How can investors and the asset managers serving them get a good night’s sleep? According to Linus Lim, CEO of Phillip Capital Management (PCM), quality financial products beget quality sleep for both parties.
The active and buoyant US market, constantly hitting record highs, has made investors here burn the midnight oil as they stay glued to their screens to place bets on the best entry or exit levels. However, not everyone is able to endure the disruption to their sleep, stemming from the 12-hour time zone difference, over a prolonged period.
In the same vein, “not everyone’s portfolio can be structured that way, to have that kind of volatility”, says Lim in an interview with The Edge Singapore. “What makes sense is to probably have a framework of picking companies and stocks — growth stocks — with a reasonable backing behind them and a reasonable business behind them. That’s the big picture,” he adds.
Enter the Phillip Global Quality Fund, launched on Feb 24. The fund, which will feed into the GMO Quality Investment Fund, ended its initial offering period on Feb 19. According to PCM, a subsidiary of homegrown broking house PhillipCapital, the fund uses a quantitative quality metric that puts together a portfolio of high-quality stocks that stands to win over time with lower risk.
In other words, the fund manager will help investors look for safety and value through quality. Ways to gauge the quality of the stocks include high and stable profitability and a strong balance sheet. The underlying fund has an annualised return of 13.9% so far, and has not delivered any negative year since its inception in 2010, says PCM.
Founded in 1977, GMO is a privately-owned, Boston-based asset management company with assets under management (AUM) of US$59 billion ($77.79 billion) as at Sept 30, 2020.
As a relatively mature investment product type, the fund is but one of a seemingly endless variety that investors can pick and choose from.
According to Lim, what sets this fund apart is GMO’s screening process, which claims to have identified a portfolio of 43 securities distilled from a broad pool of 2,000 companies after four rounds of stringent vetting. This ensures that the chosen portfolio consists only of the most notable names in the key growth sectors of information technology, healthcare and financial services with the best potential for returns.
At launch, the fund’s top 10 holdings are household names: Microsoft Corp (5.7%), Apple (4.9%), UnitedHealth Group (4.9%), Coca-Cola Co (4.4%). Alphabet Class C (4.4%), Accenture Class A (4.0%), US Bancorp (3.7%), Oracle Corp (3.6%), Taiwan Semiconductor Manufacturing (3.5%) and Johnson & Johnson (3.3%).
“It’s a fairly high conviction list,” notes Lim. “It is global but it is also targeted. [There’s] no magic or rocket science to the methodology of going back to fundamentals: cash flow, reasonable growth and reasonable valuation.”
Within GMO’s fund, US equities receive the biggest allocation at 81.6%, which is a higher proportion relative to the 66.1% allocation into US equities for stocks that make up the MSCI World Index.
In a way, this is unsurprising, given how the US market remains the world’s largest and most liquid. European equities in the fund make up 12.9%, versus MSCI World Index’s 19.2%; while those elsewhere make up just 3.4% versus 14.7% for the MSCI World Index. Some 2% is held in cash, ready for quick deployment by the fund managers when the opportunity arises.
From a sectoral perspective, the fund is most heavily committed in IT; some 37% of the fund is invested in stocks from this sector. Healthcare is the second largest sector, with 23.9%. In contrast, MSCI World Index has 22.1% in IT and just 13% in healthcare.
On the other hand, the fund has allocated a mere 6.2% to the consumer discretionary sector, versus 12.2% by MSCI World Index.
The price-to-earnings one-year forecast stands at 20.5 times for the GMO Quality Investment Fund, compared to 25.1 times from the S&P 500 Index and 22.5 times by the MSCI World Index. However, GMO’s fund wins with a forecasted 27.1% return on equity, compared to the S&P 500 Index (21.2%) and MSCI World Index (17.7%).
According to Martin Chong, director of portfolio management (business development) at PCM, the firm has been in talks with GMO since 2019. “We believe that these strategies complement our product offering.” Among PCM’s clients, response to the fund has been positive, he adds.
“When we launch this in the Singapore retail market, we hope to raise as much as possible,” says Chong. “We already have some commitment from institutional investors… We hope we will achieve $100 million AUM within the first year; as always, the more the merrier.”
According to Chong, the fund will also be part of the model portfolio for the Phillip Global Wrap Account (PGWA) in Malaysia, Thailand and Hong Kong. The fund will be available on PhillipCapital’s POEMS online trading platform with a 0% sales charge and an annual management fee of 1.5%.
Hot money euphoria
While investors can always buy and sell individual stocks, these funds play a key role as part of their broader investment portfolio. For one, the professional managers bring about a certain level of mental discipline when making investment decisions.
Lim acknowledges that today, markets are hot and investors are eager to invest in different instruments that will give some kind of return. With the recent rebound in global markets from the drastic crash sparked by pandemic fears early last year, a sort of “revenge investment” mindset is prevalent, adds Lim.
But Lim also warns of the pitfalls of such unbridled enthusiasm. “[We have to be] prudent, to be fairly careful about it as well. Because hot money also means lots and lots of euphoria and that’s what we’re seeing: over-enthusiasm in the market.”
Over the past couple years, certain sectors, such as technology, have outperformed the broader market by multiple folds. Many notable counters soared, prompting more speculators to chase them up higher to often eye-popping levels.
On the other hand, many other stocks in traditional sectors continue to languish, even with solid fundamentals, and they remain discounted by the market. As expected, investors prefer to chase after those stocks doing well, further exacerbating the gap, and enticing even more investors to jump in.
Lim is wary of the growing dissonance. “The winners and losers in our markets seem to be quite bifurcated. It seems like, ‘If you’re not in this, then you have a fear of missing out’, which, in my view, can be dangerous from a market perspective.
“If you’re a CEO running a company, and you have investors jumping in like a mob and then jumping out, I don’t know how you can run your business,” he adds, underscoring his support for GMO’s fund. “GMO is not jumping in and out like a mob and you’re [investing] in companies with other shareholders who are not like that.”
ESG investing, like baking and yield-chasing, sees growing interest
With global interest rates held low for a foreseeable period, investors’ mindsets and behaviours have been adjusting accordingly. For a start, the chase for yield continues, says Linus Lim, CEO of Phillip Capital Management (PCM), adding that some of the funds launched by PCM over the past few years have taken that into account.
“We’ve always looked at having funds with some decent cash flow, so that investors can have a passive income.” Increasingly, there are new demands from clients which Lim, who assumed the apex role at PCM in April 2020, is trying to meet.
Formerly PCM’s director and co-chief investment officer, his promotion coincided with the start of the circuit breaker last year. During those months, many turned to baking, and Lim was no exception. “I baked while getting my sustainability accounting standards qualification.”
When working at the company’s UK office some 15 years ago, Lim sought to bring ESG investing to Singapore. Known then as “ethical investing”, Lim soon realised that the concept was ahead of its time. There was no interest in both the UK and Singapore, save for funds from mosques and churches.
But now, things have changed, he says. “The world has reprioritised certain things. We did a webinar on ESG recently, in conjunction with Phillip Securities, and about 400 people signed up. “I think the conversation is beginning. When I talk to listed companies now, some of them talk about their ESG initiatives. Our responsibility as fund managers is to come up with investment solutions that touch on that.”