Tong’s Value Investing Portfolio: Value investing proves resilience

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tong%27s_thumbnailsTHE local bourse endured one of its worst weeks of this year as selling pressure intensified.

The latest 3Q14 earnings results were, by consensus, a huge disappointment. That led to a slew of downgrades and lowered expectations. But the primary reason behind this latest sell-off is probably the ringgit’s precipitous decline.

The FBM KLCI ended down 3.9% last week, under-performing key regional markets. This brings the benchmark index’s cumulative losses for the year-to-date to 6.3%.

I suspect market weakness will persist, as long as the ringgit and economic outlook remains uncertain. The latter, in turn, will to a large extent depend on oil prices and our government’s policy response, if any.

Complicating the issue is also the greenback, which is widely expected to keep strengthening as growth in the world’s largest economy gains traction — compared to tepid growth forecasts for the rest of the world.

Given the high foreign holdings in our capital markets, both equities and bonds remain susceptible to further selling pressure — if the ringgit continues to depreciate.

Those who follow my other portfolio, Tong’s Momentum Portfolio — that is published daily in The Edge Markets and The Edge Financial Daily — would have noticed that I had sold down most of my stock holdings in mid-November.

The Momentum Portfolio only buys stocks that are highlighted by Stocks with Momentum — where stocks are picked out by a mathematical algorithm based on volume build up and rising price trend over periods of time. Ever since the broader market started showing signs of weakness, the number of stocks picked out by the algorithm has, unsurprisingly, been falling.

This also means that the algorithm is a pretty good leading indicator of market direction. Going forward, when the algorithm starts picking out more stocks, it should signal a sentiment reversal for the broader market. You can track Stocks With Momentum by visiting daily.

I am not making any changes to my Value Investing Portfolio, which is currently 75% invested. My intention for this portfolio has always been to accumulate and hold stocks that I believe are undervalued relative to future earnings prospects.

Ultimately, companies with strong fundamentals, sustainable business models and growth potential will outperform. And this has proven to be the case last week.

Stocks in my Value Investing Portfolio were not spared the selldown. All suffered losses. However, the total value of my portfolio fell by a lesser 2.8% compared to the FBM KLCI’s 3.9% decline.

This also debunks widely held belief that smaller cap stocks will always fare worse in a broader market sell-off.  

Having said that, I will hold off on adding more stocks for now — pending clarity on the impact of falling oil price and ringgit on our economy. For a more comprehensive coverage on this subject, please read The Edge’s cover story this week.

My portfolio, for the first time, registered a loss of 0.9% since inception. Nevertheless, it is still out-performing the benchmark index, which has fallen by an even greater 4.4% over the same period.

Incidentally, all the stocks in my portfolio pay pretty decent dividends (See Table 1). Most also have strong balance sheets with cash in hand. At times, this would help companies maintain steady dividend payments over any short-term earnings shortfall — particularly if the longer-term prospects remain intact.

Of note, Tasek’s dividends in the past 12 months included special dividends totalling RM1.10 per share. Excluding these, yield would have been about 4.3% at the current price.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.