(July 1): Last week, I wrote about why the Malaysian stock market has been a chronic underperformer. To recap, we tabulated the revenue and net profit of all 855 companies listed on Bursa throughout the past five years, from 2014 to 2018.
Despite marginal top-line growth — revenue increased at a compound annual growth rate (CAGR) of 2.6% — total net profits fell 6.8% annually, on average. Margins for all sectors came under pressure throughout the five years. No surprise, then, that the FBM KLCI and FBM Emas Index ended in the red in four of the past five years. I also wrote about some of the structural issues that are the likely causes of the persistent earnings decline.
We will repeat the same methodology for companies listed on the Singapore Exchange and tabulate the results in my next column. The Straits Times Index too did not do well between 2014 and 2018, with a CAGR of -2.3%, on average. We will also take a quick look at other regional market performances during this same period.
Stock price gyrations are dictated by both internal factors, primary of which are underlying earnings, cash flows and balance sheet, as well as the external environment. The latter is mostly beyond our control.
But one could still perform with reasonable positive returns investing. And we have proven this with my Malaysian Portfolio, which is up 50.7% in less than five years since inception (in October 2014).
Over the same period, the FBM KLCI and FBM Emas index have lost 8.6% and 7.2% respectively. The portfolio also compares well against the MSCI World Net Returns index, which is up 45.5%.
For the benefit of readers who are new to my Malaysian portfolio, as with my Global Portfolio, this too is a “real” portfolio. The trading account is with Maybank Investment Bank. The portfolio, which started with an initial capital of RM200,000 ($65,000), invests solely in Malaysian stocks.
We have bought and sold numerous stocks over the years. Oftentimes, the companies may have low profiles but have given us very good returns for this very same reason. We have lost money too, though fewer in number and smaller in quantum (see Tables 1 and 2).
A key part of investing is in acknowledging mistakes and cutting your losses. Too often, investors hold on to losing stocks for far too long but are too quick to take profit. Let the winners run. And when you run into a loser, cut loss.
We have also compiled performances for 192 pure equity Malaysia-focused funds. Assets under management (AUM) totals nearly RM63 billion, with the average fund size at RM327 million.
For the 158 funds that have been in existence for at least five years, cumulative five-year returns range from 55.6% for the best-performing to -45.3% for the worst-performing fund. Their average cumulative five-year return is -0.2% (after annual management fees but before initial sales commission).
What a non-productive application of domestic savings. If they had only left the money in the bank and generated 3% a year, incremental income to Malaysians would have been RM1.89 billion. This money would have been better spent and this would have created a multiplier effect on the economy. Meanwhile, these fund managers are raking in some RM1 billion in fee income every year, at an average rate of 1.5% of AUM.
I have no doubt many fund managers will object to such a direct comparison. The truth is often painful. But my Malaysian Portfolio proves that one can generate superior returns by managing one’s own funds wisely and rationally.
One of the main arguments against mutual funds and unit trusts, as often highlighted by Warren Buffett, is the high initial sales and annual management fees that are paid whether or not the funds are making profits. Critically, when stocks are not performing, and there will be times when they do not perform, management fees will compound total losses for investors.
Fund managers’ interest may not always align with that of investors. For example, the larger the fund size, the more fees earned — but the harder it is for the fund to outperform.
It is not difficult to be a smart investor. Our methodology in discovering many of the low-profile, value stocks is quite simple to emulate. We often start with the Fundamental and Valuation scores for all companies.
The scores, which range from zero to a maximum of 3, take into account various metrics such as earnings, growth, yield, gearing, liquidity, margins, return on equity, book value and so on. The higher the score, the better. The Fundamental and Valuation scores provide a quick take on the underlying fundamentals and attractiveness of current valuations for the stock.
Some other useful traits to consider are historical share price trend and longer-term financial track record. Are sales and margins trending up over time? Does the company pay consistent and rising dividends and is there room for a higher payout? How does the company compare against its sector peers? All this data is available on www.absolutelystocks.com.
There are other qualitative factors to consider before taking the plunge, such as whether you trust management. But strong underlying fundamentals and attractive valuations are very good starting points.
Stocks are an integral part of any portfolio. That said, it is increasingly clear that diversification across markets and asset classes not only help reduce overall risks but also improve returns. This is one of the main reasons behind my decision to start the Global Portfolio.
Case in point: the Employees’ Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) have far outperformed the average Malaysia equity fund.
EPF, with investment assets totalling RM791 billion, reported average return on investment (realised gains) of 7.2% from 2013 to 2017. Net income on investment assets averaged 5.8% annually, after expenditures, which translates into cumulative returns of 32.8% for the five-year period.
Roughly half of EPF’s assets are invested in fixed-income instruments, 42% are in equity and the remaining is invested in real estate and other assets. Notably, overseas investments account for 28% of total assets but contributed more than 41% of gross investment income in 2017.
PNB too has made a priority of diversifying its portfolio, with AUM topping RM300 billion. The fund reported return on assets averaging 6.4% between 2014 and 2018, equivalent to cumulative returns of 36.5%.
About 70.8% of assets are invested in public equity in 2018. Notably, investments in fixed income and overseas increased to 7.4% and 4.9% respectively as at end-May 2019, up from 5.8% and 2.4% in 2017.
Both funds have steady inflows of fresh money and neither has a redemption issue. Thus, they are better positioned to make decisions based on a longer-term perspective, as would the individual investor. Their returns are also enhanced by the size and dominant positions in the shares traded on Bursa as they capitalise on market-making opportunities.
Diversification across different markets and asset classes is, over time, a must — and increasingly doable, with new investment instruments (such as exchange-traded funds) and, going forward, tokenisation of assets for all types of real tangible assets, including gold and property. Geography is no longer a barrier.
My Global Portfolio gained 0.9% for the week. Total portfolio returns now stand at 8% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 5.8% over the same period.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
