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WHAT if at the start of 2021, you were given a choice between picking an exchange-traded fund (ETF) that tracks all the main Bursa Malaysia Index series, which index would you choose?

Other than the FBM KLCI, Bursa Malaysia has some 20-odd indices that typically don’t only track the various sectors, but are also broken into various categories like the FBM Mid 70 Index, FBM Top 100 Index, the FTSE4Good Bursa Malaysia Index, FBM Small Cap Index, FBM Mids Cap Index, the FBM Emas Index, FBM ACE Index, and the FBM Fledgling Index.

At the same time, at the start of 2021, you were also informed that in the past two years, the best performing index among all the indices was the Bursa Malaysia Healthcare Index, which rose 174%, followed by the FBM ACE Index, which was up by 149%, and the BM Technology Index, which jumped 138%.

At the other end of the spectrum, over the past two years, you were also told that the worst-performing index was the Bursa Malaysia Property Index, which was down 16%, followed by the Bursa Malaysia Finance Services Index, which fell by 11%, and the third-worst performing index was the Bursa Malaysia REITs Index, which gave up about 10% in value.

Given the above scenario, if you were asked to pick an index or a basket of indices at the beginning of January 2021, which would you choose, given the past performance, the economic scenario, sector dynamics, and market sentiment?

Past performance is immaterial

The first lesson in investing or trusting your fund manager is never to put too much weight on past performance, as that is, firstly, history.

Second, it is unlikely to be repeated.

Third, past performance is never a gauge of future performance. In other words, past performance is immaterial.

Hence, to have a winning set of bets in the market is to do proper and in-depth research, to understand the economic data and how it impacts the various sectors, and last but not least, is to make a judgment call as to whether the sector is riding on a tail-wind or head-wind, which will determine the performance of the companies in each of the sectors.

Once that is done, it then boils down to picking the winners within the sector as no two companies are the same and the one that perhaps will always be a winner would be the one that commands that dominating position in terms of market leadership, superior balance sheet, high operating leverage, strong management, and an eye for the environmental, social and governance or ESG matrix.

Had you chosen to buy an ETF based on the past performance of the top-three highest return indices, your performance in 2021 would have been at both extremes of the market.

In 2021, the Bursa Malaysia Technology Index surged another 38.6%, which was its best-performing index for the year.

However, both the Bursa Malaysia Healthcare Index and the FBM ACE Index were the two worst-performing indices, dropping 34.6% and 40.2%, respectively.

If you have made an equal allocation to these hypothetical index ETFs at the start of 2021, your returns would have been negative 12.1%, way below the FBM KLCI’s 3.7% loss.

If your strategy was to buy the three worst-performing indices for the past two years with the hope that the three indices would rebound in 2021, you would have done much better as the Bursa Malaysia Property Index fell by 4.2%, the Bursa Malaysia Finance Services Index rose 1.6%, while the Bursa Malaysia REITs Index dropped 5%.

All in, if you had an equal weight exposure on the three worst-performing indices, your returns in 2021 would have been a loss of 2.6%, much better than the FBM KLCI’s 3.7% negative return.

This clearly shows that past performance of riding on winners doesn’t mean they would perform all the time, while buying on past worst-performing indices may surprise you with better returns instead.

Searching for 2022 winners

While past performance is never an indication for the future, one cannot help but look into details as to why a particular index has been able to outperform every year while others continue to underperform.

Consistently, as explained earlier, it is mostly sector-specific and of course, it then boils down to the individual stock or stocks within the sector itself, as some would still be able to provide a decent return.

Based on data provided in the first table, although the Bursa Malaysia Healthcare Index, FBM Mids Cap Index, and FBM ACE Index are the top-performing indices over three years, they do have negative performance in between the time horizon.

Only the Bursa Malaysia Technology Index and the FBM Fledgling Index were clear winners, providing positive returns for three consecutive years.

There are several other indices too that had positive returns every year and this includes the Bursa Malaysia Transport Index with a total cumulative three-year return of 18.6% and the FBM Small Cap Index with 39.5% cumulative returns.

At the other end of the spectrum, the second table summarises the negative performing indices for the past three years.

As can be seen, the Bursa Malaysia Property Index and the Bursa Malaysia Consumer Index had provided negative returns for three consecutive years.

A special mention is also required for the Bursa Malaysia Construction Index as that index had a cumulative three-year return of minus 1.2%, but only because, in 2019, the index was up 34.3% but fell by 26.4% over the past two years alone.

Is index investing still relevant?

This week’s column has been centred around indices and their performances over the past three years.

The question is, are these indices still relevant in the age where investors are not necessarily investing based on a particular sector or theme, but based on multiple factors that make up a basket of a stock portfolio?

This is where the investment in the modern world requires new thinking and this will be addressed when this column dissects the new paradigm shift in index investing in today’s technologically driven market next week.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.