Teng Chee Wai sums up 2018 as a tiring year for fund managers. Many unexpected events had caused volatility to increase in the global markets, making it extremely challenging for them to navigate the shifting landscape.
“In February last year, it started with concerns about the US interest rate cycle. Then, geopolitical risk came into the picture, with [US President Donald] Trump’s views on China, the trade war and [the summit] with North Korea, which caused market uncertainty,” says Teng.
“And then, when we saw clarity on the trade disputes towards the end of the year, the market started to worry about the global economy rolling over.”
Even December, which traditionally had been an uneventful month for markets, was not spared, says the managing director of Affin Hwang Asset Management Bhd (AHAM). “Our equity portfolio managers were navigating this environment in 2018 very carefully. At one point, we were ‘cash up’ in our portfolios. But eventually, we were whipsawed by events.
“Just when we thought it was safe to go in again, the market took another tumble. For instance, when we saw that Trump and China President Xi Jinping had come to some form of agreement in November, we thought it was time to go out and reinvest. We did not know that December would turn out to be an even worse time. So, some of our funds were caught along the way.
“On the equity side, our domestic portfolios are down by a single digit while our regional portfolios are down by 10% to 12%. I would have loved to get a much lower negative [return]. We were on track to achieve it, but we took the view that the worst was over and went back into the market in November, which gave us a knockdown.”
Despite these conditions, AHAM did well in its overall business last year, says Teng. In addition to achieving net positive sales growth, its assets under management saw a slight increase to RM48.4 billion (as at Nov 30) from RM47.4 billion in 2017.
“We manage government-linked-company assets to the tune of RM10 billion or RM11 billion while our bank distribution business hovers at RM9 billion to RM10 billion. But the bulk of our management comes from corporate assets, which includes insurance companies and high-net-worth individuals. This makes up about RM24 billion,” he says.
The volatility has continued into the new year and global markets are still on the decline. Observers are speculating when a recession could occur and the depth of it should that happen.
Teng says the jury is still out on whether the current slowdown will eventually bring the global economy to a recession. “The positive side is that the central banks, the US in particular, have raised interest rates. And they do have room to begin reducing rates by 2020, which is what the market has begun to price in already.
“That is such an irony, right? Last year, the market anticipated two interest rate hikes in 2019, with the possibility of two more in 2020. But with the turn of events over the last four or five weeks, we are now talking about interest rate cuts in 2020.
“So, I can tell you that the market is very fickle now. There are so many moving parts. And to make things worse, the market volatility is something difficult for most portfolio managers to stomach at the moment. Just look at how the Australian dollar performed on Jan 3.”
On Jan 2, a flash crash sent the Australian dollar to its weakest level since 2009, falling more than 3% to 67.49 US cents before rebounding shortly after. On Jan 5, it was back at 71 US cents.
The decline was attributed to concerns about global growth, driven by multiple factors, including weak manufacturing data coming out of China and the EU. This was made worse by algorithmic or high-frequency trading in the market.
Teng says his team is restrategising its asset allocation in the light of the current market conditions. He acknowledges that it will be tough going forward, but it is something the team is prepared for.
“This is my 19th year in this business and we are not averse to market cycles as we have been through 1998 and 2008. This is another one of those things where you have to be mentally strong to ride out the storm,” says Teng.
“We are hoping that this does not become a perfect storm. It may turn out to be if all three major economies see a downturn together. So far, China has turned downwards while the US is showing signs. Japan and Europe have not shown signs of turning down yet. So, let’s see what happens.
“It is just that in 2019, we are facing a situation where we have had a prolonged economic or market rally over the past eight years. So, the question is whether this is a necessary correction of the market.
“The answer is yes. The markets cannot continue to rise in the midst of an extended economic cycle. So, from a client perspective, it is important to properly asset allocate your positions from day one.”
A smooth integration
The tough market conditions notwithstanding, the last five years have been good for AHAM since Affin Holdings Bhd completed the acquisition of HwangDBS Investment Bank in September 2014. While there was initially some nervousness about the acquisition, Teng has been pleasantly surprised to see the smooth integration of the corporate cultures.
“The Hwang culture was very much entrepreneurial-driven while Affin’s was a lot more process-driven. The efforts made by management and shareholders to work together to ensure that the entrepreneurial spirit of Hwang remains is a key point in the thriving asset management business that we have today,” he says.
“We have kept the entrepreneurial culture very much alive. It was a successful merger of cultures and we have seen good results since. The merger is not seen as a ‘one plus one equals two’ but more as a ‘one plus one equals multiples of two’.”
One key advantage that AHAM could leverage post-acquisition was to grow its government-linked-company business. “One thing that has helped us as being part of Affin was that we could reach out to more government-linked funds and government-linked companies and be a good service provider in that particular space,” says Teng.
Since then, the company has accomplished many of the milestones it had set out to achieve. One of them was to have a pre-tax profit of more than RM100 million, which the fund house achieved in the last two years, says Teng. This is an impressive jump from Hwang’s profit of about RM20 million prior to the acquisition.
Another achievement was the building up of its private wealth business within the asset management industry, says Teng. “It is a natural progression as we have been a big player in the corporate space. Over time, we have built good relationships in the space and we have a decent portfolio of high-net-worth clients who invest with us today.”
To develop the private wealth business further, there must be more products and the alternative space was something that the company needed to be in, he says. So, last June, it established its private equity arm, Bintang Capital Partners Bhd, to deploy capital and support fast-growing private companies with proven track records.
Bintang aims to back entrepreneurial founders who have built a strong business presence in Asia-Pacific and intend to take their businesses to the next level of growth. It selects companies with enterprise values of US$20 million to US$200 million.
In the next five years, Teng hopes to go regional and set up offices in some Asean countries. However, this will only be done after the company has solidified its businesses here.
“When it comes, it comes. We should not do it just for the sake of doing so. We must be good and successful at managing assets here. Only then can you start expanding to other countries and replicating what you have done here,” he says.
Teng believes that in terms of market share, AHAM is positioned behind Public Mutual Bhd and CIMB-Principal Asset Management Bhd, the two largest players in the industry. Has he set his sights on being a future market leader?
“Someone once asked if I wanted to be No 1. I told him that is not the point. If we continue to grow and be good at what we do and continue to acquire clients and assets, we will eventually get there. But we should not set that as a goal,” says Teng.
“Instead, the primary objective of a company should always be serving its clients. They are the most important stakeholders in our business. That must continue to be the key focus of the firm, not striving to be the best in this or that.”
What he is most proud of today is the people who have journeyed with him all these years, especially those who came on board with him post-merger. He wants to continue developing talent in this organisation.
“I want to bring young people into this organisation and get them interested in developing a career in the financial industry. My proudest moments are when I see that after five years from their first day out of school, they are still working for me and still engaged in this industry,” says Teng.
Another area in which AHAM is putting a lot of effort is innovation. This is a necessity, especially with the industry continuing to face cost pressures, says Teng.
“Our approach to reaching out to clients must change. So, we set up the Innovation Lab last year. And you will see a lot more initiatives roll out of it in the near future.”
AHAM appointed its first chief innovation officer, Allen Woo, in January last year to set up and lead the team. Top on the Innovation Lab’s list of priorities is to drive down costs and improve the client experience.
“The amount of paper we use in this organisation should be at least halved in the next three years. That is where the back-end processes have to be a lot more efficient,” says Teng.
“Another big dream that I have is when a client needs to purchase Affin Hwang products and they can do so in just three clicks. Right now, there are too many clicks. As a first step, I think it can be seven or eight clicks.
“These are things that we are spending time and effort on internally to make ourselves a lot more efficient. We are not only using innovation as a means to reach out to our existing client base but also to drive productivity. Then, in three years’ time, we will use innovation to come up with new products to reach out to the masses.”
Currently, investors can only top up their existing unit trusts on Affin Hwang’s website or purchase select products on third-party platforms such as Fundsupermart.com.
Improving the client experience is something that Teng wants to focus on, especially as AHAM acquires 5,000 new clients on average each year. “We used to have more clients coming to us via distributor channels such as banks and platforms. But since we launched PRS funds five years ago, we have acquired about 5,000 new clients each year,” he says.
“So, in the last five years, we have had 25,000 to 30,000 new clients. Over the years, we started to see PRS as a natural opportunity for us to have more clients come to us.
“When we have this number of clients, we get them to invest in other products such as our unit trusts. So, we have developed service teams around that. Today, we manage to convince about 45% of them to have more than just their PRS funds with us.”
Capturing the changing landscape
AHAM has been in fund management for many years now and has seen various market conditions and the introduction of many investment vehicles. Compared with a decade ago, the landscape is changing very quickly, says Teng.
“Young investors have access to many investment options and they are willing to give these a try. They are a lot more adventurous than their parents. This is the segment that our Innovation Lab is trying to address,” he adds.
“While they do not make up a large portion of our investor group, we are mindful that they — the millennials — will be our investors in the next 10 to 15 years. We must capture them now to be there with them as they go through this journey of investments.
“For now, a big part of our pool of investors is in the 45 to 60 age group. But 15 years from now, some of this wealth will pass to the next generation. That is when you really have to think about products that cater for their needs.
“We have been engaging the second generation of our existing client base. What we have found is that there is a lot of interest in start-ups, unicorns and things like that. So, we started the private equity business because we realised that this group wants to try new things and be at the forefront of this evolution.”
The Innovation Lab was set up with two objectives — to drive down costs using productivity and technology and to use technology to reach out to clients. “We want to put more information at their disposal and be more transparent. We want to get them to engage with us more,” says Teng.
“Right now, the only time they engage with us is when they really look at the portfolio and when the value is down. When it is up, they do not bother.
“We also want to use the Innovation Lab as a tool to reach out to a segment of the market that we have not been able to — the masses. These segments will only invest in small amounts. But today, the entry costs are high. So, how can we break it down and make it cheaper for them?”
Teng hopes to see much better results this year. “Right now, it is not so much about coming up with new products but improving our internal processes,” he says.
Teng is proud of the fact that AHAM’s fixed-income team has developed its own capability in managing global bonds. Four years ago, the company was given a mandate by a pension fund as part of its initiative to develop local talent to manage global bonds. Eight asset managers — four local and four global — were selected.
“We are one of the four local asset managers to be given a chance. When we first received the mandate, we were just lost because when we looked at the index, there were 20,000 components,” says Teng.
“Plus, we are talking about running interest rates and credits across global markets in the US, Europe, Japan and emerging markets. So, what we did was ask the help of our other shareholder Nikko Asset Management. It tasked its London team to advise us and get us started.
“We also invested in a young team of people in Malaysia, where they would learn about these markets even though these were across different time zones.”
It was challenging at first. There were so many things to learn, but the team took it in their stride.
“If you look at the US alone, you have to learn about the Treasury market, municipal bonds, mortgage-backed securities and asset-backed securities. Then, you must understand how the markets function,” says Teng.
“Sometimes there are opportunities. Sometimes there are traps that can kill you. Nonetheless, I gave the team the latitude to try and learn.”
Apart from the dedicated team of four who managed this portfolio of US$300 million to US$400 million, the entire team at AHAM was on hand to support the infrastructure, credits, processes and macro-processes. Their efforts paid off. While this was a lean team, it was able to compete with its larger counterparts.
“While we are not yet as good as the global fund houses, I think the message that I want to send is that we are willing to build. We took this opportunity to grow our team and to get results on top of it all,” says Teng.
“Looking at the performance metrics over the last four years, we are not far from these global asset managers. To me, that is a proud achievement. In fact, we were given an award last year by the pension fund for being the best global bond fund manager.”
Last year, the market was abuzz with rumours that Affin Hwang Asset Management Bhd (AHAM) was going to be listed. However, managing director Teng Chee Wai says while there are no concrete plans to list yet, he is open to doing so in the future.
“We have not made any submissions to the Securities Commission Malaysia (SC) yet. But if we eventually do so and obtain the SC’s approval, the whole process is meant to do a few things. The first is that it is meant to further reinforce the reward system for the management and the team to bring the company to the next level,” he says.
“Second, this is to help Affin realise the value of its investment in us over the last four to five years. From my perspective, it is good to list because then you ensure the independence of the firm. We have fought hard for that and although Affin is a major shareholder of the firm, I must say that it has granted us that independence.
“I think a listing will enforce the independence, in my view, to allow the public to be shareholders. If management is not doing a good job, remove us. If we do not keep our independence, remove us. We are still at the discussion stage now and hope to get something done by 2020.”
Introducing a passive strategy
Investors can look forward to more exchange-traded funds (ETFs) when Affin Hwang Asset Management Bhd introduces its passive strategy. But managing director Teng Chee Wai says its plans are still in their infancy.
“We are still trying to figure out what works and what does not work in Malaysia. So far, we have seen what does not work. So, we are very realistic about it. We ask ourselves what we can do differently and how these strategies can help meet the needs of our portfolio managers and the sales team to help build their clients’ portfolios.”
Teng says ETFs have not been successful in the country for several reasons. “One, I think it is because the strategies that have been launched in the market are not volatile enough to create opportunities for people to trade. Two, they may not have been strategies that help asset managers or clients diversify their exposure.”
While investors can gain access to ETFs listed overseas, Teng believes that it will be easier for investors to access them if they can be traded locally. “My view is that we should continue to launch ETFs with certain themes so that they interest investors over time. We are going to be a little bit more active in this particular space and hope for the best,” he says.
“I am not sure if we will be successful, but a lot of my businesses have started with trial and error anyway. Some will turn out well and be successful, others may not be. But we are happy to try.”
Is the fund house worried that its passive strategy may take off and cannibalise its products that use an active strategy? Teng does not believe so.
“Trends have shown that the passive strategy is indeed growing faster than active ones. Look at the funds in the marketplace. A lot of them consistently underperform, yet they charge 1.5%, compared with passive strategies that charge 5 to 10 basis points and perform in line with the index,” he says.
“It does not make sense. But because the draw of money into passive funds has been strong, these investments end up performing well because it is all blind money. They do not choose companies, [the money just goes into] the top 30, top 50 companies. Then, you starve capital to the companies that need it in the growing phase. Yet, you give capital to those who may not need it because they are in the established phase of the business cycle.
“But that is the challenge of the industry. I have never seen the passive strategy as a replacement for my active strategy, partly because our active funds have been performing relatively stronger than the index anyway, on a rolling three to five-year basis.”
Instead, Teng sees ETFs playing a complementary role in terms of what the fund house can do to bring strategies that can be traded in Malaysia and used by local fund managers to supplement their existing portfolios. “I think there are a few inefficiencies for us to extract and participate in the Asian marketplace [via ETFs],” he says.
He adds that even AHAM’s active strategies use ETFs. “Last year, we were one of the biggest buyers of an inverse Chinese A-share ETF (listed in Hong Kong). At one stage, we owned about 40% to 50% of the unit holder.
“We invested in it across a few funds. We wanted to use it as a hedge to our beta. Because we know the market makers, they allowed us to trade units and cash out our units when we wanted to exit so there was no issue of liquidity.”
Last November, AHAM announced that it had entered into a strategic partnership with Samsung Asset Management (Hong Kong) Ltd to drive product innovation across a range of initiatives, including the development and offering of Leveraged & Inverse (L&I) ETFs on the country’s stock exchange.
Under the terms of the agreement, AHAM will appoint Samsung AM as its investment adviser to provide advisory services in the management of its derivative-type ETFs, including L&I products, through shared resources and expertise.
“Samsung was the first asset management firm in the region to launch futures-based ETFs in Asia and has been managing L&I products since 2009. It was one of the early pioneers of ETFs in South Korea and has built a strong name in its home market,” says Teng.
“Given Samsung’s strong capabilities and success in managing L&I products, we believe that we are able to capitalise on its expertise to complement our growth strategy. L&I strategies are not readily available in the market, but we believe that such strategies will catch the eye of investors and asset allocators.
“The focus remains on providing investors with a diverse suite of products to choose from. And with the plain-vanilla ETF options already available in the market, we thought it would be suitable to also have some tactical options for investors to participate in.”
The company currently has one ETF — the TradePlus Shariah Gold Tracker — which it listed in late 2017. However, according to Bloomberg data, the fund ended last year at RM1.73 per share, slightly below its Jan 3 price of RM1.77.
Teng explains the fund’s performance. “Unlike actively managed funds that aim to outperform their benchmark, ETFs are generally bound by their investment objective to track the benchmark. The TradePlus Shariah Gold Tracker has managed to do so and mirror the benchmark relatively well over last year.
“However, gold prices tumbled in 2Q and 3Q2018, alongside most commodities, on concerns about the health of the global economy, a strengthening US dollar and weaker confidence in China’s growth rate. However, ongoing uncertainties and the sell-off in equity markets globally pushed gold prices higher in 4Q.
“While the gold price ended 2018 in the red, it has clawed back from its lows. Investors’ shying away from risker assets, coupled with the weakness in the dollar index, pushed gold prices higher towards the year end. With market volatility expected to persist, gold will be a valuable source of diversification for investors to cushion their portfolios.”