Alpha generation through thought leadership

No matter how one looks at the performance of a fund – whether it be short-term of one year, medium-term of three to five years, or even across a horizon of over a decade, Principal Asset Management Berhad’s (Principal) Principal Greater China Equity Fund appears to have consistently outperformed its benchmark across various horizons. 

Since inception in June 2007, the fund has grown by 159.76% as of end-January 2023, while its benchmark MSCI Golden Dragon Index has grown by 73.04%. The fund has been awarded best performing Asia Pacific Equity ex-Japan (10 Years) fund in Asia Asset Management’s Best of the Best Awards 2023. 

Principal Malaysia’s Chief Investment Officer (CIO) and CIO, Equities of Principal Southeast Asia, Patrick Chang says the company is “thrilled to receive this recognition”, and shared that one of its main strategies is to have a “rigorous and disciplined investment process that focuses on in-depth research and analysis of companies and industries”. 

“We believe consistent alpha is generated when we achieve “thought leadership” through the early identification of long-term growth prospects of companies. We believe that a thorough understanding of the underlying businesses is crucial to identifying high-quality, undervalued companies with strong growth potential,” Chang says.

Chang says that Principal’s investment approach is characterised by a long-term horizon and a patient strategy that enables its investment team to remain committed to its investment thesis, even when the market is volatile. 

“To avoid concentration risk, we maintain a well-diversified portfolio and actively seek opportunities outside of the benchmark. We continuously monitor and adjust our portfolio to capitalise on changing market conditions,” he says.

Overcoming challenges

He adds that there were three key challenges in 2022. First, was the economic slowdown in China, which Chang says was due to the Chinese government’s efforts to deleverage the financial system and ongoing trade tensions with the US. 

“This created a challenging investment climate as companies faced reduced demand and revenue growth,” he says.

The second challenge was regulatory uncertainties. Chang says during such an environment, where new regulations are introduced frequently, it is difficult to assess the regulatory risks associated with investments, particularly in sectors such as technology and healthcare.

Last but not least, were geopolitical tensions with the US. “This was particularly evident in the technology sector, where concerns around national security led to increased scrutiny of Chinese companies,” he says.

“Despite these challenges, our team was able to navigate the market by taking a selective approach to investing. We focused on companies with strong fundamentals, such as robust cash flows and solid balance sheets. We also focused on areas that are defensive and identified stocks that could remain resilient in a slow growth environment, such as consumer staples and healthcare companies,” he says. 

Investment opportunities

2022 was also a year Chang and his team identified key investment opportunities. Among the opportunities the team saw include renewable energy, technology innovation, as well as consumption upgrade.

He says that China’s commitment to achieve carbon neutrality by 2060 has resulted in a growing focus on renewable energy. “This created opportunities for companies involved in renewable energy generation, such as solar panel manufacturers and wind power companies. As the government implemented policies and incentives to promote the use of renewable energy, we saw significant growth potential in this sector,” Chang says. 

“Overall, our investment process focused on identifying companies that were well-positioned to benefit from the government’s policy priorities and the “common prosperity” policy, while also being mindful of regulatory risks and other potential challenges,” Chang adds.

As market conditions remain challenging, Chang believes that income will become increasingly important in 2023, and yield will remain attractive. “In Asia, we see opportunities in both the equity and investment grade credit space, as the region offers good yield potential,” Chang says.

“Despite the rebound in stock market performance in January 2023, Asia’s valuation remains low, indicating significant potential for growth. This suggests that China’s reopening has not yet fully unleashed its benefits, making Asia Pacific ex-Japan market an attractive option for investors,” he says.

Chang says that his investment team remain positive on Asia and emerging markets over developed markets such as the US, due to their “favourable economic conditions and growth prospects”. 

“Our investment themes for 2023 will focus on Quality, Income, and Sustainability, as we believe that these themes are relevant in the current market environment and align with our clients’ investment objectives,” he says.

“Overall, we remain committed to our disciplined investment process and long-term investment philosophy, providing our clients with a diversified and balanced investment portfolio that meets their investment objectives while managing risk.”