Says Lai: “Every one of them (the crises) has left a mark on how we look at stocks; has taught us about what a crisis looks like and what we do during a crisis. But none of them changed the fundamental way we look at stocks.”
Tang is the lead fund manager for the Nikko AM Shenton Thrift Fund, while Lai is the lead fund manager for the Nikko AM Singapore Dividend Equity Fund (SGD class).
“For the Shenton Thrift Fund, our one job is to outperform the Straits Times Index and we have done, on average, close to 1% outperformance,” Tang says.
A quick look at the top 10 holdings of both funds shows similar stocks. For the Shenton Thrift Fund, the top holdings are DBS Group Holdings, United Overseas Bank(UOB), Oversea-Chinese Banking Corp (OCBC), Singapore Technologies Engineering, Sembcorp Industries, Singapore Telecommunications(Singtel), Singapore Exchange(SGX), Yangzijiang Shipbuilding, ComfortDelgro and Keppel DC REIT in that order.
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The top 10 stocks in the Singapore Dividend Equity Fund are DBS, Singtel, UOB, OCBC, ST Engineering, Sembcorp, SGX, ComfortDelgro, Yangzijiang Shipbuilding and CapitaLand Integrated Commercial Trust.
Dividends
The Singapore Dividend Growth Fund is a total return strategy with no benchmark. Historically, the fund has delivered 5% to 6% a year. “That’s a fairly good benchmark, bearing in mind the fund does get 5% from dividends, and then we add a bit more for capital appreciation,” Lai says.
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“The dividend fund is unique in Singapore because where we have found the alpha is really about identifying companies that have underappreciated dividend growth and this has been one of the most important things in the last three years,” Lai adds.
Alpha in finance measures an investment portfolio’s performance against a certain benchmark, usually a stock market index, and the degree to which a fund manager has managed to beat the market.
Since the Singapore Dividend Equity Fund has no benchmark, it can be a lot more diversified, Lai points out. At present, close to 25% of the fund is in the three local banks (DBS 8.8%, UOB 8.1% and OCBC 8%). “We don’t want to be overly dependent on one sector because it does go through cycles. The last few years have been very good, but we don’t want to overconcentrate on that sector. Our job there is to look for reputable dividend players in all other sectors. It’s not just the banks which pay higher dividends,” Lai points out.
The fund aims to invest in equities offering sustainable dividend payments with long-term capital appreciation, which are categorised as dividend anchors and dividend growers.
Lai explains: “These stocks already pay some dividends, and we see that they have the potential of raising the dividend payout and dividend yield strongly over the medium term, over three or five years. We will invest in them because the Singapore Dividend Equity Fund will mainly invest in what we call ‘dividend anchors’; 70% to 80% of the fund is invested in dividend anchors, which pay high dividends, are very reputable and very dependable. A smaller 30% of the fund will be invested in dividend growers. These are stocks which are not paying high dividends but have the potential to pay much higher dividends over the near term.”
He adds that the fund is unlikely to invest in stocks that do not pay a dividend and are unlikely to pay a dividend soon. “Some of the high-growth companies say it’s not our strategy to pay any dividends for the foreseeable future. This will not be suitable for the fund,” Lai says.
Market boost
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Investors like choice and liquidity. Chinese and Indian markets have many choices, with thousands of stocks and new listings. Unfortunately, SGX, with its focus on derivatives, has had an accelerated pace of delistings and just one initial public offering (IPO) this year.
On Feb 21, the Monetary Authority of Singapore (MAS) and the Financial Sector Development Fund (FSDF) announced the launch of a $5 billion Equity Market Development Programme (EQDP) to boost the local market. Under this programme, MAS will invest with selected fund managers who have the capability to implement investment mandates with a strong focus on Singapore stocks.
As part of the incentives, there will be a tax exemption on fund managers’ qualifying income derived from funds investing substantially in Singapore-listed equities. There will also be adjustments to the Global Investor Programme (GIP) to support more capital inflows into Singapore-listed equities.
MAS has also announced measures for a smoother path for companies wishing to list on SGX.
“We want choice. So that’s why we are cheering on the MAS EQDP, because they are going to inject liquidity, and they are going to make sure companies come to Singapore to list,” Tang says. MAS envisions a better price discovery process.
“When the $5 billion goes out, fund managers will raise their hands. There will be new players. We welcome it because we think that will create more opportunities. In the last 25–30 years that we have been managing funds in Singapore, we have never had a helping hand from the government,” Tang adds.
Some market watchers believe the pivot to public markets could be associated with challenging returns and exits private equity faces.
“The measures are about trying to better harness opportunities for the equity markets. That’s why we are all excited,” Tang says.
“The Singapore stock market trades US$1.5 billion [$1.93 billion] daily. There are single stocks in Hong Kong that trade US$1 billion a day,” Lai says. “In a sense, the difference is too stark and not befitting a financial centre. The porousness of the market is one thing. People would rather invest in exciting US stocks. What’s lacking in Singapore, unlike markets like the Australian Securities Exchange or KLSE Bursa, is that the superannuation funds in Australia or EPF in Malaysia invest in local stocks.”
Secret sauce
When investing on behalf of their funds, both Tang and Lai believe the key factors to focus on are positive fundamental change and sustainability of returns. “We are likely to see that play out through alpha for the markets,” says Tang. “When you look at our pitch deck shown to our institutional investors, we always have a chart where we have, on one vertical, a positive degree of change, and on the other vertical, sustainable returns, which is something you can find on Bloomberg, We need the best high return on equity [ROE] companies.”
The stock-picking approach is very much a bottom-up method. Tang says the team screens for stocks with around 10 indicators. “The delta [risk metric] comes from the ability of a company to continue to deliver, which is underappreciated by the market. What’s proprietary is positive fundamental change. What we try to do is to form an informed judgment. We do our analysis as fund managers to find out what is mispriced in terms of what and where change is happening, but the market has not picked up on it,” he explains.
And he goes one step further. “One of our highest active share positions, the largest overweight company, is Sembcorp, a utilities company with a fairly simple business and is quite boring. But if you look at the history of the last four or five years, you will probably think this is a growth stock. What we felt that was underappreciated was a strong pivot to renewable energy,” Tang elaborates.
Three years ago, Sembcorp spun off Sembcorp Marineas Seatrium. “We found that the residual utility business was severely undervalued, and it was also a company going through transformation, transforming from brown energy to green energy. They have kept delivering divestments away from coal and brown energy and recycled their capital into investing in green energy. When we met them three years ago, we saw that positive change was taking place. We can actually say that positive ESG [environmental, social and governance] did matter,” Tang says, adding that a lot of editorials on green investments point to their underperformance.
Lai adds: “We look for stocks with consistent growth and a positive outlook. We might even go one step further in looking at the second derivative, like what is not in the forecast or what could be in the forecast in six months’ time or a year’s time, right? What do we see that the market doesn’t see?”
Liberation Day and stock picks
Lai says shortly after Liberation Day on April 2, “we had an ad hoc meeting to discuss what’s going on and what drives the bottom-up stock pick. Interest rates are just one factor. Trade flows are another factor; defence is yet another. We put the macro inputs into a bottom-up process.”
His view is that interest rates have peaked, so the banks may not outperform. The performers that the two funds have picked are quite varied. They come from sectors such as renewable energy, defence and aerospace maintenance.
“ST Engineering has one of the highest ROEs because there is a flight to safety and secure ROE,” Tang says
Liberation Day has provided Tang and his team with the opportunity to reassess the Singapore equity market. The market is looking for the next best thing after US exceptionalism. “Money may not be fully safe in the Magnificent Seven and US Treasuries. Investors are looking for a new home outside the US. I’m not saying Singapore is the best solution, but Singapore has benefited immensely from the safe haven, high dividend flow into our markets. We think that will continue because Singapore is a good example of a beneficiary of unsafe, challenging and testing times.”
The new Singapore service ecosystem will likely embrace service exports such as transport, logistics, data, artificial intelligence, renewable energy and the like.
“I hope one day we get an ROE of 15% for the Singapore market and that the market will no longer comprise 50% banks. DBS has been a rock star, but others will follow. The market’s ROE is high single digits. In our funds, we’ve run a higher ROE compared to the market and there are companies that are investible to drive those returns,” says Tang.
