Investment Manager:

CIMB-Principal Asset Management Berhad

(December 2013)


How has the Fund performed recently compared to its peers and are there any particular stocks or areas where it is performing well?


During recent months the Fund has performed in line with its comparative index, despite challenging and volatile market conditions. We have sold our exposure in ASEAN countries and gradually increased weights in Hong Kong/China.


The US Federal Reserve’s plans on tapering of monetary policy continue to be one of the biggest movers on world markets. If and when the tapering does begin, what effect is it likely to have on Asia-Pacific markets?


Asia Pacific markets are likely to fall if the Federal Reserve (Fed) announces a plan to taper QE. The Fed is likely to announce a broad time-line if it decides to taper and markets will start to discount the tapering once they are fairly sure of the time-line. As such, by the time the tapering actually happens, the bulk of the decline may have taken place.


How will this affect your strategy for managing the portfolio?


We believe QE is running its course in Asia Pacific markets. Markets are preparing for the eventual withdrawal of liquidity by the Fed and we are seeing the effect of this withdrawal on those markets, as evidenced by markedly poor performance compared to developed markets since beginning of this year. Withdrawal of liquidity means markets will be more discerning and will not follow a herd mentality as they have done in the past and chase growth. Markets will place more emphasis on long term fundamentals from now on. This is a great environment for stock-pickers like us.


For much of this year emerging markets as a whole have been struggling with capital outflows. Has the Asia Pacific region had the same problem and to the same extent as other emerging market regions?


The Asia Pacific region has continued to see inflows in 2013. ASEAN countries saw outflows but this was outweighed by inflows into the North Asian Market (ex Japan).


There are also major worries in the region about falling local currencies. Could you explain, in simple terms, how local currency problems affect investments in a particular country or region, and specifically how, if at all, it has influenced your investment strategy for the Fund?


A local investor investing in his/her own domestic market could be oblivious to currency movements. However, this is a pan-Asian fund and the fund is denominated in USD. Currency is an important component and factor determining the overall return of a fund invested in many different underlying currencies. For instance, the Jakarta Composite Index (JCI) return is up about 2% YTD, measured in IDR. However, it is down about 13% in USD terms. This is because the IDR has fallen about 15% against the USD. We analyse companies on a total return basis and focus on those benefiting from a falling domestic currency (if any). Conversely, we avoid companies that have USD costs but revenues in domestic currency.


Many investors are concerned about the continuing struggles of the Chinese economy. However, are there still worthwhile investment stories there regardless of the pace of economic growth or other market concerns?


In most markets there are well managed companies which can take advantage of an adverse situation and turn it into a winning strategy. This is also the case in China. For instance, companies with good online sales in China have been doing well and taking market share from competitors in an otherwise tough retail environment that has been seeing slower growth.


Are you confident of Beijing’s ability to deal with the problems facing the Chinese economy and if so, when do you see the country’s economic growth reverting to its previous very high levels?


Many issues in China were because the economy was originally centrally-planned and is transitioning into a market-based economy. Like all reforms there will be initial pains until the measures bear fruit. For much of the last few decades China has been building infrastructure and using fixed asset investments (FAI) as the primary engine of growth. Returns on FAI were initially high. However, marginal returns have fallen at an accelerated rate in recent years as too much FAI turned into over-capacity. China’s new leaders understand the issues and are embarking on reforms to turn the focus away from FAI. Concentrating on high growth was the wrong strategy and has been partly at the root of the current malaise. We believe growth in China will slow down to around 6% to 7%. In the short term we will see adverse adjustments (this process has been ongoing for the last 12 to 18 months) but this will be at a more sustainable pace and we will see less boom bust cycles.


Growth appears to be slowing in other Asian nations as well. What strategy do you take when all your investment markets are showing slow growth?


Growth will be difficult in the next 12 months as many Asian nations can no longer rely on easy monetary policy or fiscal spending to boost growth. In fact, many countries are seeing the beginning of a tightening cycle. In addition, debt burdens are forcing governments to scale back on fiscal spending. In this environment, we are cautious on the corporate earnings outlook and wary of companies with high earnings expectations. We will avoid paying growth with low earnings visibility. Dividends have become a larger part of total returns in a slower growth environment. As such, one of our strategies is to invest in high dividend payers.


You have previously said that you expect 2014 to be an important year for Asian countries to implement structural reforms to help promote sustainable growth rates. What will these reforms mean for investing in the region?


The measures recently announced by the Chinese government are good examples of reforms that will be positive for growth in the longer term. These measures - interest rate de-regulation, property tax reforms, reducing the size of state-owned enterprises (SOE) through higher payouts, letting market mechanism determines prices etc - are necessary to allocate resources effectively and efficiently. In the long term, if resources are allocated efficiently, growth will be promoted.


How do you see the prospects for the Asia Pacific region in the coming three months?


In the coming three months, markets in Asia Pacific region will remain on the same track we have seen for most part of this year – one step forward and one step back - and will end largely flat.


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