This article first appeared in Wealth, The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

Kenanga Investors Bhd’s emphasis on sustainability in performance and long-term value generation has been pivotal to the firm’s continued success at the Refinitiv Lipper Fund Awards 2022.

Keeping up its stellar tradition, the fund house clinched the group award for Best Mixed Asset (Provident) and four individual fund awards.

Under the individual awards — where all the winning funds were in the Provident universe — it clinched the Best Equity Malaysia Diversified for the three-year category, Best Equity Malaysia Small & Mid Caps for the five-year category as well as Best Equity Malaysia and Best Mixed Asset MYR Flexible in the 10-year category.

“As a bottom-up stock picker, our investment philosophy reflects our belief that fundamental research combined with a relative-value approach can create consistent, superior risk-adjusted returns.

“We believe that consistent outperformance over an economic cycle of three to five years is repeatable by applying bottom-up stock-picking strategies to identify quality stocks. These stocks are generally undervalued relative to their intrinsic value, or are undervalued relative to their peers and the overall market valuation,” says Ismitz Matthew De Alwis, Kenanga’s executive director and CEO.

The fund house’s approach involves a comprehensive research process from understanding industry dynamics to the individual company’s business model and factors that drive return on equity, he explains.

“In formulating a company’s investment thesis, we usually run channel checks on its competitive advantages and also attempt to model out the growth drivers.

“Some of the key areas we look at are management quality, sustainable business model, industry dynamics and balance sheet strength. By consistently applying this strategy, our funds have continuously achieved outperforming returns throughout the last three, five and 10 years,” he says.

Despite its well-honed strategies, Kenanga too was not spared the onslaught of challenges brought on by the coronavirus pandemic.

“2021 proved to be a tricky year to navigate in large part due to the persistence and escalation of Covid-19, rather than the gradual diminishing path some had expected,” says chief investment officer Lee Sook Yee.

It was akin to walking a tightrope, she notes. “While there was progress to be made step by step, the journey was fraught with various event-driven risks, such as lockdowns, fiscal controls and threats posed by ESG [environmental, social and governance] considerations.”

Apart from the reimposition of the Movement Control Order (MCO) following the spread of deadlier strains of the coronavirus, the firm also had to contend with challenges posed by new tax measures announced, such as the prosperity tax and higher stamp duty for trading as well as sporadic allegations of forced labour practices against domestic corporates, says Lee.

Despite the ordeals, Kenanga’s funds managed to weather the volatile year well with strong returns, thanks to the firm’s bottom-up stock-picking strategy, she says.

“Through our careful stock selection process, we identified and invested in stocks with strong fundamentals and superior earnings growth prospects over the longer term. This strategy has served us well as the share price would ultimately be dictated by earnings despite the short-term volatilities.

“A key contrarian call we made was to minimise our exposure to the glove sector from late 2020 as we expected the industry to experience an oversupply issue in 2021. This was in contrast to most research analysts, who carried forward their optimism over the sector into 1H2021,” shares Lee.

De Alwis concurs, adding that one of the biggest challenges was having to grapple with the lingering impact of the pandemic, as persistent waves of Covid-19 resurgence triggered intermittent lockdowns and containment measures, which pulled the markets down with them.

“Although such corrections became less intense as vaccination gathered pace, new sources of fear took shape in the form of worries over rising inflationary pressure, attributed to severe supply chain disruption, talent and component shortage, and power rationing, which impacted our investments to varying degrees,” says De Alwis.

The firm navigated these speed bumps by constantly reviewing its investment theses to make sure they stayed relevant and identifying the “relative winners” from sectors that were deemed resilient, consistently growing and reasonably priced.

“The tech sector was one key sector that ticked most boxes and contributed immensely to our outperformance last year,” De Alwis says, adding that Kenanga’s fund managers make it a point to discuss and review asset allocation decisions on a quarterly basis.

“We decided on a relatively low cash position at the beginning of last year, and stuck with it for the most part of the year, given our reading of the market conditions. Generally, the cash level was held at 5% to 10% for most funds, with no material changes.

“Instead, rebalancing was mainly driven by sector selection, where we overweighted externally driven sectors such as exporters, manufacturing and tech and underweighted domestic demand-driven sectors given the various lockdowns,” he says.

As volatility in the global and domestic financial markets is likely to persist, De Alwis says the firm’s fund managers will continue with their bottom-up investment process and philosophy.

“Domestically, we tilt our portfolios slightly to reduce overweight in tech and increase weighting to ‘reopening themes’, including consumer staple and discretionary, as well as energy and commodities in view of the robust prices.

“On the foreign side, we expect higher volatility this year as developed markets approach late-cycle dynamics while their central banks embark on a tightening phase. Hence, we are adopting a more defensive stance in terms of asset allocation.

“Nonetheless, we are still bullish on emerging markets such as Asia and Asean (including Malaysia), as these regions are still relatively early in the recovery cycle while reopening trades continue to gather pace as vaccination rates reach acceptable levels. For China, the government has pivoted to an easing stance after a growth slowdown and policy crackdown last year,” he says.

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