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Kenanga's Ngo Sells Palm Oil Stocks, Keeps Cash on Oil's Slide

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By Dominic G. Diongson
Nov. 22 (Bloomberg) -- Kenanga's Johan Tazrin Ngo, whose funds got a boost from palm oil producers, is moving to cash because he expects a slowdown to affect Malaysia.
Ngo's investments in companies such as IOI Corp. helped make one of the funds he manages the third-best performer in Malaysia in 2005. The edible oil, which is made from the fruit of palm trees grown on vast plantations in the Southeast Asian nation, is used for cooking and in processed food and can be mixed with diesel to fuel trucks and buses.
Ngo, 34, has profited from expectations of increasing demand for biofuels, which last year drove up the price of palm oil and shares of the commodity's producers. Yet he has turned wary because of the drop in crude oil prices since July.
``It looks like a fantastic business when you have high oil prices,'' said Ngo, chief executive officer at Kenanga Investment Management Sdn., a subsidiary of Kuala Lumpur investment bank K&N Kenanga Holdings Bhd. If crude oil prices drop enough, though, there could be excess biodiesel capacity two years from now, he says. ``You need $60-$70 a barrel to be profitable,'' he says.
Lower petroleum prices are likely to drag down palm oil, Ngo says. The price of benchmark West Texas Intermediate crude oil declined 24 percent to $55.81 a barrel on the New York Mercantile Exchange on Nov. 17 from a record $78.40 on July 14.
Palm oil futures, which traded at 1,408 ringgit ($373) per metric ton on the Malaysia Derivatives Exchange in January, rose 31 percent to 1,848 ringgit on Nov. 21.
Turning Cautious
Shares of IOI, Malaysia's biggest publicly traded palm oil plantation company, have risen 52 percent in 2006 through Nov. 21 to 18.90 ringgit. Kuala Lumpur Kepong Bhd., the second largest, is up 65 percent to 13.90 ringgit. In 2005, IOI shares rose 31 percent, and Kuala Lumpur Kepong rose 21 percent.
The Kenanga Syariah Growth Fund that Ngo manages held 19,000 shares of Kuala Lumpur Kepong and 3,000 shares of IOI at the end of 2005, according to data compiled by Bloomberg.
Ngo, whose family has operated a company that trades the commodity since the mid-1970s, says he's been slowly reducing his stakes in the plantation companies because of uncertainties about the price of crude oil.
It's not just palm oil that Ngo has turned cautious on. Because he's concerned that slowing economic growth and weak consumer demand in the U.S. will affect economies in Asia, including Malaysia, Ngo is keeping as much as 20 percent of assets in the two unit trust mutual funds KIM oversees in cash, he says.
On the Defensive
``We're making sure we're shifting more toward a defensive posture for the portfolio as opposed to growth,'' said Ngo, who enjoys polo, kickboxing and reading. ``Going forward, the market will be less tolerant of a negative earnings surprise. The risk is more to the downside than to the upside.''
About 95 percent of the $140 million KIM oversees are in funds it manages for the Malaysian government, overseas investors and individuals. The remainder is in the two unit trusts.
One of them, the Syariah fund, invests in stocks that comply with sharia, or Islamic law. Muslim Malays constitute a majority in the ethnically and religiously diverse country.
The fund doesn't buy shares of alcohol or gaming companies because those activities are banned under sharia. It also doesn't invest in banks because the payment of interest is barred under Islamic principles. With the equivalent of $1.3 million in assets, the fund was up 15.3 percent in 2006 as of Nov. 21.
Searching for Dividends
The other unit trust, the $4.5 million Kenanga Growth Fund, has no sharia restrictions and can invest in any stock in Malaysia. It has performed worse than the Syariah fund, gaining 14.4 percent from the beginning of 2006 through Nov. 21. To help boost returns in the non-sharia fund, Ngo is turning to companies that have been providing steady earnings growth and paying dividends, he says.
``Companies know now that they want investors to stay with them,'' he says. ``There has to be a reason for it, so they're either going to show really good growth or give a nice dividend yield.''
Ngo is investing in Malayan Banking Bhd., or Maybank, as the country's biggest lender is known, for the non-sharia- compliant fund. On Nov. 21, the lender's dividend yield, or the ratio of payout to stock price, was 7.5 percent during the trailing-12-month period. Malaysian stocks had an average dividend yield of 3.9 percent in as of Nov. 21, the fifth highest among 14 markets in the Asia-Pacific region, according to Bloomberg data.
The non-sharia fund bought shares of Affin Holdings Bhd., a financial services group, in January 2004 and sold them in September 2005 after they rose 45 percent.
Money off the Table
Ngo graduated with a bachelor's degree in business economics from the University of Reading in the U.K. He started his career as a portfolio manager covering equities in Japan, Malaysia and other Asian countries with Coutts & Co. in London in 1993. In 1997, he returned to Kuala Lumpur and started at what's now KIM.
Ngo, a nephew of the sultan of Pahang state in Malaysia, made his first stock investment at age 16. He bought shares in the initial public offering of Marks & Spencer Group Plc. When he sold a few years later, Ngo says, the stock of the U.K.'s largest clothing retailer had almost doubled.
For now, Ngo says, he doesn't expect to deploy the cash he's got on hand anytime soon.
``It's very easy for people to get disappointed,'' he says. ``Sometimes it's better to get some money off the table, just find something else.''