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Monday, July 27, 2015

No fool-proof way to invest

Fund manager Ambrose says skills are gained from benefit of hindsight
WITH the increasingly pessimistic outlook for the world economy weighing heavily on global financial markets, what is an investor to do? Unfortunately, there is no fool-proof way to invest, and more often than not, skills for successful investing are gained from the benefit of hindsight, says seasoned fund manager Gerald Ambrose.
The managing director of Aberdeen Asset Management Sdn Bhd can attest to this. Relating his personal experience, he recalls missing out on the London property boom after having sold his property there a few years before prices peaked.
On a more formal front, he recollects that Aberdeen had appeared to be on the losing end when it did not go big into the dot-com boom in the 1990s. But in retrospect, it was spared when the euphoria fizzled out for the tech sector.
“There is no right or wrong rule in investing. There is also no one-size-fits-all approach and I have friends who have reaped good returns from investing in alternatives such as wine and art,” quips the affable fund manager.
However, some basic principles remain, like spreading your investments over several areas, he says.
And gold, it would appear, has a small allocation in the portfolio of many a successful investor.
“Many investors who I respect tell me that 10% to 15% of what you have should be invested in gold. This is really not to make more money, but as an insurance policy, given the scenario where unproven economic experiments, such as quantitative easing (QE), are being performed on paper money all over the world.”
He says gold could be one’s only store of wealth if QE efforts do nothing measurable for the real economy and render paper money worthless, However, don’t buy paper certificates entitling you to pieces of gold, but gold itself.
While gold prices are down from their peak of US$1,911 in 2011 on the back of a positive outlook on the US dollar, some think it has not lost its glitter.
At the time of writing, gold was trading at around the US$1,100 an ounce level.
This is because the commodity is seen as much more than a hedge against inflation and a weak dollar. Commodity prices are tanking because much of the world is suffering an economic slowdown, and this is where gold comes in as a safe-haven asset.
“If QE ends badly, currencies might be worth nothing. Gold could be priceless. So above not below US$1000 it is worth having some,” Ambrose says.
The other three main asset classes are equities, bonds and property.
With returns from bonds currently dismal, funds are moving into US Treasury Bills, Malaysian Government Securities and the likes of Japanese government bonds for the same reasons as investing in gold. They are all seen as safe-haven investments during economic uncertainty.
Ambrose joined Aberdeen in 2005 after it was selected as the country’s first foreign fund manager to have been awarded a domestic asset management licence. The fund management company is a unit of the UK’s Aberdeen group and has RM13.2bil assets under management locally. Aberdeen currently has US$7.1bil or RM27.01bil invested in Malaysian equities as a group.
In terms of returns, Ambrose says it has beaten the benchmark – the MSCI Malaysian equity index – by 3% on a three-year rolling average since it started a Malaysian country fund in 1997.
While the Malaysian chapter is focused on equities, Aberdeen has a network covering equities, fixed-income instruments and property globally.
As for equities, Ambrose subscribes to Aberdeen’s bottom-up approach. This is basically looking at individual companies rather than the industry in which that company operates or the economy as a whole.
On what to look out for in stock-picking, he says one factor is whether the company has a business plan that will provide profits in eight to ten years’ time. And it would be better if its business model had a competitive advantage over others. “Make sure the cash flow and balance sheet can fund its growth, and ideally, it should have some spare cash for dividends. If you have a stock and don’t sell it, the only benefit is the dividend you get.”
Liquidity in the system
Other things that matter is the management of the company; whether they understand what a shareholder is, and in the case of fixed income, whether the borrower understands the obligation of the coupon of its debts.
Sustainable investing is also playing a bigger role. “If you buy a stock that factors in environmental, social and corporate governance (ESG) issues into investment decisions, then you will find their prices going up.”
Taking a leaf from investment guru Peter Lynch, he advises investors to research before making an investment decision, as otherwise, it would be akin to playing poker without looking at the cards.
Macro-economy wise, he believes the QE programmes taking place around the world “would end up in tears and be bad for the capital markets.”
The bad news, he says, has yet to be fully discounted by the market and this is a function of ample liquidity in the system.
“Many stock markets, including Malaysia, are still looking far from cheap, going by adjusted price earnings charts over a ten-year period,” says Ambrose, who thinks that the Malaysian market may see adjustments to accommodate the current economic and political situation.
Because of the weaker ringgit, many Government-linked companies are reluctant to invest overseas and an unintended consequence of this is that they are crowding out the market more than before. This has made the local stock market more protected than others, and one reason why prices have not discovered their proper value, However, he contends that the situation is not as bad as it was during the financial crisis in 1997. Based on international reserves, the capital outflows had been largely from the capital markets. Malaysia’s terms of trade – exports minus imports – have remained quite resilient despite the weak ringgit, notes Ambrose.
On the FTSE Bursa Malaysia KL Composite Index which is trading at around the 1,729-point level, he says the company does not have a view on the index’s year-end target as Aberdeen does not follow trends. However, he concedes that the firm does not see triggers for a major bull run.
“Still, there are many good companies in Malaysia which are well-managed and have good cash flows, but to find them at a price that gives attractive upside is the difficult bit.”
Since the oil price decline in September, he says the fund has picked up a number of oil and gas (O&G) stocks which have dropped to valuations that it felt had genuine upside. It has added a couple of blue chips. Its current poftfolio has 45 listed companies on Bursa Malaysia.
Ambrose believes the O&G stocks it bought can withstand lower oil prices. Dialog Group Bhd, for instance, has done well as it is in fuel bunkering. Bunkering is in because oil is in contango right now. This means that the futures price is higher than the current price, resulting in demand for fuel storage space to store oil for future sales.
As for property, about 15% of Aberdeen’s group assets under management is invested in that sector. It has an Asia private equity division headquartered in Singapore, which has some investments in the Malaysian property sector.
On his personal investments, Ambrose has some European unit trusts invested via Aberdeen. These include a pool of companies listed in Europe like Nestle SA and Unilever, which have the bulk of their sales in emerging markets. He says he had taken advantage to invest in the parent companies of these multinationals, given that the ratings of these stocks have cooled down vis-a-vis their foreign units.
According to Ambrose, back in the 1990s, the price earnings ratio of Nestle SA was about 24 times yielding a return of 3%. Nestle (M) Bhd, meanwhile, was listed at eight times and yielded a return of 7%. The trend has come full circle, with Nestle SA trading at around 13 times to yield 6%, while in Malaysia, the stock is trading at around 29 times and yielding about 4.5%.
Ambrose has also invested in Aberdeen’s frontier market equity fund, which invests in countries like Sri Lanka, Pakistan, Vietnam, Myanmar and Nicaragua. Where alternative investing is concerned, Ambrose says often the best investments are the ones not bought for investment value but as things you like.
“Art in Asia is exciting but undervalued and under-invested. On the other hand, wine has caught up, with more people entering the market, particularly in China and Russia.”

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