This article first appeared in Wealth, The Edge Malaysia Weekly on March 27, 2023 - April 2, 2023

Kenanga Investors Bhd has grabbed the group award for Best Mixed Asset Malaysia (Provident) at the Refinitiv Lipper Fund Awards 2023. The firm also won four fund awards.

Kenanga Malaysian Inc clinched the Best Equity Malaysia Diversified (Provident) award in the 10-year category, while Kenanga OA Inv-Kenanga Managed Growth won the Best Mixed Asset MYR Flexible (Provident) award in the three-, five- and 10-year categories.

Chief investment officer Lee Sook Yee says the firm’s investment philosophy reflects its belief that fundamental research, when combined with a relative value approach, can result in consistent superior risk-adjusted returns.

“We believe the consistent application of our bottom-up stock-picking strategy to identify high-quality stocks can lead to a sustained outperformance over an economic cycle of three to five years. The stocks we invested in are generally undervalued relative to their intrinsic value, or are undervalued relative to their peers and overall market valuations,” she says.

On top of that, Lee and her team established a comprehensive research process that aimed to identify industry dynamics, the business model of individual companies and various drivers of the returns on equity of these companies. It is a thorough process.

“In formulating a company’s investment thesis, we usually run channel checks on the company’s competitive advantages and attempt to model out their 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 achieved outperforming returns through the last three, five and 10 years,” says Lee.

The biggest challenge that she and her team faced last year was extreme market volatility on the back of tightening monetary conditions, rising inflation and geopolitical conflicts.

Just how fast did interest rates rise in the US Federal Reserve’s attempt to tame inflation? US interest rates shot to more than 4% from close to 0% in a short period of time. The Fed also implemented its balance sheet reduction programme, otherwise known as quantitative tightening, which drained liquidity from the US monetary system and tightened financial conditions worldwide.

It did not take long for the European Union to follow suit. Central banks in the region also raised interest rates to tame the inflation rate that had almost risen to double digits.

In the meantime, the semiconductor supply chain entered a destocking cycle, triggering a correction in the sector’s valuations. All this while China continued to struggle with tight Covid-19 restrictions and issues in its property sector.

On the home front, the market was negatively affected by external developments, alongside the political uncertainty ahead of Malaysia’s 15th general election.

What did team Kenanga do in the light of all this? “We adopted a more defensive strategy by holding higher levels of cash to face these challenges,” says Lee.

“Despite the market volatility, we continued our research efforts to identify companies with sound long-term growth prospects. Some of these measures helped reduce drawdowns on the funds despite the negative impact when the market declined. Additionally, we expect companies with solid fundamentals to recover faster when the market environment improves.”

The long-term focus of Kenanga’s funds is reflected in their performance over three, five and 10 years. As at Dec 31, 2022, Kenanga OA Inv-Kenanga Managed Growth, a mixed-asset fund, generated total returns of 21.08%, 27.02% and 84.02% respectively during those periods.

Kenanga Malaysia Inc, an equity fund, provided investors with returns of 23.38%, 22.52% and 116.13% respectively during the corresponding periods.

“The effectiveness of our stock-picking strategy over the long term is reflected in our win. Given our growth focus, we have invested in many small- and mid-cap companies that delivered strong earnings growth over the years,” says Lee.

“On-the-ground research of these companies and sectors has enabled us to hold positions for the long term in the sector. Additionally, we exited companies that were unable to execute [their business plans] well and did not have a good track record.”

Last year, Lee and her team held higher levels of cash throughout the year in response to the worsening global economic outlook. They also reduced holdings in sectors that were affected by the rising interest rates.

“Cash levels progressively increased by an average of 10% to 15% throughout the year. Additionally, the team made a conscious decision to reduce holdings in the technology sector, given the valuation risk and downside potential in earnings due to the inventory rebalancing cycle,” says Lee.

“As the year progressed, a more defensive stance was adopted, leading to increased holdings in large caps such as banks/financials, while holdings in small- and mid-caps were reduced.”

Overall, 2022 was a defensive year for Lee and her team. But, this year, the firm has turned more constructive on equities, owing to US inflation peaking and signals from the Fed that it could turn dovish, both of which increase the probability of market sentiment turning positive in the second half of the year.

“However, we expect volatility to persist in the short term and we will periodically deploy capital on market weakness. Our focus is on beneficiaries of stronger consumer demand and companies in the industrial and technology sectors for their longer-term growth potential,” says Lee.

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