Apart of introducing the traditional three model portfolios (i.e. THEMATIC, GROWTH and DIVIDEND YEILD), we have also added another two Modern Portfolio Theory (MPT) based portfolios under our “On Our Portfolio” series for 2017. For a start, we have the portfolios with funds 66-79% invested in view of the potential higher volatility post Donald Trump’s inauguration. All these portfolios will be reviewed on a monthly basis. The mid-and-smallcapitalisation stocks’ selection remains our key focus on the On Our Portfolio series. Besides, our invested stocks also partially mirrored our 1Q17 strategy outlook which we believe the market is likely to be volatile and remain in a range-bound mode.
Volatility remains the name of the game in 2017. We believe the market will likely remain volatile in view of potential aggressive rate hike in the US. Besides, Trump’s presidency could start a combative phase with US major trading partners such as China and Mexico. The underlying market conditions, meanwhile, appear mixed with relatively low excess liquidity in the domestic banking system remaining a concern. While the weak Ringgit performance is set to continue to influence the domestic investment sentiment, the emergence of a General Election (GE) theme play could potentially uphold the local equity market. All in, given the uninspiring corporate earnings growth ahead, we reckon that 2017 could be another range-bound year with a year-end index target of 1,732. We continued to see the Plantation as well as the Oil & Gas sectors as potential dark-horses, especially the former due to the rising CPO price trend. Besides, trading/investment opportunities could potentially arise under a few tactical theme plays such as; (i) Export or Strong US dollar, i.e. Plastic packagers and Glove manufacturers, (ii) laggards or fallen angels, and (iii) GE plays.
Reiterate our three model portfolios…...Moving into 2017, as usual, we will continue to introduce our traditional OP model portfolios that are based on three different investment themes, namely Thematic (aggressive), Growth (balance) and Dividend yield (conservative) with an initial virtual capital of RM250k each. All these model portfolios are on discretionary mandates with a single stock limit of not more than 30%. All the portfolios will be based on an absolute total return measurement with the aim of outperforming the FBMKLCI and 12-month fixed-deposit rate of 3.1%. All three model portfolios’ criteria remain unchanged where the: (i) Thematic portfolio will be focused on stocks that have more than 10% potential total return and potential theme-play candidate, (ii) Growth portfolio will focus on companies that have less than a 1.0x PEG ratio with consistent dividend pay-out, and (iii) Dividend yield portfolio emphasis on investing in high dividend yield companies, which have more than 4% indicative 12-month dividend yield. In short, we are investing 64-74% of the RM250k allocation to each portfolio (please refer to overleaf for details) for a start and will review the portfolio on a monthly basis. Having said that, if there are any changes in our portfolio during the month, we will issue a separate report to update followers. …..with additional two new model portfolios based on Modern Portfolio Theory. To make for more efficient investment decisions, we have decided to introduce two more benchmark model portfolios that are based on the MPT strategy with an aim to seek the maximum return or minimal risk under a group of stock selections. The two MPT-based model portfolios mainly consist of a combination of the big-mid-and-small-capitalisation companies as well as a mix of both aggressive and conservative stocks (please refer to overleaf for details). There are only two constraints in the portfolios, namely (i) single stock limit of not more than 30% and (ii) optimised the portfolio return/risk at the maximum/minimum level. These portfolios, meanwhile, will be reviewed on a monthly basis and the current month portfolio performance will be the key vital to determine the allocation (of each stock) for the following month. We believe these MPT-based model portfolios could provide an additional investment tool to investors as well as market direction guidance moving forward.
Outstanding historical performance. Our OP portfolios (i.e. Thematic, Growth, and Dividend Yield), which were based on discretionary investment approach, have performed well since the inception in 2013. Indeed, it has outpaced the benchmark FBMKLCI by more than 15% in CY13, CY14, and CY15. These portfolios, however, faced a great challenge in CY16 as a result of an inappropriate stock weighting allocation and passive trading approach. The historical performances are shown in the following table.
Introducing another two model portfolios based on the Modern Portfolio Theory (or The Markowitz Mean- Variance Model). In view of the increasing market volatility coupled with a wider trading band, investors are set to face a great challenge to generate extra returns in investment. Thus, to make for more efficient investment choices, we have decided to introduce another two model portfolios that based on the MPT strategy with an aim to seek the maximum return or minimal risk under a group of stock selections. MPT basically is a mathematic framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. Its key insight is that an asset’s risk and return should not be assessed solely on itself, but by how it contributes to a portfolio’s overall risk and return, according to Wikipedia. Moving forward, while our OP portfolios will continue to focus on the mid-to-small capitalisation stocks recommendation, we will adopt the MPT strategy to minimize the risk while maximizing the return in order to make our investment decision more efficient. The two MPT-based model portfolios mainly consist of a combination of the big-mid-and-small-capitalisation capitalisation companies as well as a mix of both aggressive and conservative stocks.
In our MPT portfolios, we have assumed that retail investors tend to re-allocate their funds based on the latest market direction that favours either big cap (FBM30 ETF); safe heaven (KLCC REIT); growth (OCK, PESTECH, PMETAL, SLP), thematic (AIRASIA, SKPETRO, TAAN, PMETAL, OCK, PROTASCO), and/or dividend yield theme (PWROOT, AEONCR, PROTASCO, PMETAL). Besides, we have also set a single stock limit of not more than 30% as well as to optimise the portfolio return/risk at the maximum/minimum level. By applying such criteria, the back-testing results (based on the past 6- month monthly closing price) for the above-mentioned group of stocks are shown in the table below.
What MPT suggested to January 2017 portfolio…..Based on the respective stocks’ performance in our selected poll of stocks in December 2016, the MPT suggested that investors who are seeking a higher return should allocate 10% of their funds in KLCC REIT as well as 30% each in PESTECH, PMETAL and SLP. The proposed portfolio appears reasonable given the favourable risk/reward ratio of 1.0x. Alternatively, investors who are more risk averse could allocate the majority of the funds to the relatively fewer volatile stocks, such as FBM30 and KLCC REIT, with the balance in the mid-and-small-cap stocks. The risk averse portfolio, however, is less compelling in our view given the unfavourable risk/reward ratio.
Source: Kenanga Research - 17 Jan 2017
