Fund awards: please use only funds of a decent size

The Edge presented The Edge -Thomson Reuters Lipper Fund Awards 2016.

The full article appeared in the "Personal Wealth" pull out of The Edge Weekly from March 6-12 2017.

What is remarkable that apparently fund size did not play a role in the selection process.

From an international point of view, a USD 500M fund or larger has a decent size, that would correspond to a fund of more than RM 2 Billion. Almost no awarded fund fits that size.

In Singapore it has been said that a hedge fund (I admit, that is a different breed from a pure equity or bond fund, but just for comparison sake) has to have a minimum of about USD 50 Million to have a sufficient size to survive (because of expenses, compliance etc.), in other words more than RM 200 Million. But many of the awarded Malaysian funds don't even have this size.

There are quite a few awarded funds with its size below RM 25 Million, way too small to consider, in my humble opinion.

And then there is even one fund with a size less than RM 1 Million.

Honestly, those micro size funds should not have been considered for the awards. At a very small size one can invest in opportunities that are not available at a larger fund size.

In plain English: if investors pour money in these awarded funds based on their previous track record (achieved at a very small size), they might be disappointed in the future.

Anyhow, I think there are much too many unit trust funds in Malaysia. I can imagine some choice between bond funds and equity funds, pure Malaysian focused and international focused, but some fund houses have more than 20 funds. I question the amount of focus given to each fund by the managers. And with so many funds under one umbrella it will be hard not to win an award.

"Local Corporates Need To Buck Up on Corporate Governance"

I wrote before about James Hay from the Pangolin Fund.

Another interesting interview with BFM can be found here.

00:46 about research on pangolins needing funds
01:45 bonds versus equities
04:50 corporate governance, strong correlation between good CG and returns
05:15 many listed companies are family controlled
05:40 the need to visit companies and meet management
06:10 many companies, especially in Malaysia, still destroy value, diluting shareholders
07:20 lack of shareholder activism, very few fund managers go to AGMs and question management and INEDs
08:20 need to look in past history, company announcements
09:40 short term "adventures" by management in unrelated industries destroys value
10:10 companies should give excess cash back to shareholders, not waste it in risky investments
12:55 Hay also got "fooled", like in Silverbird's case
14:00 concentrated investing, intention to hold the shares for the long term
15:30 Challenger, Singapore listed
16:50 12% performance per year, calculated in USD

Why are so few local fund managers speaking out about bad CG?

It seems they "outsource" that work to MSWG, which is of course the "easy" solution, but not enough.

Asian fund managers (4)

BFM interview with James Hay from the Pangolin Fund.

Some of the subjects:

• Nestle
• Public Bank
• Malaysia shunned at the moment, might indicate opportunity
• Hup Seng
• Padini
• Dairy Farm
• Excellent corporate governance
• Avoiding GLCs like Maybank, would these companies be able to compete outside Malaysia?
• Stressing importance of research, also on the ground

An earlier interview with Hay can be found here.

Are monkeys suitable fund managers .......?

Research by London’s Cass Business School shows that randomly chosen portfolios — that might as well have been picked by monkeys — are overwhelmingly likely to beat market-cap-weighted indices. But most monkeys failed to match equal-weighted indices, or indices based on most sophisticated measures to limit risk.

So the hierarchy is that simple equal weighting indices beat monkeys, who beat value-weighted indices like the S&P, which beats the average active manager (who nonetheless complains that the S&P benchmark is unfair).

Yet our money is still mostly run by active managers, while none that I am aware of is run by monkeys. For these reasons, and many more, we need to know more about indices.


Interesting article in FT showing that monkeys might be suitable candidates (and probably cost efficient ones) to pick stocks.

I have posted about animals punching above their weight before.

The above article in FT is actually more regarding equally weighted indices:


S&P has long published an equal-weighted 500 index, in which each stock is 0.2 per cent of the index. This is probably a more valid benchmark than the S&P 500 itself — and as the chart shows, it is much harder to beat. The mere act of regular rebalancing needed to keep it equal-weighted means taking profits in gainers and buying stocks that have recently fallen — which is good. It also overweights smaller and cheaper stocks, which do well in the long run.


Wiki: The FTSE Bursa Malaysia KLCI, also known as the FBM KLCI, is a capitalisation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation that meet the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules.

The same applies to the EMAS index.

Liberalization of the Unit Trust industry (2)

"Wammo" commented on my previous posting: "Check out the performance of local funds on Fundsupermart - very few stand-out performers".

I have used his link to fund selector of Fundsupermart. I used the criteria:

• Main Categories: "Equity"
• Geographical sector: "Malaysia"
• I looked for funds with at least a 3 year track record

These are some of the disappointing funds that I found:

 



 

Please be informed that the above numbers exclude any initial sales charge. In other words, for an investor the returns are even worse.

In comparison, this is the graph of the CI, since 1994, highlighted the last 10 years:

Fund managers have nothing to complain about, the market went up from 820 to currently 1877, a rise of 129%, or annualised 8.6%. Any fund manager worth his salt, with a disciplined attitude towards value investing should easily beat the return of the CI in the longer term.

And they are supposed to do exactly that, that is what they are paid for in the first place through the yearly management fees. Otherwise a low cost index-tracking ETF makes more sense.

The average 10-year performance over all Malaysian equity funds is 9.7%, not that bad, at least one per cent more than the index. But the outperformance will most likely be lost by the initial sales charge, which can range up to a whopping 5%. I strongly recommend investors never to pay more than 2% in sales commissions, preferably less.

Liberalization of the Unit Trust industry

Article in The Edge Malaysia: "Local players not ready for unit trust liberalisation":


"Local unit trust management companies (UTMCs) are not ready for full liberalisation of the local unit trust industry, Permodalan BSN Bhd chief executive officer (CEO) Kamarul Izam Idrus said, adding that they still need more time to prepare themselves. "While we welcome the idea to liberalise the unit trust industry, we feel that it would greatly impact local players who are still struggling to increase their market share. I don’t think local players such as Permodalan BSN and other small UTMCs are ready for the [impending] stiff competition,” he told The Edge Financial Daily. Kamarul cited branding, reputation and fund performance of local fund houses that are yet to be strengthened as reasons."


"Fund performance ...... yet has to be strengthened", to me that can only mean that some of the unit trusts have had a disappointing performance. That is of course bad for people who invested their hard earned money in them. Should fund performance not be of paramount interest, more important than the protection of certain unit trust management companies?

Anyhow, these management companies had a long time to get their act together, and would have certain advantages over their foreign counterparts. They should be much more informed about the local investment scene (where not all is what it appears to be), and should have had ample time to develop marketing channels.

Luckily it does look like the Prime Minister is serious about liberalizing this industry. What is needed is top notch managers and lots of transparency regarding (for instance) performance and sales commissions (I think commissions should never be higher than 2%, preferably even less).

Malaysia has lots of good managers (and the occasional bad one), both in Malaysia and in other countries. In know several good ones in Singapore, but one of the best known managers is Cheah Cheng Hye, about who I wrote in the past.

"In investing, you get what you don’t pay for"

I read the interesting article "The Mutual Fund Walking Dead", with the following eye-opening graph:

"The underperformance of active mutual funds is well publicized at this point.  These graphs are just another nail in the coffin.

What got my attention with this data is that it shows how many active mutual funds just completely go out of business.  Basically, they get shut down or merge with another fund.

The first study shows that only 55% of active mutual funds survived the 15 year period through 2012. Somehow, 36% survived but underperformed.  And only 18% both survived and outperformed their index.

The second graph shows how much worse active fund underperformance is once you add in the graveyard funds.  Nearly all of these asset classes go to roughly 80% underperformance against their index over 10 years including the dead funds.

In Don’t Count on It, John Bogle informs readers that there were only 49 stock mutual funds in 1945.  By 2006, that number had ballooned to 4,200.

He also shared that around 50% of the mutual funds created in the 1990s failed and 1,000 funds failed in the 2000-04 period.

So not only are you competing against simple, low-cost index funds when trying to choose active funds.  You also have to dodge the walking dead zombie funds that end up dying.

Mutual fund companies will continue to churn out funds that mirror the hottest performing sector or asset class.  If they don’t work those funds will be swept aside for the next revolutionary idea.

Don’t take the bait."


The graphs are from Vanguard, the company founded by John Bogle.

An interesting interview by The New York Times with Bogle can be found here, some excerpts (emphasis mine):


Start with the economy, the ultimate source of long-term stock market returns. “The economy has clouds hovering over it,” Mr. Bogle says. “And the financial system has been damaged. The risk of a black-swan event — of something unlikely but apocalyptic — is small, but it’s real.”

Even so, he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.

“Wise investors won’t try to outsmart the market,” he says. “They’ll buy index funds for the long term, and they’ll diversify.

“But diversify into what? They need alternatives, bonds, for the most part. What’s so frightening right now is that the alternatives to equities are so poor.”

In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.

But low yields today predict low returns later, he says, and “the outlook for bonds over the next decade is really terrible.”

Dark as this outlook may be, he says, people need to “stay the course” if they are to have hope of  buying homes or putting children through college or retiring in comfort.

Too much money is aimed at short-term speculation — the seeking of quick profit with little concern for the future. The financial system has been wounded by a flood of so-called innovations that merely promote hyper-rapid trading, market timing and shortsighted corporate maneuvering. Individual investors are being shortchanged, he writes.

He is still preaching the gospel of long-term, low-cost investing. “My ideas are very simple,” he says: “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”

He advocates taxes to discourage short-term speculation. He wants limits on leverage, transparency for financial derivatives, stricter punishments for financial crimes and, perhaps most urgently, a unified fiduciary standard for all money managers: “A fiduciary standard means, basically, put the interests of the client first. No excuses. Period.”

Asian fund managers (1)

In my opinion, there are three good ways to invest in equities:

[1] Do it yourself: you need to spend lots of time on it, but it can be pretty rewarding while learning a lot in the process. I have invested in Asian shares for about 20 years (for 16 years mostly Malaysian shares), booked returns of 15+% per year which is very typical for decent value investors. My hunting ground for investable companies has the following characteristics:

• Small and medium size, not yet discovered by large fund managers
• Focused, they tend to be better than conglomerates, but also more easy to analyse
• Good corporate governance, where the managers are prepared to share the profits with the minority shareholders
• Decent dividend yield, although a company growing fast might want to keep cash in the company, in general companies paying some dividend tend to perform better is my experience
• Good to decent balance sheet, needed to withstand a rainy day
• High ROE (Return On Equity) of at least 15%, may be the most important criteria of all; there are similar concepts which are also excellent like ROCE etc. I hope to revisit this subject in the future.
• Good and consistent track record (correlated with the previous)
• Cheap price relative to their good quality track record
• Be aware of cyclical companies near their cyclical high (they look cheap, but aren't)

Pretty common sense all of the above, but amazingly, these kind of companies are often found to be boring by other investors, are thus neglected and offer good value for patient investors.

However, not everyone has the time to devote to this, or don't have the right attitude for it. Even the best investors will sometimes have disappointing results in the short or even medium term, one need to have the stamina to deal with that.

[2] ETFs (Exchange Traded Funds): funds that are passively invested and thus have (very) low management fees. Good for "macro calls", I for instance am quite interested to invest in companies in Africa, for which I use an ETF which invest in larger companies spread out all over the continent, to reduce country risk. There are a huge amount of ETFs, each with a different focus, again, one should do his homework before investing in them, but they can serve their purpose quite well.

[3] Managed, good quality funds: these funds are actively managed by fund managers with a long and distinguished track record. There are quite a few good or excellent fund managers focused on Asian shares. Although management fees are much higher than for ETF's, excellent fund managers are indeed worth it.


The last category is the subject of this posting, and I will revisit it several times in the future.

In the past I did write several times about some Asian fund managers, for instance:

Value Investing with Cheah Cheng Hye
Claire Barnes and the Apollo Asia Fund
Top holdings of good Asian funds


Just to be clear:

• I do not receive one cent commission by writing about these fund managers
• I might or might not have money invested with them
• I might or might not know them
• I think they are good, that they select the right kind of stocks, that they have good track records, but I could be wrong, and even if I am right, past results are no guarantee for good results in the future
• As usual, readers should do their homework, either when they want to invest in these funds, or when they want to follow some of the top holdings of these fund managers

The first fund manager I like to present is Yeoman Capital Management. I had encountered them a few times in HK small caps in which I was interested.

A good article about the fund can be found here.

Valuebuddies had a nice posting about the manager, drawing my attention, including some links to interesting video's:








Sun Hing Vision is a company in which I have owned shares myself, also because David Webb invested in it.

Some posters at Valuebuddies have better eyes than me and guessed which books are shown behind Yeo Seng Chong:

On the top deck :
- Competitive Strategy: Techniques for Analyzing Industries and Competitors
- You Can Be a Stock Market Genius
- Common Stocks and Uncommon Profit
- The Essays of Warren Buffet
- Value Investing : From Graham to Buffett and Beyond
- Competing on Analytics
- Beating the Street
- One Up On Wall Street
- The Value Imperative

On the bottom deck :
- The Wealth of Nations
- 2x Intelligent Investor
- 2x Security Analysis