This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 18 - 24, 2016.
The interest rate hike by the US Federal Reserve last December has resulted in less volatility in emerging market economies this year. Clement Chew, CEO of Apex Investment Services Bhd, says the Indonesian property sector, in particular, is looking attractive as the impending tax amnesty bill is set to be passed.
Apex may be a small player in the asset management industry, but things are set to change. The firm has revamped its investment and decision-making process, and Chew is looking forward to growing the business and strengthening its reputation in the country.
He says that by attracting talent and experienced fund managers to the firm, he is “deepening the bench” of the company. “Like in football terms,” he smiles.
Besides attracting talent, the team’s investment and decision-making process has changed since Chew took over as CEO. “In a multinational team environment, it is about building consensus, meaning that if we want to make a decision, we come together to brainstorm and influence the decision through the power of our ideas,” he says.
The Apex team led by Chew has a morning meeting every day and portfolio meeting every week. At the former, they discuss the day’s news that could impact stock movements and at the latter, macro-development trends and fund strategies are discussed.
Looking at the performance of the company’s funds, Chew says seven out of the eight have saw a return of 6% to 9% last year. “This was a good start as the market was down 3% last year. But I think we need to improve when benchmarked against our peers in the industry. This is important.”
He adds that the eight funds include both conventional and shariah funds that invest in local and regional markets. He believes these offerings are sufficient for now so the firm will not be launching many new funds this year. “We will probably launch one or two regional wholesale funds,” he says.
Chew and his team are leveraging the corporate relationships they have built to attract more listed companies to invest in their money market funds. He is also eyeing high-net-worth individuals with private mandates of RM10 million and below.
“RM10 million and below is considered small to some big firms. But to us, we can take it and focus on smaller mandates. There is good potential in this segment. We are finding our niche in this space,” says Chew.
After all, the firm’s ultimate goal is to generate sustainable return for its clients. “We may not be the top player among our peers, but we want to generate steady and consistent returns for our clients. If we can have sustainability in our performance, we would have done a good service for our investors,” he says.
The asset management business is like the endurance horse race in Arab countries, says Chew. “The Arab royalty in the Middle East are very fond of this sport. The participants ride on a special breed of Arabian horse and ride across the desert for as far as 100km. It is all about endurance and stamina.
“There is a saying in this sport: ‘In an endurance race, if you try to win, you will not finish. But if you try to finish, one day you will win.’ I think the asset management industry is like that.”
Bottom-up stock picking
Chew says the firm is not investing aggressively in the Malaysian market this year as companies’ earnings are expected to fall further, in line with the expected negative earnings of the MSCI World Index. He adds that Apex holds about 30% in cash, which is higher than its peers’ 12% to 18%.
“We are not aggressive this year. First, the revenue of companies are under. There is also pressure on them to grow sales. This is due to the weak consumer and investor sentiment. Second, the cost for most companies are high this year due to the weak ringgit and other input costs,” he says.
“It is a double dose for companies in general. Margins have been squeezed and earnings are under pressure — just like the last two to three years.”
Typically, the low base effect would see corporate earnings improve, but Chew believes it is unlikely to happen. “This is a valid question, but I would say the pressure on top line and costs are more pronounced this year than last year. This takes into account a slower economy, weaker consumer confidence and more cautious investment spending budgets. The removal of subsidies, imposition of GST, higher cost of imports due to the weak ringgit and higher wage costs are also part of the reason,” he says.
“From the start of the year, you will see some of the analyst projections saying that corporate earnings in the market are growing. But towards the end of the year, people will lower their projection from 7% to 8% growth to 4% to 5%. It will probably end up being negative,” he adds.
“Looking at the MSCI World Index, corporate earnings globally are expected to be negative and I would say the same for Malaysia. By the way, the country’s corporate earnings have been negative for the past three years.”
On the local front, Chew says the firm is using a bottom-up stock-picking approach with corporate earnings expected to be disappointing this year. Consumer counters that have a sound management team and operations with good cash flow are what his team is looking for. They include small and mid-cap companies such as Spritzer Bhd and Three-A Resources Bhd.
Spritzer is the largest bottled water producer in the country and is well known for its Spritzer and Cactus brand of mineral water. The company is controlled by the Lim family, with about 60% equity interest held mainly through another listed entity, Yee Lee Corp Bhd.
The company’s revenue has grown every year since listing in 2000, navigating through hard times such as the 2008 global financial crisis. Net profit jumped from RM10 million to close to RM30 million this year.
Three-A Resources is an investment holding company with two wholly-owned subsidiaries, namely San Soon Seng Food Industries Sdn Bhd and Three-A Food Industries Sdn Bhd. The company manufactures liquid caramel, caramel colour, soya protein sauce and glucose syrup, among others.
“We like them because their products have quite inelastic demand [any change in demand will be relatively small even as prices increase]. The management is very good at what it does. The valuation is not too expensive either,” says Chew.
From a bottom-up perspective, Apex is also comfortable holding stocks in the oil and gas and crude palm oil industries, which were badly hit by the collapse in commodity prices last year. Chew likes Dialog Group Bhd for its good track record.
“We are a fans of the company because the management has a very good track record of executing projects. The world has an overcapacity in oil production and its tank terminals will be quite sought after. It is also expanding its terminal capacity in Pengerang, Johor,” he says.
“It has a competitive advantage [against its peers which have tank terminals in Singapore] as the cost of storing oil and gas products is much higher in Singapore,” he adds.
Chew likes companies that are expected to benefit from the strengthening of the ringgit this year such as Astro Malaysia Holdings Bhd and Tenaga Nasional Bhd. “We like stocks that were under pressure because of the weakening ringgit, such as Astro and Tenaga. A stronger ringgit will help ease Astro’s content cost, which is priced in the US dollar. It will also help slightly lower Tenaga’s interest expense cost for its US dollar debt,” he says.
Telecommunications and banking are some of the sectors Chew is underweight on. “Telcos are facing headwinds in terms of spectrum costs and higher operating costs. Competition has also intensified, forcing some of them to reinvent their business model. Telcos’ dividend yields have fallen and are less attractive than in the past,” he says.
“Meanwhile, banks are facing net interest margin pressure and lower loans growth due to a slower economy. Loan provisions are expected to increase and the capital market environment is sluggish.”
Chew is rather pessimistic about the global economy. He says the low and negative interest rates in the world’s major economies are distorting growth and productivity and destabilising the global economy.
He says Europe has moved into unprecedented negative interest rate territory and growth has not picked up. Abenomics, on the other hand, has failed to revive Japan’s economy so far. The central banks there have exhausted their monetary policy as there is no more room to cut interest rates to revive their economies.
This is despite the US economy recovering and China growing at a much lower rate than before. “What we have seen globally since the global financial crisis is that we have entered a period where growth has continued to be disappointing and below expectations, whether it is Japan or Europe and other forecasts. Global growth this year is expected to be about 3%, but it will most probably be 2% to 2.5%,” says Chew.
“World growth is not expected to be positive at the moment. We don’t see where the engines for growth are. Because of this, we have some yield plays, as interest rate expectations are scaled down.”
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