalf of asset owners, to generate a positive impact through our investments. Through managing ESG risks and opportunities, we believe long-term investment returns can be improved. Hence, we have developed an ESG integration framework that was incorporated into our investment process in 2021. Our framework is built upon in-house ESG research, augmented by the FTSE ESG database, which is one of the global leaders in ESG research and analytics database providers.
