Mutual Fund Performance: Pacific Ex Japan Funds

Fund performance is as of the close of business July 05
Top 10 Pacific Ex Japan Funds (ranked by one-year performance)

Assets Returns
(Size In US$Millions) 1 YR% /3 YR% / 5 YR% / YTD%

T Rowe Price Int:Asia (3,114.3) 73.06 / 183.13 / 246.69 / 30.89
Fidelity SoEast Asia (2,833.4) 68.50 / 200.55 / 253.80 / 34.00
DFA Asia Pac Small Co (120.7) 66.30 / 152.52 / 297.86 / 36.39
iShares:MSCI Malaysia (1,113.7) 64.90 / 93.11 / 129.48 / 30.75
Guinn Atkin:Asia Focus (54.5) 63.10 / 159.72 / 237.99 / 32.95
iShares:MSCI S'pore (1,912.8) 60.1 / 141.48 / 200.49 / 22.1
Fidelity Adv Korea;A (34.4) 59.43 / 240.25 / 228.10 / 38.11
JPMorgan:Asia Eq;A (13.9) 56.97 / 135.93 / 151.90 / 25.58
Fidelity Adv Em Asia;A (87.3) 56.56 / 180.99 / 211.61 / 24.04
TCW:Asia Pacific Eq;I (29.0) 55.57 / 137.24 / 162.71 / 25.02

The above compilation for Asia based funds (excluding Japan) is very interesting indeed. Among the hundreds of funds investing in Asia, these are the creme de la creme. My important conclusions:

a) Brand name power - There is strength and reliability in brand name power. Names like T Rowe Price and Fidelity topped the charts for a variety of reasons. They are more able to attract and retain talent. They have a more extensive and solid management structure to monitor, provide oversight and push through ideas. They have a better supporting structure in economics, currency strategy, big picture strategy, quant people, sophisticated data mining channels, and by virtue of their size, they always get the analysts' first call.

b) When looking at these kind of tables, it is best to leave out those with small asset size. It is much easier to perform well with fund size of under US$50m. I would use that as the minimum benchmarking.

c) iShares - iShares are indexed ETFs designed and run by Barclays Global Fund Advisors. They do very well for their set out objectives. They have two funds in the top 10 because they are indexed country funds. Two out of the top ten performing funds are indexed funds - lends weight to the belief that active fund management generally fails to outperform the index. Those that do are really anomalies rather than the majority.

d) Assess your own investments. Did they outperform the index? How many sleepness nights did you have to endure to get your 50% return? You have no one to scold if you lose 20% of your funds in bad stock selections. Let someone else do the worrying for you. T Rowe Price and Fidelity 's 3 year and 5 year record can't be beat - let them do the worrying for you. They have better weapons to fight the war of attrition. If you MUST do some personal investing because you just have to do it: why not park 60% or 70% of total funds with a solid house with at least 3-5 year track record, and keep the rest for your own investing purposes.

We can outperform the index and even top fund managers over certain periods, eventually over the long haul it evens up a lot. I think people will have a lot less stress by invetsing most of their funds in a good mutual fund. As more than 70% of EPF withdrawers finish spending their lump sum within the first 3-5 years, reinvesting the bulk of retirement funds in a couple of solid funds will ensure for better protection, longer drawdown period or provide for a strong annuity.

Gems From The Pool Of H-Shares Warrants

Now that I got your attention ... There are some great buys available on some of these H-shares covered warrants listed on KLSE. I shall not bore you with my outlook on H-shares, QDII etc... I have ranked the best buys taking into account their valuation and stock fundamentals as well:

Top Tier Buys

a) China Mobile - C3

b) HK Exchange-C1 (this one not H-share)

c) Petrochina -C1

d) Petrochina - C3

Secondary Buys

a) CCCC - C1

b) ICBC- C3

c) China Mobile - C1

d) China Life - C1

Should just buy and hold these suckers till expiry.

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

The Star highlighted the relative property values in the region. Basically the entire series of articles was to highlight how "cheap" Malaysian property prices were. As higher end prices zoomed to stratosphere in Singapore, there was some spillover into KL and Penang high end as well. In the table compiled by JLW and OSK on regional comparisons among luxury condos are the current average psf in ringgit (usd):

Kuala Lumpur 560 (164)

Singapore 4,616 (1,357)

Bangkok 714 (210)

Jakarta 425 (125)

Hong Kong 5,563 (1,636)

Shanghai 1,225 (360)

Beijing 646 (190)

What would be useful is to look at GDP per capita to get a gauge on income per person. Its not exacting but a good indicator (in USD).

Malaysia 10,400

Singapore 29,700

Thailand 8,300

Indonesia 3,700

HK 36,800

China 6,200

Now it would be easy to look at GDP per capita in usd / psf in usd to get some interesting ratios:

KL 63.4x

Singapore 21.9x

Thailand 39.5xx

Indonesia 29.6x

HK 22.5x

Shanghai 17.2x

Beijing 32.6x

The lower the ratio, the more unaffordable it would be. Obviously, KL sticks out like a sore thumb, its "cheap" and "affordable" no matter how you cut it. What's interesting is how expensive and unaffordable the luxury condos are in "poorer nations". Which is to say when it gets to highly unaffordable levels, safe to say that the bulk of purchasing involved foreign buying and/or speculation.

Still, why is Malaysia so cheap la? Is this the best buy story for the decade? Well the short answer is NO. The long answer is also NO. And here's why:

KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

A "poor" country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Jakarta, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped. If you want KL prices or Penang prices to shoot higher, ask the politicians to double the population of KL or Penang. We have to have people bumping into each other all the time while walking on sidewalks, then our property prices will surge. We have to double the time we spend travelling to work, then our property prices will surge. Good tradeoff?

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, New York, etc... KL is neither here nor there. What about Bangkok? It certainly is not financial center. Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it is the center for a country with a very decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, India, South Korea. Decent population size means critical mass achieved in many areas, esp domestic demand. We need Malaysia to move quickly from 26 million to at least 60 million. Mahathir was right after all - throw away your condoms and let's procreate like there is no tomorrow, so that we can have a better tomorrow!

Then you can have some good ripple on effect on real estate values. If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries? Hmmm... I can think of Islamic Finance as the one area where we could adopt the "blue ocean strategy". Our MSC achieved only 10% of what we set out to do. Our main revenue comes from oil & gas, plantations and other soft commodities - they are not high value add industries with the exception of oil & gas.

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not that crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Stockholm, Helsinki, ..etc.. you will find that good infra is a good thing but does not necessarily translate to stratospheric real estate prices. Infra wise, KL is better than Bangkok, Jakarta, Mumbai but we still lag their real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land. Now, we are extending into IDR as well. The picture is so clear. Commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change.

Foreign investors and/or foreign speculation can drive real estate values up. But they need to be convinced of more upside. Just consider the factors cited, Malaysia does not look like having good upside or remotely standing a chance of catching up to their neighbours, so why would foreign property investors dive in? We may see some interest in IDR as there could be some decent upside in store but its limited at best.

At the end of the day, cheap real estate is not a bad thing. It improves our affordability. It helps to attract FDI in particularly for industries where land is a big cost factor. There is NO Asia average median real estate pricing where we all gravitate to. We will stay where we are in the pricing curve unless one or more of the factors above changes significantly for Malaysia. Short answer NO, long answer also NO.

KLCI At 1,600 By Year End

Finally, after debating in my head for the longest time, this is my new target for KLCI. First and foremost, I have to be convinced that the global equity markets platform is OK: and they are. While major markets have been wrestling with rising rates (except USA), most are just looking at max one rate rise for the rest of the year (ECB, UK). BOJ should do at least one, maybe two, but from where they are at now, that's nothing, in fact it shows the return of Japan's consumers and the benefits of having an undervalued yen for so long. Japan's markets should do even better over the next 6-12 months.

But does that bode well for KLCI, after all, its the second best performing bouse in Asia already in the first half. Nobody can touch the China markets, but the KLCI is up there with Hang Seng. The HK market had a brilliant run. You don't get good prolonged runs if you do not have the necessary catalysts. HK's allure was prompted by the swift developments in China's QDII, which brought up H-shares and will boost buying in HK shares as well now that new QDII funds are allowed to do that. HKSE topped the world in IPO raised over the last 12 and 18 months, surpassing London and New York. That's significant. Although there will be big IPOs heading for Shanghai bourse over the next 12 months, the wheels are in motion. HKSE is boosted by their enormous warrants market as well, ticked over by H-shares warrants. That derivative market has now reached the status as being an excellent platform to play the China markets without the capital hurdles of investing in China. There is a growing realisation that you don't need pure China stocks to get into the China plays. Many HK stocks have a decent China exposure and their valuations are less than half that of China companies - throw in the fact that they are more professional and no restrictions on capital movements, HK shares have found a new lifeline.

After two halfs of excellent performance by the KLCI, there are more doubters as to whether the market is sustainable. Looking at earnings valuations, it is only fairly valued. Are there bubbles, not at all, just look at the broader property markets: there is some froth in the higher end but its not excessive at the moment. Inflationary concerns are there but we still have a strong hold on controlled items esp on necessities. Bank Negara has improved the country's balance sheet scorecard. We now have reserves at 11% of GDP (while other Asian nations are at only 2%-3% of GDP, other than China), way too much if you ask any economists, but that has removed anyone silly enough to try to short the ringgit. The base currency outlook is a very important guiding factor for equity investments. Ringgit is headed the right way. I am looking at 3.30 by year end and 3.10 as the high in 2008. The stronger ringgit significantly reduces imported inflation. Wage growth has been good and will still be good for the next 2 years.

Local investors have largely shown lower participation rate in Malaysian stocks after the index has gone past 1,300. Even local institutions have done the same. However, trends have indicated that local funds have stopped taking funds from the table, and in fact has readied themselves to re-enter the bourse in the second half. EPF has stopped foreign investing as of last month.

I forsee a highish range for oil prices for the next 6-12 months which ties in nicely with the oil & gas theme. US70-85 would sustain the expansion to go for deeper wells and tougher areas. Look for stocks with capacity and unique assets. Higher oil prices on balance sees Malaysia as a net beneficiary. The other natural resources / plantations outlook are still pretty good (oil palm and timber).

Upcoming elections, enough said. Upcoming budget should see a generous reduction in personal tax rates, and maybe corporate rates. Better budget balancing via oil royalties and tax collection methods would allow for those cuts.

IDR wheels are in motion and we cannot underestimate the economic multiplier effect once that moves on. There is still a general disbelief among local investors on whether the CI deserves to be at current levels, ... don't even tell them at higher levels. If we were to look at the Top 50 market cap companies in 1996 and compared them to the current crop in 2007, what are the differences. Huge... top companies are now significantly more professionally managed. They are more regional and global in strategy and planning. Even GLCs have made large steps to improve accountability and returns. Just look at IOI Corp, Genting, Petronas ... the way they were in 1996 and now.

More significantly the connected, political counters of the past such as Renong and Idris of the 90s are now no longer. Even if you are political and connected, you have to deliver some sort of results - look at MRCB, Media Prima, Ranhill, UEM World ... Sure there are still connected counters who run on pure gas and hot air, but they no longer take the centerstage. Its an evolvement process, and its good.

Finally, the one stumbling block for foreign investors, which has left a very sour taste in the past, has now been removed substantially - capital controls. While foreign investors have bashed up and criticised countries with capital controls in the past, now there is a new perception and understanding - the countries least affected by 97 implosion were China and India, with hardline capital controls. Hence the aggressive build up of foreign reserves over the last 5 years by most Asian countries. The experience has shown that some managed control is preferred than an totally open current account management, esp among smaller countries.

So, I am firmly of the opinion that local investors have been too pessimistic on Malaysian stocks and the inherent economics. Its hard to change your mind when many have been so fixated on the transgressions and excesses of the past.

Additional Lessons From 97 Implosion

a) You need not subscribe to IMF's prescription to survive well. Malaysia's strategy using capital controls worked well. However, Malaysia may have held onto the capital controls strategy for a wee bit too long - should have been better to remove it in early 2005. That would have hasten recovery and solidify the global competitiveness of value driven industries, instead of subsidising local natural resource / plantations companies.

b) Most of the affected Asian nations owe a huge huge debt to Japan. It is not Japan's style to demand bouquets or attention, but the mutual congratulations and backslapping going on in many Asian countries now that good economic times are back appear to be showing a lack of humility in many of Asian political leaders. Japan's Ministry of Finance provided US$42 billion in emergency funding to bail the affected Asian nations to ensure short term liquidity for the affected countries. The EU chipped in US$7bn while the US threw in US$12bn. We also should remember that at that time Japan was still in the midst of its 13 year prolonged bear market. We don't hear of the gratitude ... we hear of how each country did it his/her way ...

c) Broader understanding of FDIs. Some foreign direct investments are to stay, build industries and create jobs. Some came for a joyride.

d) An unspoken lesson learned by all Asian central bankers is how helpless US and EU central banks, the IMF and World Bank, collectively were in tackling critical global capital flow issues. Maybe they cannot help that much because its beyond their ability, or maybe the gravity of the problems were not high on their priority list. The 97 implosion quietly brought Asia closer together, of how interconnected their economies are, and the need to work together more to better withstand the cruel opportunistic financial players. The coincidental rise and rise of China as the outsourcing capital for the developed world actually "saved" a number of the affected Asian countries. The rise of China did not kill off the smaller developing Asian economies as some may have previously predicted. In fact, the indirect lessons were the importance of the reassuring quiet hand of Japan and robust economic engine of China, and how they brought Asia up swifter and closer together at the same time. Its not spoken much as it is regarded as politically-incorrect, but we all know better.

The Little Bull Terrier Again

Will resume trading tomorrow, the important points in Ekovest's proposal:
a) a market valuation of RM2.0bn by Chesterton
b) a discount of 28% on the purchase consideration

Considering that there is another caveat that the SC will have to OK the independent valuation as well. The SC's valuation cannot be more than 15% lower than the RM2.0bn figure. The 240 acres will be developed as part of the Master Plan for Danga Bay land as follow: 48 acres Financial Center; 70 acres Villa Precinct; 57 acres Commercial Center; and 65 acres for Promenade. Based on the proposal, development period will be over 15 years with a GDV of RM19.2bn. Of the 240 acres, approvals from Majlis Bandaraya JB has been obtained for 176 acres of development.

Key point is the RM2.0bn valuation, which can be said to be very conservative considering it has to be approved by SC at the end of the day. That makes for a very rough RM105psf for the waterfront property. Now, of course we are talking of the super prime landbank, but the repercussions are substantial for the following companies with super-prime landbank in similar locations:

Super-prime (within 10km radius from causeway)
Danga Bay 1,380 acres
Tebrau 1,012 acres
KPRJ 1,148 acres
UEM World 15,000 acres

Then there are those within the radius but no water frontage:
Gamuda 1,200 acres
Mulpha 800 acres
Khazanah 1,00 acres

The proposed valuations should set off feverish negotiations for more deals. The valuation of RM105psf compares very favourably to the rising interest as the previous transaction was the RM65psf which AEON paid back in February for a parcel in Nusajaya - mind you this parcel is quite inferior compared to Danga Bay. Can expect reports revaluing the related companies, plus you will see more foreign companies signing off on actual deals to buy property and/or land in IDR. Once more and more benchmarks have been set, the rest just falls into place.