Interview with John Doyle, Deputy Chief Investment Officer, UOB Asset Management Ltd
OSK-UOB Unit Trust Management Berhad (OSK-UOB) manages the OSK-UOB Muhibbah Income Fund, a Shariah-compliant global balanced fund which invests up to 60% in Malaysia Islamic debt instruments and money market instruments, and up to 40% in Shariah-compliant securities of and securities relating to companies that have dividend and/or growth potential.
OSK-UOB is a joint venture between OSK Group and the UOB Group in Singapore. It commenced operations in 1996 with the launch of its maiden fund, OSK-UOB Equity Trust. Since then, it has launched 26 other unit trust funds. The total fund size under its management as at 30 June 2007 is in excess of RM2.9 billion. From 1998 to 2007, OSK-UOB has won 21 awards from The Edge-Lipper Malaysian Unit Trust Awards and Standard & Poor's Investment Funds Award.
UOB Asset Management Ltd (UOBAM) is the external fund management company. A subsidiary of United Overseas Bank Ltd, UOBAM has grown to be one of the largest local investment houses in Singapore with total assets under management of over S$25.8 billion as at 31 May 2007. UOBAM has business presence in Malaysia, Taiwan, Thailand and Brunei.
As at 22 June 2007, the OSK-UOB Muhibbah Income Fund has generated returns of 1.89% since launch (12 March 2007). The fund currently stands at RM73 million.
With regards to the fund and fund manager, how is their approach different from others and what is the overall proposition for investors?
This product is designed to have a stable and defensive profile which can be a core investment product for investors.
The investment portfolio contains companies that are less interest-rate sensitive as they have no exposure to the financial sector and are out of the loop of the global cycle. The companies' characteristics would be those which are stable, have low gearing and strong cash flow which could translate to higher dividends.
The demand for Islamic debt securities is increasing over time. These securities managed to capture a wider pool of investors including those from GCC. This translates to better market liquidity, lower yield curve and thus higher total return. Islamic securities have managed to outperform conventional securities for most of the period.
UOBAM is the external investment manager responsible for the foreign (equity) portion of the portfolio. We have over 20 years' experience and a strong track record in managing global equity portfolios.
The underlying investment philosophy is a bottom-up, fundamentally driven approach. We believe that long-term investment performance can be achieved by employing a rigorous research process to identify companies are undervalued and that can generate superior returns.
In addition a top-down process to review asset allocation adds value to the portfolios.
How frequently are your allocations revised? How liquid is the fund's portfolio and what is the typical holding period of an investment?
The allocations are reviewed quarterly and when there is a change in outlook or fundamentals. The revisions are made based on the reviews. (See Question 4 on asset allocation below for details.)
Unit trust investments are medium- to long-term investments. The fund holds about 5% in cash or equivalents, up to 40% in global Islamic equities and up to 60% in Malaysian Islamic debt securities with a medium-term tenure.
In accordance with the mandate of the fund, we take a medium- to long-term view with our investments. Securities are held as long as they remain attractive in terms of valuations, yield and/or growth. A target price or a fair value is set for each security invested in and we will take profit on a security when it has reached its fair value.
From an investor's perspective, they would enjoy a regular stream of income which could contribute towards fulfilling part of their liquidity needs.
The fund is designed to provide "regular income from bonds and stocks' dividends, and potentially capital gains". How are these opportunities identified?
The process is largely bottom up. For the fixed income portfolio, the manager performs credit and valuation analysis to identify risk/cheapness of a particular issue. The manager focuses on yield at an acceptable risk premium to generate regular income while constantly searching for undervalued securities for potential upgrade.
For the equity portion, the research team supports the manager by making bottom-up stock recommendations. These recommendations are aggregated into model portfolios for each major region, which support the firms' global equity products. The manager ensures that the Shariah model portfolio includes securities that are members of the Dow Jones Islamic Index or have approval from the Shariah board. This model portfolio is used to drive the live portfolio.
The OSK-UOB Muhibbah Income's allocations are composed of up to 60-100% Malaysia Islamic fixed income securities and up to 40% global Islamic equities. How are these weights determined and how often are they reviewed?
This fund is intended to be a stable, income-yielding fund with the potential for capital gains in the medium to long term. The fixed income portion is given a slight tilt to provide regular income and stability and to provide adequate downside cushion in times of an unexpected or severe downturn in equities.
We take into account the macro environment and global economic conditions in positioning the fund's asset allocation. Top-down perspectives provide some value-added tilts to the portfolios. The top-down assessment of the markets and asset allocation involves a detailed quarterly review of market conditions, risks and valuations to arrive at return expectations across asset classes, regions and sectors in order to establish internal targeted allocations for the portfolios.
In the event that the manager is of the view that equities are attractive in terms of valuations and supported by strong fundamentals, some weight may be shifted away from Islamic debt securities in favour of equities and vice versa. Such flexibility helps to safeguard the investment portfolio.
The fund's financial screens are pivotal elements in the security selection process. How frequently do you perform this analysis and how often would you turnover the fund's portfolio?
Financial screens are run at several levels. At the research level, analysts will run their own sector screens to help generate bottom-up ideas to incorporate into their model portfolio. A second screen is run against the firms' global model portfolio to ensure Shariah compliance in order to compile a global Shariah equity model portfolio. There is no hard and fast rule with respect to portfolio turnover; it is more or less a residual factor to the research process. In general, the firms' global equity funds typically have turnover rates of between 60-100% depending on market conditions.
You have identified three key sectors for the fund: Energy, Healthcare and Technology. What are the key opportunities and challenges associated with investing in these markets? How does your fund manage these?
The three sectors referenced enable us to achieve a fair degree of diversification across sectors that have lower correlation with one another. This enables us to control absolute risk or volatility at the broader portfolio level.
In the case of each sector, there will be differing factors that create opportunities which the analysts will seek to take advantage of. For example in Energy, the sector is broadly benefiting from higher oil and refined product prices. The analyst is currently seeking to identify companies with stronger reserve and production growth as well as higher exposure to refining to take advantage of current market conditions. Each sector will be influenced by its own specific factors, which over time will change.
Could you give an example of a typical trade in your fund and the rationale behind it?
We do not have any typical trade, however, we do have typical style characteristics in our investments that should generally dominate. You will tend to see a focus on companies with market leadership, strong growth prospects and better-than-average profitability. Specific trades will be largely driven by changes to our research recommendations which are bottom-up driven.
Compared to funds that are using similar strategies, are there any differences between your strategy and theirs? What is your element of differentiation?
We will restrict our comments to our fund/strategies.
We are style-agnostic, focusing on finding quality companies at reasonable valuations. These companies should be able to deliver long-term total returns of 15% per annum. Our systematic analysis of companies has consistently generated outperformance, largely attributable to stock selection.
Our portfolio managers are also research analysts for their respective sectors for which they conduct in-depth company research. Company visits are key in our research work. Secondary sources of information from industry studies, sell-side research, attendance at seminars and conferences provide further data. There is consistent and a high level of interaction among sector specialists.
Our portfolio managers perform fundamental and valuation analysis of companies within their coverage. Specifically they:
have a thorough understanding of a company's businesses, its earnings and cash flow dynamics.
are familiar with the industry the company is involved in and monitor developments in the industry as they affect the company's operations and prospects.
assess the quality of the management and its corporate governance practices.
value the company's securities based on a sound and thorough understanding of its businesses, growth prospects and competitive position.
monitor the company's progress, stock performance and update the relevant parties of such developments.
recommend securities for inclusion into, or exit out of holdings as and when appropriate, giving justifications.
How is the fund structured to comply with Shariah principles? How often is this reviewed?
The manager receives monthly updates from Dow Jones, which includes all details for the Index. Any investments made should be from within the benchmark or with the specific approval from the Shariah board. Existing holdings are reviewed monthly to ensure that any changes to the benchmark that may result in a holding becoming non-Shariah are rectified to align with the new policy.
For fixed income instruments, the manager selects from a list of approved Islamic securities issued in the local debt market. All Islamic issuance will have their independent Shariah advisors appointed to ensure that the structuring of the debt issuance complies with Islamic principles. In addition, Islamic principles used in the structuring need to be disclosed in the Information Memorandum.
Is Shariah compliance considered as part of your investment strategy (ie stock selection, industry screening, etc) or risk management approach (ie audit review, corporate policy, etc)?
Absolutely. As described above, the portfolio manager reviews the portfolio to ensure Shariah compliance. Similarly, the firms' compliance teams will conduct an independent check for compliance.
Overall, what have been the key challenges in developing this offering?
In terms of delivering a global Shariah-compliant equity product, there has been no major issue/change to the firms' research process. However, the model portfolio construction process does differ in accordance with benchmark consideration, and the portfolio management process is designed with additional elements to ensure compliance with Shariah principles, namely via the introduction of a screen for compliance.