THE now-extended movement control order (MCO), while necessary to control the spread of the Covid-19 pandemic, has left many small businesses and individuals strapped for cash.
The shutdown of all non-essential businesses, slashed salaries, a loss of income for freelance and gig workers, among others, has led many affected Malaysians to dip into their savings, or to withdraw funds from some of their investments in order to make ends meet.
Unit trust agents and fund managers say they are seeing more requests from some of their clients – particularly the lower and middle-income group – seeking to make withdrawals from their investments as panic grows in tandem with the rising number of Covid-19 cases in the country.
A financial planner, Haris Gopinat tells StarBizWeek that he had over the past week been contacted by several of his clients, who were mulling over withdrawing from their unit trust funds.
These clients, he says, who had only entered into the investments one or two years ago, were worried that they would run out of funds if the MCO continues to be extended, or that their investments would fail due to the weak market situation.
He says he advised the clients against doing this, as their original investment objectives had been to invest for the long term.
“The pandemic is likely to only be a temporary challenge, after which things will return to normal, ” he says, adding that his clients had ultimately decided to leave their investments untouched.
According to the Securities Commission, as of January this year, there were 39 approved unit trust fund management companies in Malaysia, with a total of 694 authorised funds.
These companies hold 20 million accounts – of which 85% are conventional, and the other 15% are syariah-compliant, with a total net asset value of RM478.73bil.
The industry also accounts for 29.08% of Bursa Malaysia’s entire market capitalisation.
Excellentte Consultancy Sdn Bhd financial planner Jeremy Tan says that while his clients have raised concerns and sought advice about whether to continue with their unit trust investments, they had not withdrawn funds just yet.
“Before they invest, we analyse the client’s risk appetite, goals and objectives as well as the investment horizon they are looking at.
“We also ensure that they do not put in all their funds into the investment – they should have cash or other assets available for situations such as this, ” he says.
This, Tan says, helps ensure that clients do not end up prematurely withdrawing funds.
While some mull withdrawing funds, some fund managers who deal with more affluent clients and high net-worth individuals are seeing their clients pumping in more cash into their investments.
Areca Capital Sdn Bhd chief executive officer Danny Wong(pic above) says the company has not seen clients seeking to withdraw funds as they generally invest for the long term, have liquid assets and are well positioned to rise out the uncertainties.
“In fact, some of them have been topping up with us – it is a good time to enter the market. We are at crisis valuations now although we are not in a financial crisis, ” he says.
He notes that based on previous experience, many funds see their total fund size or assets under management shrink during turbulent times due to both the lower value of assets held as well as owing to withdrawals by clients.
“Typically, during crisis, there are a higher number of withdrawals compared to regular periods, ” he says.
During such times, Wong says it is important for investors to remain invested – if they can afford to.
“Fund managers will know what to do during crisis. They may raise cash ahead of when the market bottoms so they can invest at the right time.
“The problem with large number of withdrawals is that it will limit the amount of cash fund managers have when the market bottoms, ” he says.
He stresses that the Covid-19 pandemic, like other pandemics in the past, will be a temporary affair.
For unit trust account holders who are looking to withdraw funds due to financial constraints, Kenanga Investors Bhd CEO Ismitz Matthew De Alwis suggests that they adopt a proper strategy.
“If it is really due to financial constraints and to avoid anxiety-induced decision making, I would advise that you have a good withdrawal strategy, such as not withdrawing a lump sum, and choosing which fund to withdraw from.
“You may also speak to licensed financial planners or advisers who can help come up with a strategy around a withdrawal schedule that works best for you, ” he says.
He notes that withdrawing from investment portfolios, including unit trusts, should be done only as the last resort.
“As much as we are now seeing net outflows amid broader stock market losses and switching to safer assets, we are not ignoring the fact that there are unitholders withdrawing to ease their cashflows.
“However, as of now, most of our investors are looking at all options when it comes to choosing the right instrument and exposure for their portfolios, and with the MCO in place they are spending more time reviewing their portfolios, ” he says.
De Alwis stresses that there is still long-term value in many Malaysian businesses and that they will continue to grow despite the short-term pain of the crisis
“If the market keeps sinking, remember that this is okay as you are investing your money for the long term, not for this week or even this year.
“Future gains are never guaranteed but the stock market reflects the economy, which will eventually recover from the pandemic, ” he says.
Do fundamental managers really struggle to match that breadth?
Even the most seasoned fundamental equity analyst can only cover 30 or 40 stocks. If you do the math, if you have to cover 6,000 emerging markets stocks regularly, and let’s say that 40 stocks are the most one analyst can cover, you need 150 fundamental analysts to cover that many stocks. Does any firm have that many fundamental analysts covering emerging markets?
Is risk management part of that EMs sweet spot for quants, too?
Everyone knows that emerging markets are more volatile stocks than, say, U.S. large cap. Risk models are relevant everywhere, but become even more relevant in an area like EMs where the stocks you trade move around more than in other areas. A good quant manager builds its own proprietary risk model – we don’t just rely on standard providers. We build our own risk model that is attuned to our process and can better determine the risk in our portfolios. It’s much more finely honed in terms of how we position size a name. Once we like a name, we use our algorithm to determine how much we can buy of that name.
For example, we have simple rules such as if you’re a biotech name, we target half the weight of any single name as elsewhere because biotechs are much more volatile, and it’s an all-or-nothing story when it comes to trial phases. So, in an area like that we diversify our bets by buying more names.
Similarly, on riskier names – typically small cap names – and high beta or more volatile names, we take smaller positions than we do on Alibaba or Tencent, for example, because for various reasons there’s less liquidity in those names. So, the focus in our risk model is essentially that for every name our position-sizing algorithm determines how much we should buy. That’s critical in emerging markets, where names are riskier than in developed markets.
You don’t meet with company management as part of your strategy. Is that a strength compared to a fundamental manager?
It’s just a different approach and philosophy. Quants are disciplined, and we try to quantify everything. To us, you can tell the quality of management story by looking at financial statements – is return on equity improving? Is return on invested capital improving? We’re not interested in a judgmental, subjective lens.
The quantitative process is about ranking everything from highest to lowest in every sector, and then trying to buy the highest names and sell names that are going down in our rankings. It’s a very disciplined process that we do every day. Fundamental analysts can sometimes struggle with when to sell, because they don’t have a disciplined number telling them when to sell. Now, selling a winner is often easier – they’ve made the money, they sell it. But fundamental analysts and portfolio managers can struggle on when to sell losers – and sometimes that is because they are biased toward management. In that sense, not meeting management can make you more objective in your decision-making.
In many ways it sounds as if your strategy is optimized to seize the moment when it presents itself.
That goes back to breadth and speed. We can cover the whole globe on a daily basis, and because we look at 10 to 20 criteria per stock, such as how are you ranked on price to cash flow versus your peers, for example, we can act and trade on a daily basis. Not many active managers do that – either fundamental or quant. Our strategies are capacity constrained – we don’t want to be too greedy about assets under management – so that we are able to get in and out of names faster than other managers, and our robust infrastructure enables us to do that. That’s an advantage for us, especially in liquidity challenged areas with high transaction costs. If you can get into a name early on the upside, you can ride it up more compared to a manager getting in on a weekly rebalancing cycle or a monthly rebalancing cycle. That’s the advantage of speed we gain from daily analysis and trading.
Learn more about quantitative equity strategies focused on emerging markets and international offerings, and that use a core style of investing which employs fundamental ideas in a disciplined, risk-aware manner while seeking to generate alpha.
- 2. The Small Cap Opportunity in EM
Most investors agree that there is more inefficiency in small caps – no matter where in the world you find them – and thus more potential for alpha. In EMs, however, where small caps may be especially inefficient, there’s an opportunity that is often overlooked, and not typically part of an allocation plan by any but the largest funds.
A fairly common asset allocation plan for a U.S.-based fund would incorporate a U.S. allocation, an international allocation, and an emerging markets allocation. Historically, a reach for increased alpha in U.S. or international small caps has been more difficult because they don’t move hand-in-hand together with their large cap brethren. In both U.S. and international equities, large and small caps tend to have more independent and less correlated performance relative to large and small caps in EMs. In other words, when large caps are on an extended roll as they have been for many years now, the small caps aren’t necessarily along for the ride. In emerging markets, large caps and small caps have moved much more closely together. Further, the annualized volatility of EM large and small caps has been more similar relative to large and small caps in both U.S. and global equities.
So why does this matter? If allocations to large caps are all about beta, and allocations to small caps are about alpha, then in EMs we believe you have a better chance of getting both at the same time, rather than one or the other.
Human intelligence overlay
The emerging markets investment capacity at Mackenzie is, at a high level, constrained, so that the team can be in and out of stock ahead of managers encumbered by much larger AUM. Leveraging its computing power, the team is as nimble as they come, ranking and trading stocks daily, tapping into highly ranked names it doesn’t currently own and getting out of names that have fallen down the ranking.
Daily trading and daily rebalancing require a strong infrastructure, especially with a 24/6 clock (Middle East markets are open on Sunday). Mackenzie’s EM team spends a lot of time making sure that its models can run several times over the course of a day – as Asia opens and closes, then Europe, and finally the U.S.
“The world never stops for anyone in terms of the rebalancing cycle, so when other managers say they rebalance monthly or weekly, that’s a lot of missed opportunity, and it’s why we scrape data daily and rank stocks daily. There is always new information out there, and a name might still look cheap in a week or two, but I’d rather buy today than five days later when the stock has run up a lot already,” says Datta.
A common knock against quant strategies is that they are “black box,” meaning they lack transparency and turn over all decisions to computers. Embedded in the process at Mackenzie Investments, however, is a feature that not many other quantitative shops offer – serious and detailed human review. If there is one thing Datta makes clear he abhors it’s the “garbage in, garbage out” results of unchecked data dumping.
“It’s even more an issue in emerging markets because the data is dirtier there,” says Datta. “Most quants claim they do some statistical checks, but every trade we do is vetted or checked by either myself or my colleagues in the portfolio management and research teams at Mackenzie. And we do find names that we pull on an almost daily basis. We don’t trade them because we found that some variable the model was looking at was not correct, or that various data sources didn’t agree. Why are we selling a name? Why did we buy this for the first time? We dig deeper. If the data is bad you’re making a wrong investment decision, so we do spend time making sure the data is clean on a name-by-name basis in our buys and sells. Pulling trades is something we do almost every day, and certainly more prevalent in our emerging markets strategies than it is in our developed market strategies.”
All of this requires top-level talent, and Datta builds his team based on their programming excellence, and with an eye consistently on the future. “One trait of our quant business is that we mix the experienced people like me with the tech-savvy youth, not all of whom need to be PhDs. There are plenty of smart people with undergrad and masters’ degrees out there. The importance of mixing experience and bright, new thinking is that technology changes at a very fast pace, and it will change even faster going forward. Today, everyone uses [the programming language] Python. That was not the case five years ago, and I don’t know what the new Python will be five years from now, but I can tell you it won’t be Python. It will be something else.”
The human factor extends to EM trade execution as well, where varied exchanges, trade settlement processes, and so forth come into play.
“We have as much sophistication and discipline in our execution as we do in our stock picking and risk management – it’s all integrated into a single process,” says Datta.
The firm has proprietary market impact/trade cost models for every trade, with key drivers such as the level of liquidity demanded and stock volatility. According to Datta, its actual EM transaction costs have always come in slightly below what has been anticipated – a clear sign that trade execution is solid. “We deal with many brokers, and we are upfront in telling them that we trade a lot of names every day and we try to get the lowest commission possible because of the volume business we do,” says Datta. “And we let them know they’ll be measured versus yesterday’s closing price and VWAP [volume-weighted average price]. We monitor them closely, and if a broker is not doing well, we cut them off or lower the trading with them. It’s a very efficient process.”
Strong execution is particularly relevant when shorting an emerging markets’ stock, which is something that sophisticated investors sometimes avoid. It can be done through swaps, but execution is crucial when shorting in different regions of the world. “For example, there are plenty of hedge funds out there that appear to be shorting in Asia and China, but if you dig deep most of them have a long bias and all they’re shorting is the benchmark,” says Datta. “With the market-neutral type product such as we have in emerging markets, we actually short single stocks in almost all emerging markets.”
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