MANULIFE INVESTMENT FUNDS SIP Growth Portfolio (Oct 2018) # Fund Information (31 Oct 2018) SIPGRO KULSIPGRO Bid Price/Unit NAV USD 1.2844 Investment Objective Fund Size USD 4.96 million SIP Growth Portfolio is a unitized fund, which is designed to provide medium to Units in circulation 3.86 million long term capital growth for those who hold a long term investment view and Fund Currency USD who are prepared to accept considerable fluctuations in the value of their Launch Date 23 July 2008 investments in order to achieve long term returns. Management Fee 1.30% p.a. Dealing Daily FUND PERFORMANCE SINCE INCEPTION Portfolio Breakdown 1 (23 July 2008 to 31 October 2018) Equities 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Fund Graph depicts returns calculated on NAV to NAV basis Source: Bloomberg MGF - American Growth Fund (A Share) 31.2% MGF - European Growth Fund (A Share) 8.0% MGF - Global Property Fund (AA Share) 7.1% MGF - Global Resources Fund (AA Share) 4.8% MGF - US Small Cap Equity Fund (AA Share) 3.9% MGF - Japanese Growth Fund (A Share) 2.9% MGF - Asian Equity Fund (A Share) 1.0% Bonds and Others MGF - US Bond Fund (AA Share) 18.4% MGF - US Special Opportunities Fund (AA Share) 16.2% MGF - US Treasury Inflation-Protect Fund (AA Share) 5.1% Liquidity and others 0.9% Fund Performance Performance SIP Growth Portfolio 1 Month -5.44% 3 Months -5.67% 6 Months -4.89% YTD -7.12% 1 Year -5.84% 3 Years 1.88% 5 Years 3.26% Since Inception 28.44% *Source: Bloomberg Note: Fund's performance is calculated on NAV to NAV. The value of units may go up as well as down. ¹The percentages presented hereof are internally sourced and computed for indication purposes only
Asia Pacific ex Japan Asia ex Japan equity markets moved notably lower in October on the back of US market weakness, a stronger US dollar, and the economic impact of US-China trade tensions. Equity corrections in the US sent tremors throughout global equity markets, negatively affecting Asian equities and sentiment. At the same time, rising global yields and a resurgent US dollar hurt already weakened regional currencies. Finally, evidence of trade tensions between the US and China translating into slower economic activity were manifested in slower growth and a deceleration in exports in the region. China s equity markets posted losses in October due to mixed economic data and lacklustre market sentiment. Mixed economic data exacerbated negative market sentiment: Third-quarter GDP was below market expectations and the weakest since the global financial crisis (2009), while September retail sales and fixed asset investment beat market expectations. To shore up the economy, the government released a raft of stimulus measures, including cutting the reserve requirement ratio for banks by 1 percentage point, increasing export tax rebates, and introducing tax deductions on household income. A technology-led sell-off in the US pushed Taiwan s equity markets notably lower. Decelerating economic data also dented market sentiment: Thirdquarter GDP growth decelerated, while export order growth moderated and PMI data weakened. Macro headwinds and weak earnings resulted in South Korea being the worst performing market. Numerous companies missed third-quarter earnings estimates, particularly automobile and consumer, further dampening market sentiment. Negative macro news compounded losses further, as thirdquarter GDP numbers came in below expectations, and the South Korean won noticeably weakened amid continued concerns over US-China trade tensions. In India, local issues pushed equities lower despite in-line earnings estimates and improvements in the macro environment. However, investor worries concentrated on market liquidity as the Non-Banking Financial Companies segment continued to receive regulatory attention, even with the Reserve Bank of India injecting liquidity twice during the month. Although posting losses during the month, ASEAN outperformed the broader regional markets. The Philippines and Indonesia were the best performing countries. The Philippines current account surplus improved on the back of overseas remittances and their central bank governor expressed willingness for further interest rate hikes to reduce escalating inflationary pressures. The Indonesian parliament s budgetary committee approved the 2019 fiscal budget, with greater government spending and the lowest deficit target sought in recent years. Following further weakness in the market, we believe the market has priced in most of the risks related to the rising interest rate trend, US-China trade conflict, and expectations of a weaker earnings trend. Consensus growth estimates and valuations of stocks have adjusted to more reasonable levels. The Asia Pacific ex-japan region is currently trading near the average P/E and P/B multiples of previous bear market multiples. There have been some positive developments recently, particularly in China. Deleveraging is taking a breather. The government has taken measures to ease monetary and fiscal conditions. Personal income tax has been lowered and this is expected to support domestic consumption. The noise on regulatory changes has also subsided and this was reflected in earnings estimates and stock valuations. Values are emerging in China and we see opportunities to reload positions in this market. Technology stocks in South Korea and Taiwan sold-off sharply amid concerns of slowing growth. Some were sold down to unreasonable levels, in our view. We continue to believe in the long-term structural growth and continuous development of technology applications and innovation and would use any weakness as an opportunity to increase our positions in industry leaders. Further, the easing of foreign currency pressures in Turkey and Argentina provide a much needed calm to South Asia as fear of contagion risk subsides. Earnings revisions in Indonesia are showing signs of stabilisation as most companies delivered third quarter 2018 earnings that are in-line or exceeded consensus estimates despite a tough market environment during the quarter. This should enhance investors confidence, in our view. We remain cautious on Malaysia. The recent change in government has added to uncertainties to corporate earnings as the new government reverses the policies of the previous party. Fiscal rationalisation amid high debt pressure is expected to weigh on economic growth in the longer term. Despite the recent market correction, valuations of Indian stocks remain high in comparison to other markets in the region. Whilst recent declines in oil prices will take some pressure off its current account balances, we maintain our preference for exporters. We believe the presence of twin deficits and high valuations will remain an overhang for domestic plays. North America Concerns about trade tariffs, the durability of the US economic recovery, declining oil prices and some slower-than-expected earnings growth reports spurred extreme volatility this month. The US Federal Reserve Board s decision to raise short-term interest rates further pressured returns, resulting in the biggest monthly decline in the S&P 500 Index in more than seven years. Within the index, the energy, industrials, materials and consumer discretionary sectors were the weakest performers, while the more-defensive consumer staples and utilities sectors posted modest gains. Consumers seem to be in a good mood, the economy is growing and stock prices have become more attractive. However, trade tensions, rising interest rates and a stalled housing market remain concerns. We remain focused on financially sound companies that have competitive advantages and the ability to generate substantial cash flow over sustained periods, with stock prices that look attractive relative to our estimates of intrinsic value. Page 2 of 5
Europe European equities fell sharply in October on concerns about the forthcoming end of quantitative easing (QE) and a mixed set of corporate results. The European Central Bank (ECB) reaffirmed it would cease purchasing sovereign debt in 2018, potentially raising borrowing costs for Southern European governments and withdrawing some of the liquidity that has helped boost asset prices since the financial crisis. Third-quarter results showed companies facing multiple challenges. Profit margins were under pressure from higher input costs while a general slowdown in emerging markets dented demand for European exports. China s car sales turned negative year-over-year after the government reduced subsidies. Also, disruption caused by new regulations on vehicle weights in the European Union (EU) led to deferred car parts orders in Europe. In the memory chip industry, rising yields and capacity additions caused a sharp correction in the prices of DRAM ( Dynamic Random Access Memory ) and NAND ( Not And ), leading many large semiconductor equipment customers to withhold spending on new equipment. Many companies also blamed US tariffs for reduced capital investment. While all sectors were down over the month, those with low exposure to the economic cycle or protectionism, such as utilities and communication services, declined less than the market. Although the macroeconomic environment has, at the margin, turned less favourable for equities, we believe share prices have moved more intensely in the past month than justified by changes in the underlying business outlook. It is worth remembering that the correction over the past month is par for the course for stock markets and that the reason European equity investors enjoy a 6.5% yield pick-up over 10-year German bonds is to compensate for these swings. Among the many concerns, the foremost are the impacts of monetary tightening, trade wars, a cyclical slowdown, negotiations for the UK to exit the EU, and Italy s recurrent issues with the EU, which could see it eventually break away from the single currency. While these are all valid concerns, there can be a tendency to emphasise the negative outcomes during periods of market stress. We believe that each of these issues are likely to produce benign results over the next 12 to 24 months, and that following this overdue pull-back, we believe equities are well-positioned from a value and profit outlook perspective. Unemployment continues to fall in Europe and the ECB s decision to terminate QE signals its confidence in the health of Europe s economies. We think some of the cyclical weakness seen in automotive will prove short-lived as China moves to stimulate car sales in 2019 and the one-time hit from regulations in Europe fades. Indeed, the closely watched yield curve remains in a healthy range and points to continued economic expansion. The risk of an all-out trade war is low, in our view, and has largely been played up by the US administration to gather support ahead of US mid-term elections in November 2018. While Italian politics is inherently unpredictable, the government s room for loosening the fiscal purse strings may be severely constrained by the reaction of bond markets. In terms of UK and EU negotiations, our base case assumption is that a compromise will be reached, perhaps more favourable to the EU but not disastrous to either. As well, we expect more clarity within the next two years over the final terms of a deal. Investors who ignore fundamentals and instead focus on price momentum or take a top-down thematic view on companies may miss the many opportunities to buy good companies trading on compelling free cash flow yields that have presented themselves in the latest bout of market jitters. For instance, the semiconductor sector supply chain has sold-off en masse despite most of the earnings weakness being confined to memory-related names, leaving players plugged into fast-growing areas of the market trading on what we view as unjustifiably discounted valuations. Japan The market sold-off in October in-line with a general decline in global markets. Concerns included rising bond yields in the US, slowdown in China and the impact of Trump s tariffs. At the micro level, the auto and semiconductor sectors have been particularly weak while rising raw material and labour costs appear to be eating into company profits. The best performing sectors over the month were tire companies, airlines and utilities. The worst performing sectors were shipping, glass and chemicals. All sectors declined. The financial sector performed better than the market with some prospect of rising JGB yields and a focus on improving shareholder returns. Fiscal year 2018 (to year-end in March) was a strong year for both the Japanese economy and the equity market. After a weak start due to conservative forecasts based on a stronger currency, the market rallied on upward earnings revisions driven by demand for machinery and technology exports and support from the domestic economy. We expect the same to be true for fiscal year 2019, despite the concerns over eurozone politics and Trump s imposition of tariffs in some sectors. As well as a continued positive outlook for global economic growth, we are expecting to see a more inflationary domestic economy which would be supportive to the financial sector. Domestic demand from construction and other sectors in the run-up to the Tokyo Olympics in 2020 combined with the tight labour market should lead to further pressures on the inflation rate. Mr. Kuroda has retained his role as governor of the Bank of Japan (BoJ) and will continue to pursue the BoJ s target of 2% inflation. Japan remains the cheapest developed market on both price to earnings and price to book. Japan s return on equity (ROE) has also been steadily improving and currently stands at 9%. We believe this could reach 10% by 2019. Although this is still well below the US (18%), it is on a faster growth path. One of the drivers for higher ROE is the record level of share buybacks. The majority of Japanese corporates have a net cash position giving them ample opportunity to make further buybacks in 2018. Page 3 of 5
Global Volatility returned to equity markets in October, as illustrated by the S&P 500 Index s daily decline of 1% or more on 10 occasions during the month, two more than in all of 2017. Nearly all broad market indices were negative for the period. More surprising, however, was the lack of an obvious catalyst to account for the widespread decline, as economic data remained strong while global unemployment continued to fall. In the US, unemployment fell to a near 50-year low, supporting record high consumer confidence. The third-quarter earnings season was strong, with more than 85% of companies surpassing estimates. However, guidance on future earnings was weaker than expected as a result of the potential increase in costs anticipated from higher tariffs. In emerging markets, China reiterated its commitment to market reforms and to ensuring that current trade frictions, which had started to affect local business confidence, were counterbalanced by more stimulative monetary and fiscal policy. However, this did not seem to sway investors, who appeared to remain concerned that US-dollar strength and the ramping-up of tariffs and trade tensions between China and the US were a precursor to further market weakness. Emerging markets, more broadly, were negatively impacted by the increase in bond yields in the US. The eurozone weakened as trade tensions appeared to be affecting the region, with export orders declining sharply. New car emissions tests in Germany, and the European Commission s rejection of Italy s new budget plan, added to the volatility. Despite ongoing concerns about Brexit and Italy s fiscal budget, UK economic data were broadly positive, making the UK the best-performing region for the month, while Asia (excluding Japan) was the worst-performing region. The utilities sector and large-capitalisation stocks with value characteristics outperformed, while the energy sector and smallcapitalisation stocks with growth characteristics underperformed. Equities had a difficult October as the combination of macro and interest rate anxieties created pressures on prices. The developed world index (MSCI World Index) fell 7.4% in October, its worst monthly performance since May 2012. The US, which has remained largely resilient to the downward pressure, finally encountered a significant decline. Unlike international markets, which are largely in the red, the US remains positive for the year, however. Emerging markets fared even worse falling 8.8% for the month bringing the MSCI Emerging Market index down 17.5% this year in dollar terms. In previous periods, we noted the significant outperformance of stocks with growth characteristics, especially in the US, and how it represented a challenge with respect to the Fund s value-based investment style. This valuation approach generally underperforms in growth markets and outperforms in value markets. The growth bias finally reversed in October. It is typical for growth stocks to struggle and value stocks to outperform during a market decline. Capital protection and/or downside market capture tend to be features of a value-biased investment style, which focuses on quality and attractive intrinsic valuation. Investors witnessed the benefits of this positioning in October. Although investors have experienced downward pressure on valuations recently, we believe equity valuations remain high overall. In addition, valuation differentials between growth and value stocks, and between the US and the Europe, Australasia and Far East (EAFE) region, remain wide. In September, we stated that we believed we would start to see a change in market performance leadership towards value and non-us markets. We maintain this view. The US is trading at significantly higher levels than the rest of the developed world, and the MSCI EAFE Index is trading near a 30-year low relative to the MSCI USA Index. According to our analysis, valuations are at extremes, not only with respect to the divergence between growth and value, but also with respect to growth stocks trading at their highest levels since the technology bubble of the late 1990s. Debt remains another major economic concern, in our view. Valuations as measured by debt-adjusted multiples remain high, and our analysis shows that debt levels have risen, even as profit margins appear to be near peak levels. We remain concerned that despite the October decline, equity valuations are still predicated on assumptions that may be overly optimistic. Namely, that global trade disputes will be resolved amicably and quickly, that corporate earnings will continue to grow at a robust pace, and that global central banks efforts to unwind their accommodative monetary policies will not affect global economic growth. Wedo not share these assumptions. We are maintaining the Fund s defensive positioning, continuing to favour companies that represent high-quality and sustainable franchises. While the defensive nature of these stocks may not reflect broader market sentiment at this time, we believe these companies are better placed to help investors weather future market volatility. Our analysis indicates a possible beginning of a rotation into defensive stocks, sparked by an escalation in the previously discussed risks. We continue to focus on companies that have enduring businesses, strong management teams with solid track records of effective capital allocation, strong balance sheets and sustainable free cash flow. We favour European companies with international operations and are maintaining the Fund s underweight allocation to the US based on our analysis of valuations. Within the US, we are maintaining the Fund s exposure to US banks, predicated not on the interest rate environment but on the potential for capital returns. We remain more cautious of international banking stocks. The Fund s portfolio is structurally focused on companies with debt levels that are lower than average, as a result of our concerns about company debt. Lastly, we continue to focus on companies that generate high levels of cash and that are trading at lower-than-average valuations. We believe valuations will likely be the key to outperformance going forward. The SIP Growth Portfolio is managed by Manulife Asset Management Services Berhad and is fund of funds structures. It invests all or substantially all of its assets into the Underlying Funds under the Manulife Global Fund platform. Please refer to the Portfolio Breakdown for the list of the Underlying Funds and the allocation. Past performance is not an indication for future results. This report is prepared for information purposes only. Important Notes: The fund performances are strictly the performance of the investment-linked (IL) fund and not to be treated as the gross premium/contribution of the IL insurance product. In the event of exceptional circumstances, such as high volume of sale investment within a short period of time, Manulife Insurance Berhad ("the Company") reserves the right to defer or suspend issuance or redemption of units. Page 4 of 5
Investment in the fund is subject to certain risks, including but not limited to: Risk Type Description Risk Management (Bond funds) Risk Management (Equity funds) Fund Management Risk The selection of securities which make up the investments of the fund is subjective and securities selected may perform better or worse than overall market. To mitigate this risk, the investment Manager has in place a disciplined investment process and practices prudent risk management. Manager has in place a disciplined investment process and practices prudent risk management. In addition, risk is also monitored through risk models. Liquidity Risk The risk of the funds being unable to meet their obligations at the reasonable cost or at any time. Manager will review and monitor the Fund continuously, and actively manage asset allocations of the Fund. In addition, the investment Manager will practice prudent liquidity management to enable the Fund to meet short term obligations. Manager will review and monitor the Fund continuously, and actively manage asset allocations of the Fund. In addition, the Investment Manager will practice prudent liquidity management. Market or Price Risk Market risk arises when the value of the securities fluctuate in response to the general market and economic conditions. The Investment Manager will attempt to diversify the portfolio, and monitor the investment climate and market conditions to take measures, where necessary and appropriate, to mitigate this risk. This may include lowering the fixed income exposure and/or reallocating the investments into more defensive investment instruments such as cash, deposits and/or other money market instruments. This risk is managed through sector/stock diversification and asset allocation. This risk is managed through sector/stock diversification and asset allocation. This may include reallocating the investments into more defensive investment instruments such as cash, deposits, money market and/or other fixed income instruments. Timing Risk The risk is subject to the volatility of the market/interest rate. The Investment Manager will manage it based on its professional knowledge and experienced investment skill. Timing risk will be managed via technical tools (i.e. from Bloomberg) as well as based on the Investment Manager's professional knowledge and experience investment skill. Company / Stock Specific Risk The risk of loss due to the fall of stocks/shares prices given the deteriorating business condition. N/A Manager will be performing continuous research and analysis on the balance sheet strength, earnings generation capability and strength of management team of the company. Interest Rate Risk The interest rate is a general economic This risk will be mitigated via the N/A indicator that will have an impact on the management of the duration of the fixed management of the Fund. This risk refers income securities. to the effect of interest rate changes on the market value of fixed income securities. In the event of rising interest rates, prices of fixed income securities will decrease and vice versa. Meanwhile, fixed income securities with longer maturities and lower coupon/profit rates are more sensitive to interest rate changes. Inflation Risk Credit Risk This is the risk that investors' investment in The risk may be mitigated by investing in N/A the Fund may not grow or generate fixed income securities that can provide income at a rate that keeps pace with positive real rate of return. inflation. The risk of loss due to the counter party's Credit risk may be managed by N/A inability to make payment of coupon/profit performing continuous fundamental and/or principal. credit research and analysis to ascertain the creditworthiness of its issuer. Page 5 of 5