Driving success with ESG
Kuala Lumpur-based Kenanga Investors Group (KIG) bagged six awards in the Asia Asset Management Best of the Best Awards 2022: Best Equity Manager, Best House for Alternatives, Best Impact Investing Manager, Best Application for ESG (ASEAN), CEO of the Year (Malaysia) and CIO of the Year (Malaysia).
Executive Director and CEO Ismitz Matthew De Alwis says that environmental, social and governance issues play an important role in the firm’s success. KIG, he says, has begun executing “a full-fledged ESG blueprint within several areas of the organisation”.
“ESG goals can be multi-dimensional depending on the purpose, and as such we believe that a holistic ESG strategy gives clear perspective for all business units and streamlines initiatives across all divisions to achieve the goal. As such, our plan consists of three primary components, namely at the product, stock and portfolio, and firmwide levels,” De Alwis says.
In the area of research, he says KIG ensures all stocks in its portfolio have been subjected to its “rigorous stock selection and investment thesis verification”.
“We purposely seek to exclude "hot stocks" which may carry unacceptable "downside risk." Factors considered include business model and value proposition, management quality, earnings quality, balance sheet strength, industry attractiveness and niche factor,” he explains.
Based on the assessment results, an ESG rating score will be assigned to all stocks in KIG’s investing universe.
“At the post-investment stage, we use our position as shareholders to exercise our voting rights on material resolutions to decide on matters such as proxy contests,” he says.
Strong growth
In 2021, KIG’s assets under administration (AUA) grew by 35.8% to 18.78 billion ringgit (US$4.44 billion), with growth coming from across all asset classes, particularly equities and alternatives.
Equity assets movement recorded an increase of more than 30% from 2020 due to continued interest in the technology and healthcare sectors. Lee Sook Yee, chief investment officer, attributes the growth in its AUA partly to KIG’s investment philosophy.
“As a bottom up stock picker, we believe consistent outperformance over an economic cycle of 3 to 5 years is repeatable by applying bottom up stock picking strategies to identify quality stocks. These stocks are generally undervalued relative to their intrinsic value, or are undervalued relative to their peers and the overall market valuation,” she says.
She says the company’s investment approach involves “a comprehensive research process from understanding industry dynamics to individual company business models and drivers of return on equity”.
“Some of the key areas we look at include management quality, sustainability of the business model, industry dynamics and balance sheet strength. By consistently applying this strategy, our funds have continuously achieved outperforming returns throughout the last three, five and ten years,” she says.
In the area of product development and ESG, the company has introduced new ESG-driven products to support social finance such as the Kenanga Waqf Al-Ihsan, the Kenanga Sustainability Series: Frontier Fund and the Kenanga Sustainability Series: High Yield Bond Fund.
“We are also proud to announce our appointment as Fund Manager for Dana Wakaf Bencana back in November 2021, an emergency relief fund established for the purposes of channelling resources to those affected by climate change-related disasters as well as future pandemics,” he says.
Despite the growth it enjoyed, De Alwis says there were also some key lessons learned in 2021, one of them “not reducing North Asia exposure fast enough when the macro environment turned”.
“We operate in an uncertain environment, hence it is crucial to possess the ability to think probabilistically and to be humble enough to revise our views when conflicting evidence appears. We have thus placed more emphasis on risk management such as having cut-loss reviews for stocks and a more comprehensive process for executing asset allocation views based on macro conditions for all portfolios,” he adds.
2022 Outlook
Lee believes the global economy will continue on its path to recovery this year. However, the growth dispersion between countries could be high as the leaders of 2021 take a step back. Emerging markets look set to pick up while developed markets such as the United States slow from a high base of growth in 2021.
“Market wise, we expect higher volatility in global markets as growth slows while central banks embark on a tightening phase. Region wise, we favour emerging market equities which are earlier in the recovery cycle,” she says.