Cover Story: The power of intellectual curiosity

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 30, 2018 - August 05, 2018.
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Taufiq Iskandar Jamingan says he has always had a healthy dose of intellectual curiosity and advocates having this mindset to be successful in investing. In his 11 years as a portfolio manager and analyst, he has adopted the habit of reading diverse materials and actively seeking out information on every topic under the sun.

“My friends think I am a nerd. I love reading and I seek pleasure in reading. I read all sorts of genres, from architecture and history to fiction, non-fiction and business. Everything is important when it comes to investing. This includes political developments as well as economic and social issues. You have to try to interpret the signs and factors when you make your investment decisions. It is intellectually challenging, but it can also be intellectually rewarding,” says Taufiq, who became CEO of VCAP Asset Managers Sdn Bhd (VCAM) in May.

Before joining VCAM, Taufiq was director and head of equity at Kumpulan Wang Persaraan (Diperbadankan) (KWAP). And before that, he was the principal officer of Prima Ekuiti (UK) Ltd, a wholly-owned subsidiary of KWAP in London. He started his career as an analyst and portfolio manager at Permodalan Nasional Bhd (PNB) in 2007, developing expertise in local and foreign equities.

Taufiq’s foray into investing took place when he was a law student at the London School of Economics and Political Science. He learnt about investments from his university friends, most of whom were looking for jobs at investment banks at the time.

“This was before the 2008 global financial crisis. So, everyone wanted to be in the industry. I was very intrigued and in my last year there, I spent a few months interning with a private equity firm. It occurred to me that I would like to be in investments so I came back and served my bond with PNB [as an analyst],” says Taufiq.

After about 2½ years on the job, he was promoted to portfolio manager with a mandate to invest in Asean markets. This was followed by more roles overseeing foreign equities.

Taufiq’s reading habit has paid off throughout his career. “For example, when I was in the UK, one of our successful investments was in luxury group Kering, which derived more than 40% of its revenue from Gucci. The inspiration I got was from reading Vogue and my appreciation of the then newly appointed chief creative director of Gucci, Alessandro Michele. I am a regular reader of any genre — even now,” he says.

That was when he was with Prima Ekuiti, where he worked from 2012 to 2017. According to Vogue, the CEO of Kering — Gucci’s parent company — credited the brand’s revival since 2015 to Michele, whose vintage style and direction transformed the brand.

Taufiq’s intellectual curiosity has also helped him spot opportunities in the unlikeliest places. For instance, when he was with Prima Ekuiti, the team decided to invest in Marks & Spencer despite widespread pessimism about the UK economy.

The idea came about when Taufiq was on his way home from Oxford Street one winter day in January 2013. As he passed by the big Marks & Spencer building, he saw the M&S insignia etched into the wall. That got him thinking: This company, which has been around for more than a century, must own this building.

“So the following day, I checked the books for property holdings and found that the company owned most of its stores and the market value at the time was way below book value. The UK property market was at the cusp of an upcycle. That is value investing and our decision to invest in the company has paid off,” says Taufiq.

He made more contrarian moves during his time at Prima Ekuiti despite the state of the UK economy in 2012 when most people thought it was in a double-dip recession. In 2013, the UK Office for National Statistics revised its figures to reveal that the economy had flatlined, but did not go into a recession.

Taufiq says his team invested in European equities in 2014, when many were staying away because of the sovereign debt crisis. “By December that year, the European Central Bank had decided to embark on its own version of quantitative easing and the market took off. Again, it is all about taking calculated risks based on sheer determination and in-depth analysis of where the market should be heading.”

He continued to take this approach when he was with KWAP and the team decided to invest in the US market last year. At the time, the pension fund was aiming to increase its overseas investments.

“To give you an illustration of our focus on long-term investments and determination to focus on the fundamentals, KWAP decided to invest in the US market when everyone thought it was at the tail end of the cycle. But we saw an opportunity to build a tactical position and it paid off because we saw solid and strong economic momentum. There was an episode of volatility in the US market last year and we took the opportunity to focus on fundamentals and value,” says Taufiq.

 

Taking on sustainable investing

Taufiq’s willingness to take contrarian positions after analysing situations will certainly help him in his new role at VCAM. The company is a wholly-owned subsidiary of ValueCAP Sdn Bhd, which is equally owned by KWAP, PNB and Khazanah Nasional Bhd.

VCAM was established in 2013 with the mandate of promoting sustainable investing through private mandates and wholesale funds. Its focus area is Malaysian and Asean markets. The company, which currently has five private mandates and two wholesale funds, had almost RM4.3 billion under management as at June.

Taufiq says while he sees a global trend moving towards sustainable investing, more needs to be done to encourage proper environmental, social and governance (ESG) disclosures among listed companies. Both investors and company owners need to understand how a focus on ESG factors will lead to profitability.

“We entered the 21st century with the Enron scandal and the Lehman Brothers’ collapse when people questioned the importance of governance. We were also besieged with several catastrophes. We had Hurricane Katrina in 2005 and one of the largest oil spills in human history in 2010. Again, people questioned the need to integrate environmental considerations into business practices. One of them was Jeffrey Immelt, former CEO of General Electric, who trumpeted ‘Green is Green’, that the ability to focus on ESG will lead to profitability, which is what I believe as well,” says Taufiq.

The major focus of sustainable investing now is encouraging companies to integrate ESG values into their businesses, he adds. It is only after investors and company owners recognise how ESG values can improve their bottom lines that sustainable investing will move towards advocating impact investing, where social impact takes priority over financial returns.

“Currently, we think that social returns are secondary to financial returns. Over time, as we gravitate towards impact investing, that is where we think financial and social returns can be pursued at the same time. But it will take time, just like how venture capital took 30 years to become mainstream,” says Taufiq.

As an example of the growing trend, he points to how the size of socially responsible investing in Asia ex-Japan stood at US$52 billion in 2016, according to the Global Sustainable Investment Review. The World Economic Forum notes that an optimistic estimate of the market potential for sustainable investing globally is US$1 trillion by 2020.

“On the home front, we have the FTSE4Good Bursa Malaysia (F4GBM) Index. Last year, the index was up 17.6%, with the total returns outperforming the FBM KLCI by 440 basis points. Over the three years since the index was introduced in December 2014, it has been up by close to 12%, outperforming the FBM KLCI by 119 basis points,” says Taufiq.

As at June, the F4GBM Index had 55 constituents, the majority of which are from the financial sector, followed by industrial and oil and gas.

“The short-term challenge when it comes to sustainable investing is to find a comprehensive benchmark. The F4GBM Index is still not big enough to accommodate large inflows into this space. I think as more data and corporate disclosures come in, more sectors will be well represented on the index. For now, we have to incentivise Malaysian corporates to disclose more,” says Taufiq.

Most of the listed companies on Bursa Malaysia have been disclosing their high-level strategic objectives for governance since the Malaysian Corporate Governance Code was launched last year. But few have indicated in detail the timeline for the targets and how the success will be measured, says Taufiq. “On balance, Malaysian companies do not provide sufficient information to allow long-term investors to better understand their environmental and social issues and how the companies assess these factors as sources of risks and/or opportunities.”

 

Women, millennials to drive impact investing growth

The ESG-integrated approach is seen in large US corporations such as Nike, Taufiq points out. The company started using recyclable raw materials in its products out of environmental and social considerations. The innovations helped it to create lighter shoes and new designs.

“If you believe that innovation comes from diversity, isn’t that what good governance calls for? More representation of women and minorities fosters diversity. Don’t you think that will lead to better innovation in a company? Don’t you think linking compensation and remuneration packages to results will lead to better profitability and accountability? If you look at it that way, investors will be more confident in accepting these kinds of products,” says Taufiq.

He believes there will be more emphasis on social impact when more institutional investors realise that they need to align their portfolios with their mission and values. The growth of women and millennial investors — two groups who will benefit from wealth transfers — will also drive impact investing as they are known to prioritise social values in investments.

“These two groups increasingly believe that purpose and profit are inextricably linked. And as more wealth is transferred to them, they will be more ethical and purposeful when it comes to investments,” says Taufiq.

He adds that impact investing is needed to address the widening social inequality gap in the world. “Some people say their major concern is technology disruption and all that, but mine is social inequality. We will see the proliferation of populism because you feel disenchanted due to the lack of opportunities given to you. And that is when people become radicalised. We have seen this on the political front. On the economic front, we have this disparity of income and the economy is performing below potential because the B40 and M40 segments, which are those who have a higher propensity to consume, just cannot do so because they do not have the ability.”

In Malaysia, organisations such as the Institutional Investors Council Malaysia, Minority Shareholders Watch Group, the Securities Commission Malaysia and Bursa Malaysia are working to encourage more transparency and disclosure among listed companies, Taufiq notes.

VCAM engages with its investee companies to express its concerns. But it does not exclude investee companies that underperform on ESG assessments, says Taufiq. “We believe in positive encouragement rather than threats. But we highlight our concerns to the investee companies.”

Negative screening, which is used to exclude companies or sectors based on ESG criteria, can result in a narrow investable universe and eliminate the opportunity for dialogue and improvement, according to a report by index provider MSCI. In particular, in concentrated markets where certain sectors dominate the index, it may be hard to exclude stocks without affecting returns. It could also mean missing out on companies in certain sectors that are working to include sustainability measures in the future.

“Unlike the exclusionary approach, we are of the view that active engagement does not limit the investment universe and does not reduce investor influence on companies. More importantly, active engagement with a clear divestment rule is always more effective than pure exclusion,” says Taufiq.

He cites PepsiCo as an example. The company began promoting healthy food and beverage lines because its CEO recognised that the global rise in obesity and diabetes would affect their business in the future.

“Shortly after Indra Nooyi became CEO, she embarked on a corporate mission to pursue ‘performance with purpose’, ushering in a shift to a healthier mix in the company’s product portfolio. The revenue grew visibly by 47% from 2009 to 2017 and the share price advanced by almost 190%. Sustainability provides a specific purpose that redefines how companies conduct their business,” says Taufiq.

This year, VCAM will focus on optimising its business operations, consolidating its mandates, improving client relationships and expanding distribution channels. Since the company is not bank-backed, it lacks the reach of some fund managers. But Taufiq is confident that its ESG funds can add value to the market.

“Our business proposition is very clear. We have laid down our plan to champion sustainable investing, so all our products comply with ESG and sustainability standards. We have value to add to the industry because we have a proprietary ESG methodology. We can leverage this capability in this space so we can grow the industry,” he says.

This may include engaging in partnerships with other asset managers, who may find foreign ESG research providers more expensive. VCAM’s proprietary framework incorporates ESG factors into its fundamental analysis. The information is gathered from public and secondary reports such as newspapers.

“The governance factor makes up about 60% of our evaluation while the environmental and social factors make up about 20% each. That is because we think management plays an important role in the long-term success of the company,” says Taufiq.

The governance factor is commonly recognised as a contributor to performance, according to a review by MSCI, even though it is not the deciding factor. Taufiq says the three factors are interlinked.

“Typically, asset managers have had more focus on governance. Governance is key not only on a standalone basis but it also relates to the other two factors, notably involving disclosure practices. In general, if the governance is not strong, then the environmental and social issues are likely to be ignored,” he adds.

VCAM’s two wholesale funds are the Malaysian ESG Opportunity Fund and the Asean 5 ESG Opportunity Fund. According to its website (as at July 10), the Malaysian fund had seen a return of 8.8% since its launch on Aug 19, 2015, while the Asean fund had posted a return of -6.5% since its inception on Jan 30 last year.

The Asean fund’s negative return had been due to the overall weakness in the region’s equity markets, which was triggered by a potential trade war and rising interest rates, says Taufiq. “The year-to-date underperformance is attributable to our overweight position in Indonesia as well as the Philippines. Our telecommunications exposure also dragged the performance,” he adds.

“Since I assumed the role of CEO, I have instructed the team to rebalance the portfolio to reflect our investment strategy and focus on secular opportunities, favouring country allocations to Thailand and Singapore. When the markets tumbled in June, we began accumulating stocks that were being traded at a discount — companies that have growth visibility and a sustained competitive edge over their peers in the industry.”

Taufiq plans to diversify VCAM’s product offerings beyond private mandates and wholesale funds. “For example, we have not had sustainability bonds or fixed-income products. So, this is one of the areas we can explore. We should also explore impact investing [in social enterprises] because there is a market for that. Our product offerings will be management’s focus next year,” he says.

 

Market outlook

Taufiq Iskandar Jamingan, CEO of VCAP Asset Managers Sdn Bhd (VCAM), advises investors to adopt diversification and risk-mitigation strategies in the current market environment. Slower global growth momentum due to quantitative easing, geopolitical disruptions and implementation of tariffs may drive up costs for corporations and debt may become an issue for consumers as borrowing costs rise globally.

“I expect more disruptions and greater volatility in the capital markets against this backdrop. During this period of rising uncertainty, mitigating downside risk will be critical. At VCAM, we focus on securities that have income-producing characteristics and companies with strong free cash-flow generation and sustainable business models,” says Taufiq.

The recent outflows from emerging markets are due to concerns about central banks’ tightening measures, he adds. “I know the headlines have been dominated by geopolitical concerns and trade wars, but politics does not end cycles. It is the central banks that end cycles.

“If it is true that the US is tightening its monetary policy and the pace of rate hikes will be much faster than the market expects, then the outflows will continue and this will affect emerging markets in the short term. In the long term, there will be some value in the market, but we have to brace for the short-term volatility.”

In the short term, US dollar assets may be attractive to some investors, says Taufiq. “On the home front, companies that have exposure to developed markets will do very well. Companies that have a solid business model domestically will also do very well if the new government is serious about delivering some of the local-centric reforms.”

More policy details will be needed to maintain investor confidence post-general election. There are attractive Malaysian assets, but investors will need to wait and see how the government plans to plug the losses from zero-rating the Goods and Services Tax and reduce the fiscal deficit, for example. The financial sector looks attractive while some large-cap companies are trading below their historic average, Taufiq notes.

“I would caution that prolonged policy uncertainties, broader loss of confidence and external constraints and shocks could overwhelm any lingering perception of value. Against this rising external volatility, the local market needs more policy details so that the momentum of improving confidence that we saw after the election can be sustained,” he says.