Norges investing more in Malaysia

Here is an interesting bit of news that came out in the Star Newspaper today 31 July 2014:

Norwegian fund Norges allots RM800mil to invest in Malaysian small, mid-cap stocks

by liz lee

PETALING JAYA: Norwegian fund Norges has allotted RM800mil more to invest in small to mid-cap stocks in Malaysia.

A market source said the foreign fund appointed Eastspring Investments Bhd about a month ago and was investing in general equity, with a preference for the small to mid-cap equity space.
“There are no specific guidelines as to which sector Norges is keen on. It wants to look at good companies and it so happens the local small and mid-cap space is doing well this year,” the source said.

Norges has been one of the largest foreign fund investor in Malaysian equities since 2010.

In April, StarBiz reported that the foreign fund had invested about RM1.7bil in 53 Bursa Malaysia-listed companies, managed by Kenanga Investors Bhd.

At the time, the fund was already sitting on a paper gain of some RM600mil, with its entire holdings in Malaysia valued some RM2.3bil. Its performance in Malaysian equities was attributed to the big run-up in many of the small oil and gas companies since last year.
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Many NEW investors would be asking this question: So, how can I benefit from this?

Well, in order to benefit from this, you would need to outsmart the fund manager that is managing this RM800 million bonanza.

Unless you have a crystal ball that monitors the investment committee of the fund manager, you would probably have not got a clue or very little.

Well, lets look at the information we have from the news paper above:
1. The investment mandate is to invest in small-cap companies (companies with small market capitalisation).
2. The investment is managed by a fund manager.

Based on the "Information 1" above, the easiest step would be to put our money into small cap unit trust funds and hope the fund manager of our unit trust can outsmart the managers of Norges' money. If there is an ETF that tracks the small cap fund, then we can also take this investing route via the ETF as the ETF would remove the headache of punting.

Boring? Well, we can always try our 'luck' in a more active investing by using the second piece of information, "Information 2" above these funds are run by institutional fund manager. If we want to try to narrow down our investment selection, we best know the nature of the fund manager.

1. Fund managers usually are run by mandates.
In this regards that means investing in small and medium companies. Larger cap companies, although they would be very attractive like for example SapuraKencana could fall outside the mandate and would not attract this investment despite all the favorable outlook. The fund manager would not score any point if they invest outside the mandate, in fact usually they would avoid it as they risk being accused of going beyond the authority given to them - a very very bad thing for a fund manager.  The first thing in narrowing down your focus is to look at the mandate.

2. Fund managers usually have a benchmark to beat.
In rewarding a fund manager, the investors would need to be to assess the performance of the fund manager and that means assessing the absolute return and relative return performance of the fund manager. When it comes to relative performance assessment, that means comparing the performance of the portfolio of investments of the fund manager against an index, usually. In this case, it should be a small cap index which are provided by various index providers like MSCI, FTSE and the works.

In order to beat the index, the fund manager invariably would have to keep a significant portion of their investment in the index stocks as a cushion in trying to beat the index. Therefore, the next place to look at would be the stocks that make up the small cap indices. The is a chance that some of the Norwegian money turning up there.

3. Fund managers usually target companies with higher (or potentially higher) liquidity (relatively speaking)
Fund managers, like other investors, would need to convert all the paper gain into paper money: cash. That means liquidity plays a role as the last thing a fund manager wants to to be holding a dead stock which no one wanted - big messy publicity that would be. Liquidity or persistent active trading would be on thier screening criteria.

4. Fund managers usually have a much much longer holding period
The Norwegian money can stay for a very long long time in a particular stock. 

5. Fund managers may look for companies with better fundamental analysis to better keep their job
No one has a crystal ball and that includes the fund managers. In order to make sure their make sound decision, or at least appear so to the investors, they need as much justification as possible. There is a term in the industry called "Cover-Your-Ass investing".

One of the best cover would be fundamental analysis. There is no guarantee that any price derived from fundamental analysis would actually materialize but it would give the fund managers something to show the investors if the price tank. Fundamental analysis would also be used to convince the investors from pulling out from the stock if the market is feeling a bit bearish.

Therefore, the third place for you to look at are companies with solid fundamentals as these would be the same target for the fund managers. Bust as we mentioned in item 4 above, the institutional money has a very very long staying power so be prepared to wait in some cases.