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Saturday, July 6, 2019

Tong's Value Investing Portfolio as of June 27, 2019

It’s not difficult to invest successfully

Last week, I wrote about why the Malaysian stock market has been a chronic underperformer. To very quickly recap, we tabulated the revenue and net profit for all 855 companies listed on the Bursa throughout the past five years, from 2014 to 2018.

Despite marginal topline growth – revenue increased at a compounded annual growth rate (cagr) of 2.6% – total net profits fell 6.8% annually, on average. Margins for all sectors came under pressure throughout the five years. No surprise then, the FBM KLCI and FBM Emas index ended in the red in four of the past five years. I also wrote about some of the structural issues that are likely the cause of the persistent earnings decline.

We will repeat the same methodology for companies listed on the Singapore Exchange and tabulate the results in my next column. The Straits Times Index too has not done well between 2014 and 2018, cagr of -2.3%, on average. We will also take a quick look at other regional market performances during this same period.

Stock price gyrations are dictated by both internal factors, primary of which are underlying earnings, cash flows and balance sheet, as well as the external environment. The latter is mostly beyond our control.

But one could still perform with reasonable positive returns investing. And we have proven this with my Malaysian Portfolio, which is up 50.7% in less than five years since inception (in October 2014).

Over the same period, the FBM KLCI and FBM Emas index have lost 8.6% and 7.2%, respectively. The portfolio also compares well against the MSCI World Net Returns index, which is up 45.5%.

For the benefit of readers who are new to this portfolio, as with my Global Portfolio, this too is a “real” portfolio. The trading account is with Maybank Investment Bank. The portfolio, which started with an initial capital of RM200,000, invests solely in Malaysian stocks.

We have bought and sold numerous stocks over the years. Often times, the companies may have low profiles but have given us very good returns for this very same reason. We have lost money too, though fewer in number and smaller in quantum. (See Tables 1 and 2)

A key part of investing is in acknowledging mistakes and cutting your losses. Too often, investors hold on to losing stocks for far too long but are too quick to take profit. Let the winners run. And when you run into a loser, cut loss.

Table 1: Malaysian Portfolio: 10 stocks with highest returns
Table 2: Malaysian Portfolio: 10 stocks with biggest losses

We have also compiled performances for 192 pure equity Malaysia focused funds. Assets under management (AUM) totals nearly RM63 billion, with average fund size at about RM327 million.

For the 158 funds that have been in existence for at least five years, cumulative 5-year returns range from 55.6% for the best-performing to -45.3% for the worst performing fund. Their average return is -0.2% (after upfront sales commission and annual management fees).

What a non-productive application of domestic savings. If they had only left the money in the bank and generated 3% per annum, incremental income to Malaysians would have been RM1.89 billion. This money would have been better spent and would have created a multiplier effect on the economy. Meanwhile, these fund managers are raking in some RM1 billion in fee income every year, at an average rate of 1.5% of AUM.

Table 3: 30 largest Malaysia equity funds by AUM
Table 4: 30 Malaysia equity funds with highest cumulative 5-year returns

I have no doubt many fund managers will object to such a direct comparison. The truth is often painful. But my Malaysian Portfolio proves that one can generate superior returns by managing one’s own funds, wisely and rationally.

One of the main arguments against mutual funds and unit trusts, as often highlighted by Warren Buffett, is the high initial sales and annual management fees that are paid whether or not the funds are making profits. Critically, when stocks are not performing, and there will be times when they do not, management fees will compound total losses for investors.

Fund managers’ interest may not always align with that of investors. For example, the larger the fund size, the more fees earned – but the harder it is for the fund to outperform.

It is not difficult to be a smart investor. Our methodology in discovering many of the low profile, value stocks is quite simple to emulate. We often start with the Fundamental and Valuations scores for all companies.

The scores, which range from zero to a maximum of 3, takes into account various metrics such as earnings, growth, yield, gearing, liquidity, margins, return on equity, book value and so on. The higher the score, the better. The Fundamental and Valuation scores provide a quick take on the underlying fundamentals and attractiveness of current valuations for the stock.

Some other useful traits to consider include historical share price trend and longer-term financial track record. Are sales and margins trending up over time? Does the company pay consistent and rising dividends and is there room for higher payout? How does the company compare against its sector peers? All these data are available on www.absolutelystocks.com.

There are other qualitative factors to consider before taking the plunge, such as whether you trust management. But strong underlying fundamentals and attractive valuations are very good starting points.

Stocks are an integral part of any portfolio. That said, it is increasingly clear that diversification across markets and asset classes not only help reduce overall risks but also improve returns. This is one of the main reasons behind my decision to start the Global Portfolio.

Case in point, the Employees' Provident Fund (EPF) and Permodalan Nasional Berhad (PNB) have far outperformed the average Malaysia equity fund.

EPF, with investment assets totalling RM791 billion, reported average return on investment (realised gains) of 7.2% from 2013 to 2017. Net income on investment assets averaged 5.8% annually, after expenditures, which translates into cumulative returns of 32.8% for the 5-year period.

Roughly half of EPF’s assets are invested in fixed income instruments while 42% are in equity with the remaining invested in real estate and other assets. Notably, overseas investments account for 28% of total assets but contributed over 41% of gross investment income in 2017.

PNB too has made a priority of diversifying its portfolio, with AUM topping RM300 billion. The fund reported return on assets averaging 6.4% between 2014 and 2018, equivalent to cumulative returns of 36.5%.

About 70.8% of assets are invested in public equity in 2018. Notably, investments in fixed income and overseas increased to 7.4% and 4.9%, respectively as at end-May 2019, up from 5.8% and 2.4% in 2017.

Both funds have steady inflows of fresh money and neither has redemption issue. Hence, they are better positioned to make decisions based on a longer-term perspective, as would the individual investor. Their returns are also enhanced by the size and dominant positions in the shares traded on Bursa as they capitalise on market making opportunities.

Diversification across different markets and asset classes is, over time, a must – and increasingly doable, with new investment instruments (such as exchange traded funds) and going forward, tokenisation of assets for all types of real tangible assets including gold and property. Geography is no longer a barrier.

My Global Portfolio gained 0.9% for the week. Total portfolio returns now stand at 8.0% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 5.8% over the same period.

The FBM KLCI too traded sideways for the week ended Thursday. Stocks have rebounded from the year low in late-May, when the FBM KLCI briefly traded below 1,600 points, but there appears little catalyst for further gains.

Stocks in my Malaysian Portfolio fared better, up 0.3% for the week. I disposed of my entire holdings in Prestariang for a respectable gain of 6.1% for a short period of just two weeks. My other new acquisition, JHM performed well, gaining 10.1% over the same two weeks.

Total returns for the Malaysian Portfolio now stand at 50.7% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is down 8.6% over the same period, by a long way.

Performance Comparison Since Inception (%)
%-8.650.7-15-10-50510152025303540455055
  • Tong's Value Investing Portfolio
  • FBM KLCI
SHARES HELDQUANTITYAVERAGE COSTCOST OF
INVESTMENT
CURRENT
PRICE
CURRENT
VALUE
GAIN /
(LOSS)
GAIN /
(LOSS)
SCGM BHD11,0661.72919,190.70.9009,959.4(9,231.3)(48.1%)
AJINOMOTO (M) BHD1,50011.81317,720.017.50026,250.08,530.048.1%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.32824,447.52.45025,725.01,277.55.2%
FORMOSA PROSONIC INDUSTRIES18,0001.44025,920.01.72030,960.05,040.019.4%
POH HUAT RESOURCES HOLDINGS13,0001.47019,110.01.56020,280.01,170.06.1%
SUPERLON HOLDINGS BHD15,0001.28919,327.50.99514,925.0(4,402.5)(22.8%)
CIMB GROUP HOLDINGS BERHAD6,0005.14030,840.05.35032,100.01,260.04.1%
JHM CONSOLIDATION BHD26,0001.14529,770.01.26032,760.02,990.010.0%
Total  186,325.7 192,959.46,633.73.6%
        
Shares bought       
No transaction.       
        
Total shares held  186,325.7 192,959.46,633.73.6%
        
Shares sold       
PRESTARIANG BERHAD73,0000.41029,930.00.43531,755.01,825.06.1%
        
Cash Balance    108,400.9  
Realised Profits / (Losses)    94,726.6  
        
Change since last update Jun 20, 2019       
Portfolio      0.3%
FBMKLCI      (0.2%)
        
        
Portfolio Returns Since Inception  200,000.00 301,360.3101,360.350.7%
Portfolio Returns (Annualised)      10.7%
        
Portfolio Beta      1.002
Risk Adjusted Returns Since Inception      50.6%
        
        
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,672.7(8.6%)59.3%
FBM Emas12,700.411,790.2(7.2%)57.8%
Footnote: 
*Current price is as at June 27, 2019. 
*Portfolio started on Oct 10, 2014 with MYR200,000. 
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

STOCKS SOLD IN THE LAST 12 MONTHS (Currency: MYR)
SHARES SOLDDATE BOUGHTDATE SOLDQUANTITYAVERAGE 
COST
COST OF 
INVESTMENT
PRICE SOLDSALES 
PROCEEDS
GAIN /
(LOSS)
GAIN /
(LOSS)
THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD10-Jan-1706-Sep-1811,0001.02011,225.01.40015,400.04,175.037.2%
LUXCHEM CORPORATION BHD25-Aug-1706-Sep-1816,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
HOCK SENG LEE BHD19-Apr-1806-Sep-1814,5001.52022,033.01.37019,865.0(2,168.0)(9.8%)
GENTING MALAYSIA BERHAD06-Sep-1828-Nov-183,8005.07019,266.03.06011,628.0(7,638.0)(39.6%)
TOP GLOVE CORPORATION BHD06-Sep-1806-Dec-183,6005.50019,800.06.03021,708.01,908.09.6%
MAH SING GROUP BHD28-Jun-1814-Jan-1919,0001.00519,095.00.93017,670.0(1,425.0)(7.5%)
WILLOWGLEN MSC BHD14-Dec-1714-Feb-1919,9000.5009,900.00.4649,236.0(714.0)(7.2%)
SAM ENGINEERING & EQUIPMENT14-Jan-1914-Mar-193,0007.38022,140.07.90023,700.01,560.07.0%
PANASONIC MANUFACTURING MSIA16-May-1818-Apr-1960026.15717,182.037.87022,722.05,540.032.2%
HONG LEONG INDUSTRIES BHD14-Dec-1718-Apr-192,0009.12618,251.010.64021,280.03,029.016.6%
MALAYAN BANKING BHD16-May-1818-Apr-193,00010.25030,750.09.13027,390.0(3,360.0)(10.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD28-Jun-1818-Apr-1915,2001.23518,772.00.92013,984.0(4,788.0)(25.5%)
DIALOG GROUP BHD06-Sep-1818-Apr-195,7003.45219,676.43.11017,727.0(1,949.4)(9.9%)
HARTALEGA HOLDINGS BHD28-Mar-1818-Apr-1911,0004.61050,710.04.75052,250.01,540.03.0%
PRESTARIANG BERHAD11-Jun-1927-Jun-1973,0000.41029,930.00.43531,755.01,825.06.1%
A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong

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