This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 1, 2019 - April 7, 2019

Affin Hwang Asset Management Bhd (AHAM) emerged victorious again at the 2019 Lipper Fund Awards from Refinitiv. It took home the prestigious Best Mixed Asset Group award for the second year running as well as six fund awards.

Affin Hwang Select APAC ex-Japan Dividend MYR won the fund award for Best Equity Asia-Pacific Ex-Japan (Provident) in the three-year category. Affin Hwang Select Opportunity won the fund awards for Best Equity Malaysia Diversified (Provident) in the 3, 5 and 10-year categories. Affin Hwang Select Balanced bagged the fund award for Best Mixed Asset MYR Balanced-Global (Provident) in the 3 and 10-year categories.

David Ng, deputy managing director and chief investment officer of AHAM, attributes the fund house’s outperformance in the mixed asset category to the team’s absolute return philosophy and stringent selection process in picking resilient stocks and quality credits with sound fundamentals. As the market conditions change, a dynamic approach will be crucial, he says.

“We aim to find the perfect ‘blend’ between equities and fixed income for our balanced funds. So, we may opt to raise our exposure to fixed income during more volatile conditions as drawdowns in bond prices are less severe than those in equities.

“Conversely, we would tilt our exposure towards equities and take on more risk when the risk-reward outcome is in our favour. We have cultivated a strong sharing environment across the equity and fixed-income teams to work cohesively with each other and complement each other’s strengths.”

Ng, who manages the Affin Hwang Select APAC ex-Japan Dividend MYR fund, says the biggest challenge last year was figuring out the impact from the US-China trade conflict. He acknowledges that the team underestimated the magnitude of the tariffs that would be imposed the US. As a result, the portfolio suffered a sharp decline.

“During this time, we spent a lot of effort reassessing very fluid developments on the geopolitical scene. To manage risks, we reduced stocks that were vulnerable to trade tariffs. We also quickly increased our cash holdings in 3Q2018,” says Ng.

“Last November, we took a view that the market was oversold and China’s step-up in stimulus would help to stabilise the economy, albeit with a six to nine-month lag. So, we started deploying cash to buy beaten-down stocks, with a focus on companies that have strong balance sheets and a competitive edge in their industries.”

According to him, one of the sectors with the potential to stand out this year is materials. This could be driven an increase in infrastructure spending in China as well as a potential softening of the US dollar.

“A weaker US dollar is typically positive for prices of basic materials. However, we are investing in small amounts as this is a volatile space,” says Ng.

He says the fund generally avoids mobile telecommunications companies due to the ongoing pressure to reduce prices and lack of clear direction in their strategies to generate additional revenue from 5G services. “We have also reduced holdings in semiconductor companies due to the excessive supply and high inventory levels. As this is a dividend fund, we are also avoiding companies with high leverage and with poor cash flows as they tend to be vulnerable in an economic slowdown.”

On the fund’s strategy to ride out market volatility, Ng says it will focus on two baskets of companies. The first comprises those with a secular growth outlook, have strong balance sheets and hold a competitive edge in their industries.

“The second consists of those with decent dividend yields and stable business models such as real estate investment trusts and utilities. These companies will provide the fund with a measure of stability as they tend to hold up well during a market decline,” he adds.

David Loh, senior portfolio manager (equity) of Affin Hwang Select Balanced, says the fund’s asset allocation was very nimble last year to adapt to a fluid environment driven major events that had broad market implications. When the market was strong, however, the team deployed more into equities to achieve better returns.

“We adopt a high-conviction approach and conduct thorough research before making any decisions. With a clear understanding of our exposure, we were able to remain calm during a market sell-off and ride the cycle to enjoy price upside,” says Loh.

Due to the mass exodus of funds from emerging markets after the sharp appreciation of the US dollar as well as the US-China trade tensions, the fund had to trim its yield-dependent stocks as rising rates would pressure these assets, he says.

“We also sold technology names as these were the main source of contention during trade negotiations. Overall, we were defensively positioned and held a sizeable amount of cash to protect the portfolio,” says Loh.

On the fixed-income side, senior portfolio manager Ahmad Raziq Ab Rahman says the fund was defensively positioned in terms of duration. “We were also cautious on the property and construction sectors.”

Gan Eng Peng, director of equities strategy and advisory, who manages Affin Hwang Select Opportunity, says the fund’s strength lies in having a flexible worldview. “The 10-year period covered one of the biggest global monetary build-up in history and also the beginning of the withdrawal of stimulus, with no precedent to guide us.

“The strength of the fund was in navigating through this varied environment pushing money into positions that we had conviction on — which means a strong understanding of upside, risk and characteristics of the position. having the same fund manager managing this portfolio throughout the period, there was no change in style or restructuring of the portfolio, which would have detracted from performance.”

Last year was when markets felt the effects of the end of easy money, he says. US interest rate expectations were ratcheting up, leading to a strong US dollar.

“Hence, we saw large portfolio outflows in the region, including Malaysia. The fund positioned for this event taking out yield-dependent names as rising rate expectations are bad for such assets. We also had cash holdings of up to 40% at one point as the market trend was negative and cash was outperforming everything else,” says Gan.

“The shocking 14th general election results led to sluggish market conditions, driven too many reforms and lack of economic direction. We were caught off-guard and had to unload our construction names like the rest of [our peers].

“The fund was very light on small caps in 2018, which had a horrendous year. We were hardly invested in Barisan Nasional-linked counters entering the general election and a judicious amount of cash holdings protected the downside of the fund.”

According to him, the fund favours four sectors and themes this year. From a sector perspective, Gan believes that the banking industry offers one of the few large caps with decent value, high yields and a bit of growth. He also likes small caps as he thinks “the indiscriminate sell-off in the space last year has created good value in selected names”.

In addition, Gan sees potential in dividend-yielding stocks. “In a market that does not exhibit much growth, yield stocks offer some returns, both from the yield itself and potential yield compression as rate expectations are lowered,” he says.

Gan sees some upside from the widening trade divergence arising from the US-China trade war. “The global supply chain is shifting and diversifying away from China as a result of the trade war. Even if there is a US-China deal, manufacturers are sufficiently shaken to seek alternative supplies. Malaysia and Vietnam are prime beneficiaries of this trend.”

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