The Phillip Growth Fund (click here for the factsheet) is an absolute return focused unit trust. It invests in a diversified portfolio of global equities, as well as bonds, money market and other instruments, to minimize volatility. The fund can also invest in REITS or Real Estate Investment Trusts. According to Philiip Capital Management, while the fund aims to give a consistent positive returns without tracking any benchmark, the asset allocation breakdown for the fund is typically around 70% equities and 30% bonds. It can also hold a high cash position at the discretion of the fund manager. The fund itself is quite evenly diversified across countries and sectors. As at the end of January 2005, 65% of the fund was in equities, 16% in bonds and 19% in cash (see asset allocation breakdown at the end of this article).

The fund has been a consistent performer. In the 3-year, 2-year and 1-year period ending 31 January 2005, its annualised returns were 14.0%, 20.3% and 7.0% respectively (calculated using offer-to-bid prices, in SGD and with income re-invested - see table below). This performance compares well with similar funds for the same period (see table below). The fund size stands at SGD 18.27 million as at 31 Jan 2005, and investments can be made by cash and SRS. The chart below shows the performance of the fund against the MSCI World Free SGD. While the latter was not the fund's benchmark, it was used internally by the fund house to compare fund performance.

Source: Fundsupermart
MSCI World Free was used internally by the PCM for comparison purposes, until 27 February 2005.

ANNUALIZED RETURNS OF THE FUND VS PEERS AS AT 31 JANUARY 2005

Investors should note that with effect from 27 Feb 2005, the composite benchmark for the Phillip Growth Fund will be 70% MSCI World Free Index (SGD) + 30% Citigroup World Government Bond Index (SGD Unhedged). This will be included in the new prospectus of the fund which will be issued on the same day. According to the fund house, the main reason for including a benchmark is to enable a clearer performance comparison against peers.

The fund is managed by Jeffrey Lee, who is the Managing Director and CIO of Phillip Capital Management. He has 19 years of investment experience and was previously the Director of Investment at AIB Govett (Asia) Ltd. and Jeffrey has also held senior investment manager positions at DBS Bank and Mitsubishi Corporation Group before. He is a certified Chartered Financial Analyst, and obtained his Bachelor's (Honours) Degree in Chemical Engineering in 1985 on a Public Service Commission Merit Scholarship. In an email interview with Fundsupermart, he talks about the fund's investment strategy and how he is positioning the fund for this year.

Q: What is the current investment strategy for this fund? Are there any specific themes the fund is adopting? (i.e specific country or sector overweights)

A: We are not benchmark huggers. What we often try to do is to find better alternatives to benchmark stocks. We have flexibility in our investment approach, adopting elements of top-down and bottom-up. We also allow for both growth and value-style investing, because there will be periods where one style will outperform the other. We buy into investment themes early, and we also leave the party early. We believe it is always good to leave something on the table for the next investor who comes along. We are not afraid to sell when valuations get outrageous.

We try to buy companies at a reasonable discount relative to their assets and growth, and this helps to minimize the downside risk. For example, we are always on the lookout when globally competitive companies crash significantly on bad news flow. When they do, we will start to circle around it, analyse it and decide whether it is worth buying. One such company is Marsh & McLennan, a global professional services firm in three core businesses: - Risk & Insurance Services, Investment Management (Putnam Investments) and Consulting (Mercer Inc). We bought the company somewhere near the bottom after it crashed due to issues surrounding its insurance business. At that time, we thought the market was being too pessimistic over M&M's business franchise.

We currently find Asian stock markets attractive relative to the rest of the world and will be focusing much on companies with strong business models, strong cash flows and high dividend yields. We are generally positive on Resources, Infrastructure, Consumer, Technology and Telecommunications.

In Resources, we think China's demand will be sufficient to keep global commodity markets in deficit. Infrastructure and utility stocks are able to offer steady and sustainable high dividend yields. Given the global demand growth uncertainty that has been brought about by the US triple deficits, we think stocks that can benefit from domestic demand will be in favour. General retailing, leisure and entertainment, fit into our domestic consumption theme. We have started to buy in tech leaders globally, given expectations of possible bottoming of the tech slowdown in the coming quarters.

Q: Is the fund house more positive on bonds or equities for 2005? Why? Currently what is the fund allocation for bonds and equities, to what extent is this allocation flexible?

A: We are generally more positive on equities. There are presently interesting opportunities to be found in quality stocks that have sustainable high dividend yields. These are relatively attractive compared to bond yields and yet have reasonable growth and price appreciation potential. We think bond prices are susceptible to falling capital values in an environment of rising interest rates. We are keeping duration relatively short for the debt securities we invest in.

Q: The consensus is that the Fed will raise interest rates in the US and that the USD will continue depreciating. What kind of impact will this have on the fund?

A: So long as we buy companies at very cheap prices relative to their growth and assets, we should do fine. Further, a substantial part of the fund's portfolio is invested in companies with strong cash hoards or low leverage. Such companies will cope better in a rising interest rate environment and will be in a superior position to make acquisitions at cheaper prices and/or benefit from improving returns on cash.

Q: Can the fund invest in emerging markets (eg. Eastern Europe, Latin America)? Will the fund start investing in these regions?

A: There is no restriction on emerging markets exposure. So far, we have invested in global companies with exposure to emerging markets.

As an oil play, we are also currently invested in PetroKazakhstan. The company is the largest oil company and largest supplier of refined products in Kazakhstan, a country that is important to world energy markets because it has significant oil and natural gas reserves. The Central Asian state is beginning to realize its production potential. With sufficient export options, Kazakhstan has the potential to become a major world energy producer and exporter.

Q: The fund's performance improved greatly since 2003 (refer to performance chart). Is this due to the market itself or are there reasons specific to the fund investment strategy? (if so, please elaborate on reasons)

A: Our uniqueness stems from our philosophy of not putting monies at risk when the risk/reward is not in our favour. Prior to 2003, we adopted a very defensive approach, which served us well as stockmarkets derated following the bursting of the technology bubble in 2000 and spared our clients the agony of losing money.

The "take-off" point coincided with our change in investment stance, from being defensive to aggressive when we sensed that equities started to offer very attractive risk/reward tradeoffs. We loaded up on high yield stocks with reasonable growth prospects.

Q: What might affect fund performance going forward?

A: We may temporarily underperform at times when markets exhibit "irrational exuberance". However, our fund usually outperforms during difficult markets. And over several investment cycles, it has generally done well. Our strategy will be to buy companies exhibiting reasonable growth potential, strong cashflows, sustainable high dividend payouts at a low enough price. This way, we allow ourselves to build a comfortable margin for error. Some of our winning stocks include Singapore Exchange, Deutsche Boerse and HSBC.

Q: The fund holds 19.41% in cash and cash equivalent as at 31 Jan 2005. This is higher than the cash portion similar funds would hold. What are the reasons for this?

A: A combination of new money inflows and a limited offering in what we would normally deem as attractive investments were behind the buildup in cash. However, we have recently identified new investment opportunities and have been putting the cash to work since.

Q: What is the reason for the upcoming inclusion of a benchmark for the Phillip Growth Fund?

A: With effect from 27 February 2005, which is when our new Prospectus will be issued, the composite benchmark for the Phillip Growth Fund will be 70% MSCI World Free Index (SGD) + 30% Citigroup World Government Bond Index (SGD Unhedged).

Of late, we have noted significant inflows into the fund from investors for whom the fund has met the objective of significant capital appreciation over the long term. The main reason for including a benchmark is to allow for a better performance comparison against a composite of well-known independently constructed benchmarks that are commonly used by our peers and clients. The introduction of a benchmark will not, however, detract us from our long-standing investment objective, which is to deliver superior risk-adjusted positive returns over the long run.

ASSET ALLOCATION BREAKDOWN (as at 31 January 2005)

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