KEY POINTS:

• We evaluate the investment strategy, historical track record, resiliency as well as annual expense ratio of Kenanga Syariah Growth Fund as compared with its benchmark, FBM Emas Shariah Index and some well-known top performing peers, including CIMB Islamic DALI Equity Growth Fund, Hwang AIIMAN Growth Fund, Pacific Dana Aman and Public Islamic Sector Select Fund.
• By having higher exposure in the consumer sector and holding more cash during market uncertainty, the Kenanga Syariah Growth Fund has demonstrated lower volatility and higher resiliency.
• Even though Kenanga Syariah Growth Fund is prohibited from investing into the conventional finance and banking sector, its performance has still outperformed FBM KLCI and is comparable with other top performing shariah non-compliant Malaysia equity funds..
• With its excellent historical performance, higher resiliency and sound investment strategy, we believe that Kenanga Syariah Growth Fund should be one of the top picks for investors who want to invest into Malaysia equity market.

Many investors, especially non-Muslim investors, seldom pay attention to shariah compliant funds due to the misconceptions like:

• A shariah compliant fund is only suitable for Muslim investors.
• A shariah compliant equity fund tends to underperform a shariah non-compliant equity fund as it is prohibited to invest into the conventional finance and banking stocks, which generally distributes decent dividends and are the major market movers with their large market capitalisation.

In this article, we evaluate the investment strategy, historical track record, resiliency as well as annual expense ratio of Kenanga Syariah Growth Fund as compared with its benchmark, the FBM Emas Shariah Index and some well-known top performing peers, including

• CIMB Islamic DALI Equity Growth Fund
• Hwang AIIMAN Growth Fund
• Pacific Dana Aman
• Public Islamic Sector Select Fund

Is The Investment Strategy Sound?

As a shariah compliant fund, Kenanga Syariah Growth Fund is prohibited from investing into securities that engaged in the following activities or producing the following categories of products:

• All conventional banking, insurance and financial services
• Gaming
• Alcoholic beverages
• Non-halal food products
• Interest bearing money market instruments
• Any further restrictions as may be determined by the Shariah Advisory Council of Securities Commission Malaysia and/or the Shariah Adviser of Kenanga Syariah Growth Fund from time to time.

As stated in the prospectus, Kenanga Syariah Growth Fund aims to invest in undervalued stocks but does not practice a targeted asset allocation and does not differentiate between growth or value stocks, small-mid cap or big-cap. However, studying the monthly fund factsheets and annual reports reveals that Kenanga Syariah Growth Fund concentrates less on trading/services sector and it prefers to invest into consumer, oil & gas, and plantation sectors as compared with its peers.

On top of that, Kenanga Syariah Growth Fund has consistently held 25% - 45% of its holdings as cash since June 2010. During the market crash in August-September last year, Kenanga Syariah Growth Fund has gradually increased its cash holdings from 32.6% in August 2011 to 46.6% in November 2011 in order to preserve its capital. As of end February 2012, cash holdings of Kenanga Syariah Growth Fund were reduced slightly to 38.9%.

Chart 1 shows the top 4 sectors and the cash holdings that Kenanga Syariah Growth Fund and its peers were invested in as at their latest financial year end (FY). Although the financial year for each fund ended at different months, it still gives us an idea of the respective Fund Manager’s preferred sectors.

CHART 1:

*CIMB Islamic DALI Equity Growth Fund: FY ended 31 May Hwang AIIMAN Growth Fund: FY ended 31 August Pacific Dana Aman: FY ended 31 March Public Islamic Sector Select Fund: FY ended 31 May Kenanga Syariah Growth Fund: FY ended 31 December

We believe that by diversifying its holdings away from trading/services sector to the non-cyclical consumer sector and having higher cash holdings, to some extent, have reduced the volatility of Kenanga Syariah Growth Fund and cushioned it from market downturns. Further study on the historical performance and resiliency of Kenanga Syariah Growth Fund supports our view.

Outperformance Since 2008 Global Financial Crisis

CHART 2:

The investment strategy that Kenanga Syariah Growth Fund (i.e. having a higher allocation to the non-cyclical consumer sector and cash) adopted over the years has resulted in sound performance.  As Chart 2 shows, Kenanga Syariah Growth Fund has significantly outperformed

• FBM Emas Shariah Index
• CIMB Islamic DALI Equity Growth Fund
• Pacific Dana Aman
• Public Islamic Sector Select Fund

As Public Islamic Sector Select Fund launched on 13 November 2007, we select end December 2007 as the start date for analysis due to data availability consideration. Among its peers, Hwang AIIMAN Growth Fund is the only fund that was able to perform better than Kenanga Syariah Growth Fund (from October 2008 to May 2010). Despite this, Kenanga Syariah Growth Fund managed to outperform Hwang AIIMAN Growth Fund again, even as the market crashed in August last year.

Preserve Investors’ Capital with Higher Resiliency

CHART 3:

CHART 4:

Other than having an excellent historical track record, Kenanga Syariah Growth Fund has also preserved investors’ capital well during the 5 market downturns that we identified based on the FBM Emas Syariah Index (shaded in red in Chart 2). As Chart 3 and Chart 4 show, the magnitude of decline of Kenanga Syariah Growth Fund, especially during the 2008 global financial crisis was much less than FBM Emas Syariah Index and its peers, thanks to its larger holdings in the non-cyclical consumer sector and cash that supported its high resiliency.

High Annual Expense Ratio Is a Potential Drawback

Expense ratio takes into account all the expenses that a fund incurs, including management fee and administration costs on a yearly basis. As these expenses are deducted from the asset value of a fund, the lower the expense ratio, the better it is for investors, because inventors pay less. Relatively, the annual expense ratio for Kenanga Syariah Growth Fund is much higher as compared with its peers (refer to Table 2). However, since the performance of Kenanga Syariah Growth Fund has factored in the higher expenses, this means that the higher expenses have been justified in the past given the outperformance of the fund. The high expense ratio will be a potential drawback if Kenanga Syariah Growth Fund delivers sub-par returns going forward.

Gauging Risk and Returns Together

If the rule of “high risk, high returns” holds, then a fund with higher returns may expose investors to higher risk or volatility. So, is Kenanga Syariah Growth Fund with higher returns exposing investors to higher volatility?

Gauging risk and returns together via the Sharpe Ratio and Risk Returns Ratio show Kenanga Syariah Growth Fund has the highest 3 year annualised returns and the lowest 3 year annualised volatility. Risk Returns Ratio and Sharpe Ratio shown in Table 3 could be interpreted as follows: an investor who invested into Kenanga Syariah Growth Fund over the past 3 years gained 3.10% returns or 2.76% excess returns for every percent of volatility that they stomached. Compared with its peers which generally provided 2% or lower returns/excess returns for every percent of volatility, Kenanga Syariah Growth Fund definitely did better in terms of risk-adjusted returns.

Overall Fund Ranking

Table 4 shows that Kenanga Syariah Growth Fund ranks number one on an overall basis by outperforming in terms of the performance, resiliency as well as risk adjusted returns. Again, by having higher exposure in consumer sector and holding more cash during market uncertainty has helped the fund achieve lower volatility and higher resiliency. Moreover, even though Kenanga Syariah Growth Fund is prohibited from investing into the conventional finance and banking sector, its performance still outperformed FBM KLCI and is comparable with other top performing shariah non-compliant Malaysia equity funds (refer to Chart 5).

To conclude, with its excellent historical performance, higher resiliency and sound investment strategy, we believe that the Kenanga Syariah Growth Fund should be one of the top picks for investors who want to invest into the Malaysia equity market.

CHART 5:

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