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The asset management company of Select Opportunity Fund and Dana Izdihar fund is Malaysia-based Hwang-DBS Unit Trust Bhd. DBS Asset Management is the advisory company to Hwang-DBS. Teng has 12 years' experience managing absolute return mandates and David has been managing institutional funds for seven years.

Hwang-DBS Select Opportunity and Dana Izdihar funds are long-only (directional) but are not traditional mutual funds. Both are not beholden to a benchmark index and aim to generate positive returns just like hedge funds, except they never short.

Look for performance and other key details for these winning funds in Eurekahedge's Long-Only Absolute Return Fund Directory 2004, Asia-Pacific and Global Emerging Markets Edition, to be published August/September 2003.

Interview with Teng Chee Wai and David Ng

1. Can you explain the absolute return approach of the Select Opportunity Fund and Dana Izdihar long-only funds?

   Asset allocation is key and we arrive at our asset allocation decision by taking into account global and regional flows, and data. We have access to global and regional research including independent research, and these have contributed to our decision making process. Where opportunities present themselves in specific sectors, we would participate in that sector to enhance returns. Otherwise, our stock selection criteria for our core holdings are based on selecting companies with the following three criteria: (1) strong management; (2) growth; and (3) strong cash flow. Should one or two of the three criteria be not present, we may participate in opportunistic trades provided that there is a catalyst to a re-rating of the stock e.g. turnaround or possible corporate activity or simply having been over-sold.

2. How do you manage downside risk -- do you hedge long positions, for example using warrants, options, futures etc?

   We do not currently use options (and other derivatives) to hedge against downside risk. Our only avenue is via raising cash and/or adopting a more defensive posture for the portfolio.

3. Index funds and actively managed traditional funds continue to attract the bulk of long-only institutional monies. Yet institutions increasingly appear willing to invest in long-only absolute return funds - why are these funds gaining popularity?

   The past 3 years have been difficult years for the equities markets and investors are beginning to realize that "outperforming the index" does not necessarily mean that returns are positive as well.

4. The rapid run-up in share prices on Wall Street since mid-March until July re-energised global equities markets. Yet, this bear market rally had more to do with huge cash inflows then positive economic news. What is your take on the current volatility in equity capital markets and in which ways, if any, do big swings affect the performance of Hwang-DBS Select Opportunity and Dana Izdihar funds?

   We believe that the next six to 12 months will be positive for equities markets due to reflationary efforts worldwide. This could potentially be a precursor to an economic recovery. Markets often recover before the economy. We are of the opinion that we should see cyclical growth start to pick up. Volatility is not unusual at this initial stage of a market upswing (although it has receded of late).

   Big swings could have considerable positive and negative impacts on both the Hwang-DBS Select Opportunity and Dana Izdihar funds. As stated above, asset allocation is a key factor in our investment performance. Therefore, dependent on our equities exposure, big swings could be very pleasant or less pleasant, depending on whether we got it right or wrong.

5. What are the asset allocations of SOF and Dana Izdihar currently(July 2003), and what are the largest cash positions that you could comfortably accept for these funds?

   Both funds are currently about 80% invested in equities with the balance in cash. This is down from above 90% since a month ago. The largest cash positions we would be comfortable with is about 50%.

6. Is it difficult to get investors during bullish market phases like the one just experienced to allocate a portion of their portfolio to SOF and Dana Izdihar? Do Malaysian investors accept that diversification through long-only absolute return funds can reduce portfolio risk and improve the chances of superior overall performance?

   Investor behavior is such that inflows increase when the market is rising. We think that the choice of funds they invest into is highly dependent on investment performance as well as their comfort level/relationship with the agent/distributor of the fund.

   As far as acceptance of long-only absolute return funds are concerned, we think that it has increased and should continue to do so provided performance is satisfactory.

7. Asian stock markets today show a much stronger correlation with their Western counterparts. Are these stronger correlations, in particular between the Kuala Lumpur stock market and western markets, of any concern to Hwang-DBS?

   We do monitor this. However, given the manner in which we choose our investments, we believe that there are always opportunities regardless of the seemingly high correlation. In the near-term, we expect the correlation to remain fairly high. However, we hold the view that the Asian economies would fare better than their western counterparts and this should be reflected in the stock market's performance as well. In other words, we expect a reduction in the correlation.

8. The ringgit has been pegged at MYR3.8 per USD for the past three years. Given expectations for extended dollar weakness against the yen and euro, and that Malaysia's top trading partners are Japan and the EU, do you view the ringgit peg as an advantage for investors of Hwang-DBS's ringgit-denominated funds?

   There are both pros and cons to the Ringgit peg. Overall however, a weaker ringgit should benefit and increase the liquidity in our [the Malaysian] economy and consequently the [Malaysian] stock market. As well, given the profile of our investors (i.e. mostly domestic), this should benefit them as currency translation losses do not apply to them.

9. Both the Select Opportunity and Dana Izdihar funds target returns of 10% per year but do not charge performance fees. Did you decide that charging fees beyond initial and management fees is an impediment to the development of your funds?

   We did not think that such a structure would be palatable to Malaysian investors at the point of our launches [SOF, September 2001; Dana Izdihar, October 2002]. This is an idea we intend to bring up with the regulatory authorities in order to gauge their reception to such a scheme.

10. Does Hwang-DBS have plans to launch additional long-only absolute return funds?

    An incentive fee-based fund is an idea we are toying with.

Contact Details
Hwang-DBS Unit Trust
Shamila Kanniah
shamila@hdbs.com.my
603 2142 1881