CHALLENGING TIMES AHEAD FOR S'PORE EQUITIES

The Singapore stock market has been on a bearish trend for the past few years. Weakness in global economies, a technology meltdown, and deflating prices have driven the prices of stocks down. The Straits Times Index has fallen by almost 50% since the start of 2000 till end March 2003.

Fund managers of Singapore equity funds have not had an easy time during this period. According to Lipper, there are 15 such funds offered here and average returns over the last one and three years have been poor. Over a one-year period ending March 03, the average return was a loss of 26%. The losses deepened over a three-year period to 34%.

The sudden and rapid spread of SARS has become another threat, particularly to service industries. Singapore authorities have lowered the gross domestic product growth forecast for 2003 to 0.5% to 2.5%. Other private sector economists have also brought down their forecasts. World Bank and Asian Development Bank have simultaneously revised Asia's 2003 growth downwards.

Roy Phua, fund manager of the DBS Shenton Thrift Fund, is one who thinks that fund managers need to work increasingly hard to find good investment opportunities in Singapore.

Gone are the days when fund managers could rely largely on blue chip indexed stocks for performance. Macro-economic fundamentals remain challenging for the country. Singapore's reliance on exports, especially tech exports, has rendered it vulnerable to fluctuating trade cycles.

"Looking at the broad market, there are very few growth drivers in the near term. Stock valuations here and around the world may be getting cheaper, but I think the problem is the lack of growth rather than valuations. Nevertheless, we think the market is near the bottom and is poised for a rebound as the economy recovers over the longer term "

It becomes even more important to pick stocks that can survive and grow under such trying circumstances. "We look for companies that have a unique business, able to compete effectively, and have a strong ability to deliver earnings growth surprises going forward. Those are our key criteria," says Mr Phua.

The fund's search for gems inspite of difficult economic conditions is reflected in the fact that around 30% or so is invested in smaller cap stocks like Hyflux, Citiraya, and Hong Leong Asia. Although the DBS Shenton Thrift Fund is benchmarked against the Straits Times Index, the fund is not constrained by it. Compared against blue chips, some of these small caps have done well. Mr Phua disclosed that the fund may be taking profit on some stocks due to the near term volatility of the market, and look to add on to existing positions should share prices correct further.

Despite a tough environment, Mr Phua believes that there are good companies out there still. Much time is spent visiting companies that are not yet on most investors' radar screen. It may also be some consolation to investors that Mr Phua thinks that the near-term sell off in the local bourse is overdone.

"I would be quite surprised if the STI goes below 1,200 over the next few months. A number of shares have reached prices that look interesting enough for us to buy again. But if the SARS crisis is prolonged, then the sentiment will worsen and prices will fall even more." The investment strategy of the fund however is to ignore knee jerk reactions to daily news on SARS. Some sectors might take longer than others to recover, but at a particular price even a distressed industry such as airlines can be a good investment opportunity.

However, the high cash level of the fund reveals his defensive strategy. For more than a month, the fund's cash level has been around 9% to 10%, which is higher than usual, he admits. With a fund size of around S$38 million as at end April 03, this means that around S$3.5 million or more is in cash.

The DBS Shenton Thrift Fund has approximately 20 stocks in its portfolio currently. Top 10 holdings as at end March 03 are DBS Group Holdings (11.65%), United Overseas Bank (10.82%), Oversea-Chinese Banking Corp (9.29%), Hyflux (9.07%), Hong Leong Asia (7.07%), Citiraya Industries (6.69%), Singapore Press Holdings (6.66%), Singapore Airlines (6.03%), Keppel Corp (3.54%), and Star Cruises (3.26%).

Since launch in 1987, the fund has never charged a front-end load. However, starting in May this year, a 4% sales charge will be imposed. Equity funds usually have a load of 5% when investors buy the fund.

The DBS Shenton Thrift Fund has been named by FinanceAsia, a leading financial magazine in the region, as the Best Performing Singapore Equities Fund over a 10-year, risk adjusted basis.