This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 10, 2018 - April 16, 2018

Affin Hwang Asset Management Bhd had a good showing at The Edge-Thomson Reuters Lipper Fund Awards 2018. It won two prestigious group awards — Best Equity Group and Best Mixed Asset Group — and four individual awards.

Affin Hwang Select Income and Affin Hwang Aiiman Select Income won the individual awards for Best Mixed Asset MYR Conservative and Best Mixed Asset MYR Conservative (Islamic) in the three-year category respectively. Affin Hwang Aiiman Growth and Affin Hwang Select Opportunity won the individual awards for Best Equity Malaysia (Provident) and Best Equity Malaysia Diversified (Provident) in the 10-year category respectively.

Senior portfolio manager (equity) Chow Kar Tzen and senior portfolio manager (fixed income) Ooi Phee Lip — the team behind Affin Hwang Select Income — say the fund was built with an emphasis on consistent performance and capital preservation. “The fund was conceptualised to deliver about two times the fixed deposit rates in Malaysia [over the medium term] by allocating up to 30% of the fund to equities and at least 70% to fixed-income securities. This required an absolute-return mindset, which is the firm’s investment philosophy,” says Chow.

As capital preservation is a key consideration, he says the fund house’s strategy included reducing exposure to risky assets, especially equities, in times of distress and heightened volatility.

On the fixed income side, Ooi says the fund combined active management strategies with bottom-up security selection. “We are known for being value-oriented and the strength of our in-house credit team contributed strongly to our achievement. Our credit team follows a rigorous process when assessing the creditworthiness of a company, for example, performing an in-depth analysis of the risks associated with the borrower and a particular issue. In formulating our own credit opinion, we conduct both quantitative and qualitative analysis.”

Chow says the fund house had forecast that 2017 would be a difficult year as they projected a stronger US dollar amid higher interest rates and bond yields. “The approach we employed for equity exposure was a barbell strategy to cater for that environment,” he adds.

The fund was overweight on cheap financial and high-growth technology stocks as they believed that the financial sector would benefit from expectations of higher interest rates and bond yields globally, says Chow.

On technology, he says the growth of the sector outpaced that of other sectors and was able to withstand the tough macro environment. “While the macro conditions turned out quite favourable for equity markets, the barbell strategy performed well nonetheless.”

As a result, the fund house will continue to favour the financial and technology sectors while staying away from yield-sensitive industries such as real estate investment trusts (REITs) as this area generally underperforms in a rising interest rate environment.

On fixed income, Ooi says that in a compressed spread environment, the fund continues to employ the right credit selection, duration and currency strategies. “Thus, we prefer to maintain a short-duration bias for the fund and invest in companies with better corporate financial discipline.

“With regard to country or sector allocations, we continue to like Singapore, Hong Kong and Australia, given their strong fundamentals and technically where the supply of bonds is limited, hence providing strong support for bond yields.

“We also like corporate perpetual bonds with hefty coupon reset features and prefer to own sub-debt over senior bank paper. In the high-yield space, we are very selective in short-dated China property names as well as Indonesian commodity names.

“We like Malaysia’s bond market as we believe it has very strong domestic support and it is a defensive market when global market volatility increases. Indonesia and India provide high carry, but they have rallied a lot and we are more neutral, given the expensive valuations.”

Akmal Hassan, managing director of AIIMAN Asset Management Sdn Bhd — a wholly-owned subsidiary of Affin Hwang — attributes the performance of Affin Hwang Aiiman Growth and Affin Hwang Aiiman Select Income to the fund house’s philosophy of investing based on fundamentals, as opposed to benchmarking their portfolios. “We are stock pickers with a top-down overlay, where most of our efforts are spent identifying themes, sectors and stocks from which excess returns can be derived,” he says.

Akmal says there was no significant rebalancing of assets apart from new holdings in the technology sector. “On the local fixed-income and sukuk market, 2017 started on a difficult note as foreign outflows persisted early in the year. But, in hindsight, this provided good buying opportunities for local players who benefited later from foreign funds returning to the market as a result of Bank Negara Malaysia’s relaxation of its foreign currency hedging measures and as reflationary trade post US President Donald Trump’s victory losing momentum.”

The fund house does not expect the central bank to adopt an aggressive monetary tightening stance in the coming months as inflation looks manageable. “Thus, we do not expect MYR bond/sukuk yields to correct significantly higher,” says Akmal.

“We expect a healthy pipeline of sukuk issuances this year, supported by robust economic activity and resilient growth in the domestic economy. We expect strong activities in the construction sector to continue driving the bulk of the supply of sukuk issuances. In particular, Danainfra Nasional Bhd and Syarikat Prasarana should continue being the biggest issuers as the ongoing public infrastructure projects continue to need a lot of funding.

“The power sector may see more issuances to fund solar power projects. As the property market is still weak, this could require property players to borrow to fund their working capital. Within the financial sector, issuances will probably be dominated by conventional paper.

“However, we do expect a slight moderation of sukuk and bond issuances this year as some borrowers may have already front-loaded their borrowing requirements in anticipation of higher rates and the upcoming 14th general election.”

On the performance of Affin Hwang Select Opportunity, Affin Hwang’s director of equity strategies and advisory Gan Eng Peng says he credited the performance of the fund to the positions it had taken in 2016 and early 2017 in banks, REITs, restructuring plays and various bottom-up ideas.

“We were early buyers of large-cap banks as we thought the selling was overdone. There was tremendous value and that broad economic activity should improve,” he adds.

“We took the view that the abundance of domestic liquidity would force the buying of REITs and other dividend stocks. So, the portfolio had high exposure to this space. Some big bottom-up ideas such as an aluminium smelter company, a politically connected construction company, a regional food and beverage concern and a tank farm operator also drove its performance.”

Gan says the team is shifting the fund’s portfolio towards a rising inflation environment. “We are in the late stage of a long economic run since 2009, with massive liquidity in the system. Markets tend to give the sweetest performance at late-stage rallies. We want to capture some of the returns, but not to overstay,” he adds.

“This should mean stronger growth, higher rates and better commodity performance. We express this view through banks and insurance companies, which are geared to economic growth and rising rates, as well as large-cap oil and gas stocks and net cash companies.”

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