This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 4 - 10, 2016.

The PMB Shariah Aggressive Fund has outperformed both its Islamic and conventional counterparts in the Equity Malaysia category for the last five years. 

Lipper data (as at June 10) shows that the fund delivered a return of 32.26% over a three-year period and 87.99% over a five-year period. 

The average return of funds in the Equity Malaysia category was 5.11% over a three-year period and 25.22% over a five-year period. In the Equity Malaysia (Islamic) category, the average return was 4.65% and 24.74% respectively. 

The PMB Shariah Aggressive Fund won the award for Best Equity Malaysia (Islamic) in the three and five-year categories and the award for Best Equity Malaysia in the three-year category at The Edge-Thomson Reuters Lipper Awards 2016. It invests between 88% and 99.5% of its net asset value (NAV) in equities and holds the rest in liquid assets. 

This PMB fund was launched on May 5, 1972, as a conventional fund. At the time, it was known as Kumpulan Modal Bumiputera yang Keenam, which was specifically for bumiputera investors. 

On May 5, 2005, it was made a shariah-compliant fund and relaunched as ASM Shariah Aggressive Fund. It also had a new investment strategy of seeking high capital returns with higher risk levels.

Unlike most Islamic funds, which tend to adopt a conservative stance, the PMB Shariah Aggressive Fund carries a very high volatility score of 19.7 (over three years). Meanwhile, the Lipper Rating for Preservation scores the fund one out of five for its high volatility. 

PMB Investment Bhd CEO Ameer Ali Mohamed says the fund’s outperformance justifies its low preservation score. “The fund is targeted at investors with a high risk tolerance level over a medium (three to five years) to long (more than five years) investment horizon. It is investment 101 — no risk, no gain. Therefore, if someone wants to have potentially high returns, then he must be able to assume a high level of risk. The returns may fluctuate, but at the end of the day, what is important is the return you get over the years.”

Ameer Ali points out that the prospectus clearly says the fund is for investors with a high risk tolerance, and that the risk is justified by the gains the investors receive.

“One of the principles of Islamic finance is ‘no risk, no gain’. It is explained under one of the Islamic legal maxims — al-ghurm bi al-ghunm — which translates as ‘gain is justified with risk’,” he says. “In any investment, one has to accept the associated risks. As a fund manager, we manage the risks and have measures to mitigate them.” 

He adds that he expects the fund to remain volatile due to its high exposure to equities at all times. The Islamic fund management company only invests in shariah-compliant securities, choosing from the list issued by the Securities Commission Malaysia’s Shariah Advisory Council. 

According to its prospectus, the fund has an active trading strategy and a portfolio turnover ratio (PTR) that is usually higher than normal equity funds. The PTR is determined by how frequently assets within a fund are bought and sold by the fund manager. 

Typically, a fund with a high turnover rate will have higher transaction costs. But Ameer Ali says this is not the case with the PMB Shariah Aggressive Fund as the management fee is set at 1.5% per annum, which is made possible by lowering trading costs over the years.

“A higher PTR means higher transaction costs, which comprise the brokerage fee (payable to the investment bank/broking house), clearing fee (payable to the exchange) and stamp duty (payable to the government). The total cost is now only 0.25% to 0.35% per transaction. It is cheaper than 20 years ago, when it cost up to 0.80% per transaction — three times the current rate. With the lower transaction costs, a reasonably high PTR reflects an actively managed portfolio and it is a way to mitigate market and individual stock risks,” he explains. 

Bottom-up approach

PMB Investment has adopted a quantitative approach, with a step-by-step screening process, for the fund. “We choose stocks not based on sectors but on the fundamental and technical screening of the stocks in the fund’s equity universe. In other words, we have adopted a bottom-up stock-picking process instead of a top-down one. Whether the fund continues to hold a stock depends very much on the result of future screening,” says Ameer Ali. 

The fundamental screening involves the top 300 shariah-compliant listed companies on Bursa Malaysia in terms of market capitalisation, and removing those whose NAV per share is less than 50% of its par value to mitigate the risk of investing in a potentially insolvent company.

After the fundamental screening, a technical screening is used to identify companies with the highest potential of momentum. Ameer Ali says the fundamental screening is done on a quarterly basis to avoid being influenced by market movements, while the technical screening is done on a monthly basis. 

“If we do it daily, we will be influenced by the stock market review in the newspapers or on Bloomberg and CNN. For example, if somebody says something negative and the market drops, you never know whether it is an opportunity to buy or vice versa. But we still take note of the daily news and company announcements because they may affect the fundamentals,” he adds. 

The fact sheet (as at end-April) says the fund had performed in tandem with its benchmark — the FTSE Bursa Malaysia Emas Shariah Index — until 2013, when it experienced outperformance owing to a change in its investment strategy in October 2011. 

“As the result of the change in investment strategy, the fund posted a total return of 97.2% from November 2011 to May this year compared with its benchmark’s return of 20.1%. This represents outperformance of 77.1 percentage points in four years and seven months, which on a compound basis translates into an annual outperformance of 13.3 percentage points,” says Ameer Ali.

Based on data compiled by Lipper for the 12 months ended May 31, the fund appreciated 5.1% while its benchmark dropped 5.2%. 

Ameer Ali says the fund house needs to stay true to its investment strategy and not be swayed by any factors to continue outperforming. “It is important for us to be disciplined in implementing the fundamental and technical screening. We also implement emotion-free investing, where if the screenings determine that we need to sell a stock, we will sell it without any emotions influencing our decision, following the guidelines. We are the ones who came up with the guidelines anyway. So, if we bend the rules, we might as well not have the rules in the first place.”

As at end-May, the fund’s top holdings were Time dotCom Bhd (5.8%), MyE.G. Services Bhd (4.9%), Kossan Rubber Industries Bhd (4.8%), Pestech International Bhd (4.6%) and Top Glove Corp Bhd (4.6%).

Ameer Ali expects the local shariah-compliant investment sector to continue growing over the next 12 to 24 months because of the rise in demand. He says the main impetus will be the Employees Provident Fund (EPF) Islamic — a fully shariah-compliant fund that is expected to be launched in January 2017. Being an Islamic fund management company, PMB Investment hopes to actively participate in this growth opportunity.

As for the shariah-compliant equity outlook, he expects it to be challenging, especially over the next 6 to 18 months, owing to local and global factors. “What is important is the ability to select a portfolio of stocks that will outperform the benchmark. We hope to maintain the outperformance of this fund,” he says. 

Over the next 12 to 24 months, the fund house expects to achieve its medium to long-term investment objectives of registering high total returns, provided that the fund continues to outperform the benchmark. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.