Cover Story: Recalibrating for better returns

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 4, 2018 - June 10, 2018.
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The recent merger between UK-based Aberdeen Asset Management plc and Standard Life plc has resulted not only in more diverse offerings for clients but also a new focus and greater flexibility in its investment strategies. Gerald Ambrose, CEO of Aberdeen Standard Investments in Malaysia (Aberdeen), says these changes will help the company meet the changing needs of investors going forward.

For many years, Aberdeen Asset Management held on steadfastly to its long-term view in its equity investment strategies and took on a heavy qualitative approach in its selection of stocks. The investment company had built its portfolios by physically visiting companies and picking the right ones that met its rigorous criteria.

While that approach worked well, it was getting harder to provide clients the returns they desired and meet their needs due to the quantitative easing measures taken by central banks in recent years, says Ambrose.

Since the merger, the company has become more flexible and is able to take a more tactical approach to be more competitive in the current investment landscape. “We have decided to become more flexible. We now possess the quantitative equipment that can be used to look at our portfolios in relation to the market and make adjustments based on it. We can reduce our holdings when the price of [stocks] rises outrageously high and buy more when it drops outrageously low,” he says.

However, the company has not shifted to a trading stance, says Ambrose. “Instead, we are trimming, backing and filling when prices go up and down. We want to meet our clients’ evolving needs — some want to realise gains, some want absolute returns and some want emphasis on environmental, social and governance principles. With the flexibility, it is now a lot easier for us to fulfil these needs.”

On Aug 14 last year, Aberdeen Asset Management and Standard Life announced the completion of their merger, forming Standard Life Aberdeen plc (SLA) — an investment group with US$871 billion (RM3.5 trillion) under administration. The deal between the two companies was first announced in March last year.

Following the merger, Standard Life sold its 200-year-old insurance business to UK-based Phoenix Group in February, resulting in excess capital of £4 billion (RM21.2 billion) for the newly merged outfit. The capital was then used to improve its asset management business.

“For instance, our equity and fixed-income team in Malaysia and all over the world now have their own Bloomberg terminals. This means that all the data and earnings figures that had to be quite laboriously entered before now go through an automated system. It provides us with a tremendous advantage — we now have a lot more tools and are able to do our jobs better in delivering returns,” says Ambrose.

Despite the completion of the merger, it took some time for things to settle down across its global operations, including Malaysia. Aberdeen Asset Management was not a stranger to mergers and acquisitions (M&A), having acquired the asset management businesses of Deutsche Bank and Credit Suisse in 2006 and 2010 respectively. But the recent merger with Standard Life was one of the biggest as it involved two large London Stock Exchange-listed companies.

“To be honest, it has been demoralising for our global equity team in Edinburgh and our global emerging markets (EM) team in London — not knowing who will be staying and who will be going. In Asia, there were no Standard Life fund managers, so we were able to enjoy the benefits of the merger without suffering the pain,” says Ambrose.

“The ‘hiatus’ happened because there was a lot of work to be done, synergies to be reaped and redundancies to be eliminated. By end-March, the merger was successfully completed. We are now fully integrated and have complete clarity over our objectives going forward.”

On a global level, the merger had its challenges. According to the group’s investment arm — Aberdeen Standard Investments — the combined business recorded net outflows of £31 billion following the merger, largely due to a combination of performance issues, structural outflows from the closed insurance books of business the company manages on behalf of clients and asset allocation decisions.

“When you have a merger of two companies, inevitably there will be some investors who are required to withdraw funds. Another factor is underperformance. As soon as your performance goes below the market, people would question why they are paying this amount of money when they could get computers to do it at a fifth of the price,” says Ambrose.

“But we are sticking to the same bottom-up active fund management which we think will still bode well for us. In 1999, when the dotcom bubble was reaching its peak, a lot of people were leaving Aberdeen funds because they thought that we were out of touch. Then 2000 came and the dotcom bubble burst, and we actually did a lot better on a net basis. So, we are not going to overhaul our style to meet trends.”

The company is now offering a broader and stronger suite of investment capabilities. Ambrose says these “new active” investment solutions — which include alternatives, active specialities and multi-asset strategies — are forecast to represent about two-thirds of global net inflows across the asset management industry.

According to him, these alternative strategies and solutions include private equity, property multi-manager, private real assets and hedge funds. This focus is aimed at providing greater portfolio diversification for its investors as alternative investments have historically had low correlations with traditional investments.

“A lot of people think of Aberdeen as a pure equity house, with maybe a little bit of bonds, without many arrows in its quiver. However, we also do passive fund management for clients who wish to have income from low-risk alternatives,” Ambrose points out.

“This includes infrastructure bonds, aircraft leasing and even intellectual property rights. Our job is to bring this choice to Malaysian clients, both institutional and retail, according to their risk budget.”

The company recently began offering exchange-traded funds, following the acquisition of the US business of commodity exchange product provider ETF Securities in April.


Thriving in volatility

It has been a very volatile year both globally and locally, says Ambrose. And this volatility is set to continue until the end of the year, which is ideal for Aberdeen as it has worked very hard to identify companies that have the competitive advantage of long-term growth and good governance.

“We have always been a company that spends a lot of money on fund managers in different markets going to visit companies, getting to know them and really understanding how they work to determine their fair value. This sort of market — where people are selling and there is a bit of panic going on — is ideal for us because we think we know what the right price is. So, we will buy if there is any irrational selling,” he says.

“If there is a bull market, quite often we are not as bullish because we stick with the companies with strong balance sheets and less risk. As a result, we have had a tough time these past two years when the market just kept going up. In a bear or uncertain market like now, however, we tend to outperform, thanks to our strong fundamental research.”

Ambrose acknowledges the recent challenge faced by some asset management firms. Before the 14th general election, most fund managers had quite significant exposure to the construction sector as there were a lot of mega projects in the works such as the East Coast Rail Link, Mass Rapid Transit Line 3 and Kuala Lumpur-Singapore high-speed rail. However, following Pakatan Harapan’s unexpected victory at the polls, a structural change in the construction sector has taken place, causing many, including Aberdeen, to make quick adjustments to their sector allocation.

“I am not saying the construction sector is doomed, but only the best ones can survive because the current government plans to overcome any fiscal shortfall by removing extra costs. While we did not completely panic, we did have to take a loss to readjust our portfolio, based on the new outlook,” says Ambrose.

Aberdeen continues to favour the consumer sector. Retail demand has been quite weak in recent months, but that could change as the new government’s policies could increase the people’s purchasing power. “We think there will be some pent-up demand following the zero-rating of the Goods and Services Tax and before the imposition of the sales and service tax. So, we remain exposed to the consumer sector,” says Ambrose.

One way of leveraging consumer demand is via banks, which are in a strong position currently, he says. He points out that banks in the country have reported remarkably low non-performing loans in recent months. This, coupled with Bank Negara Malaysia’s proactive measures to ensure that financial institutions are not lending to those who are not able to service their debts, have led to an attractive outlook for the banking sector.

Aberdeen is also optimistic about the technology sector, even though it has been a tricky one, says Ambrose. “It is a particularly difficult sector because typically, there are only a few winners while the rest are losers. I am a bit of a dinosaur. I sometimes even have problems with my mobile phone. But there are people on my team who are very strong in technology. So, I believe we have a competitive advantage.

“A lot of the tech companies in Malaysia are reaching pretty full valuations on a price-earnings basis at the moment and a lot of their current prices are discounting future profits. It has been a bit of a no-brainer over the past 10 years just to keep buying growth companies. But now that there are good funding activities in Bayan Lepas, we think the sector will continue to be attractive.”

Aberdeen has a small allocation to tobacco companies, even though the industry has been suffering due to the illicit cigarette trade. As about 65% of the cigarettes smoked in Malaysia are illicit, Ambrose hopes that the new government will put a stop to black-market activities to help the performance of listed tobacco companies.

“I think the government needs to offset the GST losses by improving efficiency in other areas, such as better tax exercise in the tobacco industry. I think if they are able to stamp out some of the black-market activities, the performance of tobacco manufacturers that have followed the law — such as British American Tobacco (M) Bhd — will perform very well,” he says.


Strong outlook for Malaysia

Higher interest rates and the rising US dollar have adversely affected returns in EMs over the past few months. Economists and market analysts have noted that EMs are currently not looking very good as they face unfavourable conditions, and this could be dangerous for investors with exposure to the affected economies.

In the past few weeks, the Turkish lira has been in the spotlight for its high volatility versus the US dollar. The currency has lost about 20% of its value against the greenback since the beginning of this year. Recently, prominent investor Mark Mobius even remarked that there could be a danger of contagion from the deteriorating situation.

While Malaysia has been experiencing heightened volatility recently due to the pre- and post-election uncertainty, the country is not one of the affected markets, says Ambrose. The heavy foreign selling over the past week only means that foreign investors are not in a risk-on mode, he adds.

“The ringgit is still performing well and the purchasing power parity basis is deeply undervalued. We have a current and trade surplus and the corporate sector is in a very strong financial position,” says Ambrose.

“Believe me, everybody I know and speak to overseas are delighted by the election result. The major obstacle that fund managers overseas have had by investing in Malaysia was public governance — there was a perception that they were not getting the full story from the government. I think this obstacle is gone, but they are not going to put in money straight away.”

At the beginning of the year, most investors thought last year’s rally would continue. It has turned out to be an uncertain year, which is one of the reasons foreign investors are not keen on taking the risk. “I think they are going to wait for the first 100 days to see how things pan out. But I think so far, they are quite impressed with what is going on,” says Ambrose.

There have positive announcements, such as the appointment of Lim Guan Eng as the new finance minister. Judging by his track record in managing Penang, Ambrose does not see why it cannot be repeated at the federal level. He points out that even pessimists who did not like Malaysia in the past, such as Asianomics’ Dr Jim Walker, financial analyst Chris Wood and Swiss investor Marc “Dr Doom” Faber, have written optimistically about the local market post-election.

Although Aberdeen is one of the bigger players in Malaysia when it comes to the institutional fund business, it is still a small player in the retail fund management business. Currently, it only offers two retail funds — Aberdeen Islamic Asia-Pacific ex-Japan Equity and Aberdeen Islamic World Equity.

“It is a tricky business. We need to think of fund distribution and do a lot of branding exercises. But we are planning to launch several retail funds this year,” says Ambrose.

These funds — which will be investing in Indian equities and bonds, EM credit and multi-assets — will be launched once the company receives a firm commitment from its distribution partner. “We also want to provide a hedging service to clients who want to buy the funds in Australian and US dollars. Hopefully, we can launch the funds very soon,” says Ambrose.

The company still holds a shariah unit trust fund management licence and would like to launch more shariah-compliant funds going forward, he adds.



Time to consider alternative assets

Gerald Ambrose, CEO of Aberdeen Standard Investments in Malaysia, says with the heightened volatility in financial markets, investors should consider adding more alternative investments that generate stable returns and provide lower volatility to their portfolios.

For one, he suggests that investors acquire some holdings in safe-haven assets such as gold as an insurance policy to the elevated fears in the market. “In my opinion, the ultimate alternative asset is gold. It is not a way to get rich, but a way to protect your wealth. Historically, gold outperforms equities in a bear market and is a good tool to protect investors from the effects of monetary policy measures. While paper gold would be sufficient, it would be best for investors to hold on to physical gold as paper gold is next to worthless when it comes to actual practical use as currency.”

On May 29, the spot price for gold was hovering at US$1,300. According to a market commentary by Oanda Asia-Pacific head of trading Stephen Innes, a rising US dollar remains the primary headwind for gold prices, which are offset by the escalating fears of a trade war between the US and China. Going forward, a significant bounce in gold prices could be seen if the US dollar buckles on weaker-than-expected economic data.

Ambrose says investors could turn to passion investments that have a low correlation to the equity and fixed-income markets such as fine wine. “The growth in fine wine as an asset class is being driven by the huge wealth growth in China. They are paying crazy prices for some of the finest wines in the market. However, the prices of fine wine may be affected if the wealth in Asia and the US declines.”

Fine wine is known to demonstrate distinct defensive qualities that can insulate investors from some of the risks inherent in an equity-based portfolio. A May 28 research report by Cult Wines Ltd found that Liv-ex Fine Wine 1000 — an index tracking the prices of 1,000 wines from top wine-producing regions in the world — compared favourably with the FTSE All Shares Index and gold futures, especially during the depth of the global financial crisis from 2008 to 2010 and the peak of the economic recovery that followed from 2015 to 2017.

One alternative asset class that seems to provide opportunity at the moment is industrial commodities. According to Ambrose, there has been very strong domestic demand for steel in China. While manufacturers previously met the demand, the supply may dwindle soon and this could lead to higher prices, says Ambrose.

“In the past, every time the price of steel goes up, the Chinese factories just pour out more steel to meet the demand, effectively bringing down the price. This time, mainly due to ecological and environmental grounds, President Xi Jinping is not allowing sub-standard steel companies to continue their operations. So, a lot of steel mills there have stopped operations completely, which means the supply is no longer growing,” he says.

Another commodity that investors can consider is palm oil, which is also the industry that helped Malaysia ride out the economic downturn during the Asian financial crisis. Although Ambrose does not think the palm oil sector will sharply outperform this year, Aberdeen remains overweight on the sector.

Meanwhile, he has a neutral stance on cryptocurrencies. Even though he understands the logic behind the demand, he thinks gold could provide a similar hedge for a portfolio.

“I used to think it was just bitcoin. But cryptocurrencies are really blooming and proliferating. Now, there are thousands of them out there. I understand why one would invest in cryptocurrencies. If central banks in the West are behaving irresponsibly by printing money to overcome their monetary problems, then people would have more trust in currencies that cannot be increased in supply just like that and blockchain seems to be a fool-proof system for that,” says Ambrose.

“However, I think investors can certainly switch to physical gold instead. The world’s supply of gold can fit into an Olympic-size swimming pool. So, I can’t help feeling that if investors need an insurance policy to protect them against currencies that can be adjusted in supply, then gold is the way to go.”