3/07 4 May 2007

Managing An Array of Funds

Dear Investors, My colleague, Tan Ming Han, who has been managing the EPF discretionary funds, has just left the company for a new challenge. His departure is a great loss to us as I can see vast potential in this young bright fund manager. During my short encounter with him, I notice he possesses a few basic elements to be a good fund manager - unassuming character, willingness to take calculated risk and unemotional during the recent mini bull. He has made fairly good profit for our clients this year. Fund Manager for Discretionary Accounts From where he departs, I will double up as the interim designated fund manager for those EPF discretionary accounts. Although it is not new for me to manage a large number of accounts concurrently, the landscape is however different. Not only that I have to deal with a much bigger pool of accounts now but also accounts which are of much smaller fund size. I will share with you the problems and difficulties faced by fund managers in managing a large number of accounts. In this way you will have a better understanding of the problems and shortcomings faced by fund managers in managing a cluster of funds. Fund Management Constraints While the basic job function of a fund manager is to decide on market direction, sector weighting, stock selection and specific stock weighting, there are several constraints which a fund manager will face when making asset allocation. The common constraints include risk profile of investors (i.e. conservative, moderate or aggressive risk profile), size constraints (eg large accounts should avoid thinly traded stocks and small accounts may not be suitable to buy highly priced stocks such as BAT), preference constraints (eg ethical or syariah requirements) and the changes in cashflow due to further injection of fund by certain investors. I was told there are a few clients who have imposed specific requests such as no losstaking. I do know of a client who has a specific list of stocks which we are not to touch as he is a senior partner of an audit firm. There are also some who have some unique preference for certain stocks.

Meeting Clients Needs Although clients have given us specific authorizations to manage their funds on a full discretionary basis but it is not easy for us to meet the needs of each and every clients due to their heterogeneous background. Managing clients expectation is a major challenge for asset management companies. We have to strike a balance between meeting clients expectation and ability to manage an array of accounts efficiently so that more time can be spent on studying the market and analyzing quoted companies. Like Restaurant Chef Managing a large number of individual accounts is like a chef cooking in a restaurant serving hundreds of customers at the same time. The chef cannot prepare a dish plate by plate, he has to think of a way to mass-produce in a large frying pan without compromising the taste. He cannot produce home-cook food one at a time while hundreds of customers are waiting in the dinning hall. In our case, only the larger funds from institution will be managed separately. Smaller funds are pooled together and managed as a single fund. Using Model Portfolios We use model portfolios to assist us in managing a large number of small accounts. We categorise these accounts into three sizes i.e. small, medium and large accounts. We also have a selected list of stocks which we will invest for these accounts together with the corresponding percentage weighting. Luckily for us, most of our investors are in the moderate risk profile with a handful in aggressive risk profile. In this way, the funds are placed under six broad categories. For small accounts we will have lesser number of stocks (4-5 stocks), medium-size accounts can have about 10-12 stocks and larger accounts will be given up to 20 stocks. We believe in diversification as diversification reduces portfolio risk. The model portfolios are designed for moderate-risk accounts. In the case of conservative accounts, we tend to have a lower equity weighting when the market is relatively high (like the situation now) and we will reduce the stock weighting on certain higher-risk stocks and put a higher stock weighting on blue chips. As for aggressive accounts, we will do the opposite i.e. higher equity weighting with lower stock weighting on blue chips but higher stock weighting on high growth stocks. By adjusting the stock and equity weightings of each fund, we vary the portfolio beta of each account to meet the risk profile of investors. Strong Infrastructure Back-up Once a change in the model portfolio is made I will pass it to a junior fund manager to implement the changes on asset allocation and order execution. Purchases of stocks are made in bulk and allocations are based on book entry basis for each account.

It is fortunate that we have an excellent pre-trade computer system which will identify accounts that have specific restrictions and prevent purchase of unwarranted stocks for the wrong accounts. This risk management system is developed in-house by Phillip Capital. Such pre-trade compliance will prevent us from making human errors such as buying gaming, tobacco and liquor stocks for ethical accounts, and purchase of other unwarranted stocks where clients have specific restrictions. This computerized control is very useful in managing large number of accounts. In this way, we are not afraid of handling even larger number of accounts with similar risk profile. We treat each account as a member of a large portfolio.

Ang Kok Heng, CFA Chief Investment Officer Email : kokhenga@poems.com.my