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Top Equity Funds 1Q 2013: Funds invested into ASEAN Equities Triumphed The Rest
Malaysia Perspective | 21 May 2013

By Yeoh Mei Kei

Equity markets posted divergent performances in 1Q 2013, as developed markets including the US, Europe and Japan outperformed the developing Asia ex-Japan and Emerging Markets. On a single-country basis, Southeast Asian markets such as Thailand and Indonesia outperformed the BRIC countries on the support of foreign fund inflows. Wrapping up the quarter was more good news from the US, where its economy continued to pick up speed on the back of an improving labour market and recovering housing market. Over in Europe, Cyprus managed to secure a 10 billion euro bailout which reduced its risk of exiting the Eurozone and also ended uncertainties that have affected investor sentiment over the last few days of the first quarter.

Out of the 130 equity funds on our platform, 85 (65.4%) recorded positive returns in 1Q 2013 while the rest (45 funds) were in the red in 1Q 2013. As shown in Chart 1, most of these equity funds delivered returns ranging from -1.0% to 2.0%% in 1Q 2013.

Chart 1: 1Q 2013 Returns Distributions For Equity Funds

We now take a closer look at some of the top and bottom performing equity funds for the quarter and identify some of the key reasons for the outperformance and underperformance for of each fund.

Top Equity Funds In 1Q 2013 

Indonesia Equities Outperformed…

Indonesia equity funds like the Eastspring Investments Indonesia Equity MY Fund and OSK-UOB Indonesia Equity Growth Fund delivered double-digits returns of 16.2% and 12.5% respectively in 1Q 2013.

The Indonesia market was up 14.7% in RM terms in 1Q 2013, on the back of increasing foreign buying interest. Net inflow of foreign funds for 1Q 2013 stood at USD 1.937 billion (as of 29 March 2013), a level which is 13.8% higher than the USD 1.703 billion net inflow seen for the full year of 2012. While the upward momentum in Indonesia markets may continue over the near-term on the support of increasing net inflow of foreign funds (which could lead to stronger fund performance), the heightened risk of reversal in foreign funds may increased the downward risk of the fund if the fund manager does not lock- in the gain before the markets reverse.

…So Did US Equities

Since the US outshone most markets in 1Q 2013, funds with a sizeable exposure to the US market delivered fruitful returns. The OSK-UOB US Focus Equity Fund, a feeder fund that invests into the Schroder International Selection Fund US Small and Mid-Cap Equity, delivered returns of 12.2% over the first three months of 2013, led by the financial and technology sectors. Despite this, the fund underperformed its benchmark, Russell 2500 TR Lagged (RM) Index, due to its cash position and stock selection in the consumer discretionary and energy sectors. On the other hand, RHB-GS US Equity Fund, a feeder fund that invests into the Goldman Sachs US Equity Portfolio, gained 10.6% over the same period, also underperforming its benchmark, the S&P 500 Index, which delivered an 11.5% gain in RM terms.

Given the improving US economic data and investor sentiment, the fund is likely to continue to benefit from the growing momentum in the US equity market. While we suggest investors to take an overweight position in the high growth Emerging Markets and Asia ex-Japan, investors may consider adding some US exposure by investing in the RHB-GS US Equity Fund to balance the investment risk from developing markets. Alternatively, investors could include OSK-UOB US Focus Equity Fund in the supplementary portion of investors’ portfolio as this fund invests into small and medium capitalisation US stocks, which may demonstrate greater fluctuations as compared with funds that invest in US large capitalisation stocks.

ASEAN Equities Exposure Boosted Up Returns
As Southeast Asia outperformed North Asia in 1Q 2013, it is not surprising that the Hwang Asia Quantum Fund, CIMB-Principal Asia Pacific Dynamic Income Fund and OSK-UOB Asian Growth Opportunities Fund, which are Asia ex-Japan equity funds that focus on Southeast Asia, all made it to the top 10 equity funds list in 1Q 2013 by delivering returns ranging between 14.4% and 12.5% over the same period.

While election fears weighed on the Malaysian equity market, the OSK-UOB Emerging Opportunity Unit Trust and OSK-UOB Equity Trust (which can invest up to 30% and 50% of its portfolio into Asia) had shifted more investment from Malaysia to Indonesia and Thailand. With this strategy, both of the funds benefited from the rally in Indonesia and Thailand and cushioned performance from the market weakness in Malaysia.

While strong inflows of foreign funds could remain as the near-term catalyst for the Southeast Asian markets (particularly Thailand and Indonesia), we advocate investors to stay cautious and avoid chasing the markets as the valuations for the broad-based indices suggest that the markets are now fairly priced. Downside risk of investing in the Southeast Asian markets may also be increased given the recent strong run-up which was driven by the surge in net inflows of foreign funds. Shifting of foreign investors’ buying interest from Southeast Asian markets to other regions could cause some consolidation going forward.

Bottom Equity Funds In 1Q 2013

Gold Mining Equities Lost Their Shine
Commodity-related funds like the AmPrecious Metals and OSK-UOB Gold and General Fund delivered poor returns of -15.6% and -14.2% respectively in 1Q 2013.

Gold price has been range-bound for the recent few quarters, given that improving economic data and subsiding tail-risk in the Eurozone have shifted investors’ interest from gold (which is generally perceived as a safe haven asset by investors) to riskier assets such as equities. With the price of gold having delivered a negative return, the gold mining equities were not spared either, falling by 15.9 % in RM terms (as represented by the FTSE Gold Mines Index), hurting the performance of funds which have significant exposure to the sector. Over the near-term, the performance of gold mining stocks is likely to be weighed down by the weakness in gold prices and rising production costs, as both will dampen the earnings of gold mining companies.

Softening Economic Indicators Weighted On BRIC Equities
The sizeable exposure in BRIC materially detracted from the RHB-GS BRIC Equity Fund’s overall performance as Brazil, China and Russia were the worst performing markets in 1Q 2013, delivering losses ranging between -3.0% to -5.0%. While RHB-GS BRIC Equity Fund suffered, TA BRIC and Emerging Markets Fund which held approximately 30% of its investments in domestic sukuk and deposits to mitigate the negative impact from market weakness, was not spared either as the fund still delivered a loss of -4.2% in 1Q 2013.

Moving forward, the BRIC countries are likely to stay volatile over the near-term given the weakening in industrial production, softening in retail sales and accelerating inflation, which could further affect investor sentiment. Investors who invest in BRIC equity funds are encouraged to have a long-term investment horizon in order to mitigate the negative impact that could arise from short-term noises.

Possibility of Tighter Monetary Policy Dragged Down China Equities
For 1Q 2013, AmIslamic Greater China and CIMB-Principal Greater China Equity Fund fell 3.7% and 2.9% respectively while the benchmark of MSCI Golden Dragon Index lost -0.4% (on a total return basis, in RM terms). The underperformance of the AmIslamic Greater China can be attributed to its country and sector allocations. The fund invested heavily in China and Hong Kong (which accounted for 63.1% of the portfolio as of 28 February 2013), and these two markets returned -3.3% and -0.4% losses respectively in 1Q 2013, dragged down by fears of a double-dip slowdown in growth and the People’s Bank of China’s continued liquidity withdrawals from the financial system. Sector-wise, the fund has larger exposure to cyclical sectors such as energy and materials sectors, which dragged on the performance of the fund as the sectors were impacted by the headwinds of slower economic growth in China.

As compared with AmIslamic Greater China, CIMB-Principal Greater China Equity Fund has a higher cash level and has larger exposure in the defensive sectors such as information technology, consumer staples and healthcare, which helped to cushion the fund from market weakness.

Despite the concerns over China’s economic growth prospects and the possibility of tighter monetary policy, other factors are still supportive of the market’s long-term outlook such as China’s export growth rebounding substantially as well as the increased emphasis placed on implementing “proactive fiscal policy” (we believe this will be the key stimulus to the Chinese economy and markets) during the National People’s Congress. The recent poor performance in Chinese equities may have discouraged investors from investing in China. However, the current muted valuations suggest the lack of investors’ interest, making it an opportune time to accumulate Chinese equities.

Employ A Portfolio Approach
If markets can continue to build on 1Q 2013’s broad-based strong performance, 2013 is shaping up to be another good year for investors, especially with much tail-risks removed from the table. Even after some strong market performances, equity valuations remain attractive across the board for most of the markets under our coverage, especially when compared against the meager bond yields offered in much of the fixed income space. We continue to maintain a favourable view on equities vis-à-vis fixed income and remind investors not to be carried away by the strong returns achieved in equity markets so far. We advocate investors to employ a portfolio approach to investing. With a diversified portfolio of equity and fixed income funds, investors stand to benefit from the upside of equity markets, while also having some defensive assets such as safer fixed income funds to buffer downside risks.

Yeoh Mei Kei is a Senior Research Analyst at

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