In the final Early Retirement Masterclass class of 2020, we’ve enrolled a Malaysia student who had no choice but to attend the lab classes remotely through recorded videos. As there is ample reason to demonstrate the ERM investment framework across borders this time round, I amended the final lab session so that my students can explore the Malaysian markets.
So we ran a series of back-tests using Pyinvesting over the past ten years to figure out which strategies worked across the Causeway.
Specifically, we performed the following:
- We took the 10-year historical performance of 30 stocks of the FTSI Malaysia KLCI index as a baseline to compare our performance against each other.
- We took subsets of 15 stocks that represented specific factors such as high dividend yield, low PE ratio. i.e. One team is given 15 stocks with the highest dividends in the KLCI and has to obtain the investment results of adopting this strategy over the past ten years.
- For each test, we would note the annualised return, semi-deviation, and Sortino ratio of each strategy.
We choose semi-deviation of a strategy as we prefer a volatility measure that only employed data-points below the mean. Otherwise, semi-deviation is not too different from the standard deviation measure.
The Sortino ratio of a strategy is the return of the strategy minus the risk-free rate divided by semi-deviation. When comparing strategies, the higher the Sortino ratio, the better the strategy.
The resulting table is as follows:
| Bursa Malaysia Blue-chip groups | Strategy | 10 Years Return | Semi-Deviation | Sortino Ratio |
|---|---|---|---|---|
| Trainer | Baseline | 8.9% | 13.2% | 0.62 |
| Trainer | Lowest PB | 8.4% | 10.3% | 0.53 |
| Group 1 | Lowest PE | 8.1% | 10.3% | 0.49 |
| Group 2 | High Dividend Yield | 9.1% | 9.9% | 0.62 |
| Group 3 | Highest Profit Margin | 7.9% | 9.7% | 0.5 |
| Group 4 | Lowest Beta | 8.9% | 9.5% | 0.62 |
| Group 5 | Return on invested capital (ROIC) | 10.8% | 10.5% | 0.74 |
| Group 6 | 180-Day Relative Strength Index (RSI) | 13.8% | 10.7% | 1.01 |
By inspecting ten years of results, the first observation that jumps at investors is that value strategies do not seem to work in the Malaysian stock market. If you had chosen a strategy that invests in the lowest price to book ratios and lowest PE ratios would have underperformed for the past ten years. Only a high dividend strategy would have matched the baseline strategy’s performance of buying all Malaysian blue-chips in equal-weights.
There are two strategies that were objectively better than the baseline performance – choosing Malaysian blue-chips that had a superior return on invested capital or ROIC and choosing blue-chips with the highest 180-day relative strength or momentum. The Malaysian market favours stocks with high momentum and sustainable moat.
As an intellectual exercise, I have performed the screens based on high ROIC and high 18-day RSI and short-listed the best Malaysian stocks that meet these criteria based on data on December 24 2020:
Unfortunately, the scope of the back-testing was too narrow for a full investment decision to be made.
Our ERM program performs back-tests over a 3, 5 and 10-year period on Singapore markets. We also test a much larger number of factors when we conduct our exercises. So readers should not invest based on this screen without qualitatively reviewing each stock one by one.
We can, however, conclude a general approach towards the Malaysian markets:
- Don’t try to be cheap and hunt for a low price to book and PE counters in the Malaysian markets based on the older academic papers written by Fama and French. You can get your hands burnt doing value investing in Malaysia.
- Malaysian investors have a notion for sustainable advantage, and this can be proxied by a high ROIC.
- Never underestimate the technical analysts on this market as following high momentum stocks work across the Causeway.
I even joked with my students that branching out my ERM program into Malaysia might not be a great idea. A trend-following technical analysis course might be a more profitable choice.