This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 2, 2018 - April 8, 2018

RHB Asset Management Sdn Bhd continued to win at The Edge-Thomson Reuters Lipper Fund Awards 2018. For the second consecutive year, it clinched the prestigious Best Bond Group (Provident) award and four individual awards.

Managing director Eliza Ong Yin Suen attributes the fund house’s performance to the team’s strategy as well as the organisation’s investment philosophy. They played a part in the performance of the two winning funds, RHB Islamic Bond and RHB Smart Income.

“We do not attribute the funds’ performances to a particular fund manager alone. Instead, we believe the results are predicated on a successful investment team. We can never work alone in delivering performance these days as the financial markets are becoming more challenging and we need a team to manage risks coherently and effectively,” says Ong.

As at Dec 31, 2017, RHB Islamic Bond posted an impressive return of 19.17% over three years, 39.86% over five years and 102.88% over 10 years. The fund comfortably beat its benchmark and led the Bond MYR (Islamic) table in all three categories.

Ong says the fund house adopted an “active duration-led strategy” for both government and corporate bonds to derive income and capital gains. “This presumably is in contrast to conventional propositions that assume bonds are ‘buy and hold’ securities. We also applied a rigorous credit selection process to identify corporate bonds or sukuk and we are supported by a team of experienced and dedicated researchers.”

Despite the win, Ong thinks rising policy rates in the advanced economies may have held back the performance of RHB Islamic Bond last year. “Central banks have embarked on their tapering moves by buying fewer government bonds that in the past kept interest rates low. We also dealt with significant capital outflows at end-November 2016 and in March last year, in addition to contending with a challenging environment for the ringgit,” she says.

In response, the fund house had to adopt an active asset allocation strategy to capture returns last year. “We tactically invested in both government and corporate sukuk by actively managing the weightage of these assets, aligning them to interest rate movements in the bond market. Even in the corporate sukuk space, we aggressively participated in new primary sukuk issuances to lock in higher premium yields and benefit from the declining yield trend post-issuance,” says Ong.

On the prospects of RHB Islamic Bond, she sees domestic sukuk rates remaining fairly attractive and stable because of surplus liquidity in the financial system. Furthermore, with the Malaysian government’s attempts to meet its fiscal deficit target, there could be fewer government securities auctioned in the local market. So, demand is expected to exceed supply. “We also do not expect the heavy corporate sukuk pipeline that we saw last year, and this will reduce credit spreads from widening out from low risk rates,” she adds.

RHB Smart Income was another significant performer for the fund house, providing a return of 20.17% over three years, 45.43% over five years and 81.20% over 10 years. The fund grabbed top honours for the Mixed Asset MYR Conservative (Provident) 10-year category.

On this fund, Ong says the challenges were in diversifying portfolio risk and finding companies with good fundamental growth, given that the fund’s mandate on equity positions only allows it to be invested in firms with market capitalisations of less than RM1 billion. Even so, the fund required no notable changes to its asset allocation or strategy throughout the year, she adds.

She thinks the fund’s investee companies will benefit this year from rising domestic consumption, as well as a number major infrastructure construction projects in Malaysia. “However, the fund is cautious on exporters due to the recent strong ringgit performance,” she adds.

Taking stock of last year, Ong was pleased with the performance of the equity and bond markets, with both asset classes performing well, thanks to improving global growth fundamentals. “Bonds were given a lift in prices because of relatively benign inflation expectations and stable oil prices. We also saw the ringgit rebound significantly due to improved fundamentals, as well as the influx of foreign bond [investments] into Malaysia, which rode on the strength of the ringgit,” she says.

“Within the [Asian] emerging market space, we saw the sovereign ratings upgrade of Indonesia to BBB-. This means the country is now rated as investment grade by all three major credit rating agencies (Fitch Ratings, Standard & Poor’s and Moody’s Investors Service).

“In China, we saw the establishment of Bond Connect by the People’s Bank of China to attract more foreign investors to the growing bond market there. Going forward, we expect quite robust capital flows in the region with these key establishments in these markets.”

Launched in mid-2017, Bond Connect is a mutual market access scheme that allows investors from mainland China and overseas to trade in each other’s bond markets. Foreign investors are able to buy debt on China’s interbank bond market directly through the Hong Kong exchange. Eligible investors include institutions such as banks, insurance companies, brokerages and asset management firms.

Ong also acknowledged the global sell-off that gripped markets earlier this year. However, she sees opportunities and expects the fund house to successfully navigate the early headwinds.

Ong tells Personal Wealth that she is expecting a volatile 2018, even as markets continue to be flush with ample liquidity. She expects more external headwinds arising out of several global developments.

“The US has embarked on its tax reform, which invariably means more US Treasuries being issued to the bond market. Increasing the Treasury supply during a time of rising interest rates will raise borrowing costs and possibly lower earnings if corporates are unable to effectively reprice or manage their costs,” says Ong.

Despite the market volatility, however, she believes extra vigilance will be rewarded with new opportunities. “We may be able to add on securities at attractive valuations and reposition them to ride the upside when the markets recover,” she says.

Ong sees local bonds remaining fairly attractive and stable, thanks to the surplus liquidity in the financial system and the lack of quality bonds to fill the demand. Meanwhile, there are pockets of opportunity in global bonds amid a rising interest rate environment. “We are selectively constructive on some undervalued high-yield bonds as well as Asian emerging market bonds, since the latter generally offer attractive yields relative to their risk profile,” she says.

On global equities, Ong believes markets will be volatile as investors reprice the risks of higher US interest rates and ongoing trade tariff rhetoric. “Any trade tariff retaliation by other countries could cause the volatility in the stock market to spike. However, we believe the synchronised recovery in global growth will persist and it will be a positive outcome for corporate earnings,” she says.

“In addition, equity valuations are still decent due to the strong recovery in corporate earnings. Hence, a sharp drop in equity prices will present an opportunity for us to enter the market.”

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