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 Mahamad Rodzi Abdul Ghani
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 International Herald Tribune
 Fund turns away from palm oil

22/11/06 (International Herald Tribune) -  Johan Tazrin Ngo at Kenanga Investment Management, whose funds got a lift from palm oil producers, is moving to cash because he expects a slowdown to affect Malaysia.

Ngo's investments in companies like IOI helped make one of the funds he manages among the best performers in Malaysia in 2005. The edible oil, which is made from the fruit of palm trees grown on vast plantations across Southeast Asia, is used for cooking and in processed food and can be mixed with diesel to fuel trucks and buses.

Ngo has profited from expectations of increasing demand for biofuels, which drove up the price of palm oil last year and shares of palm oil 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 at Kenanga Investment Management, a subsidiary of K&N Kenanga Holdings, an investment bank in Kuala Lumpur. If crude oil prices drop enough, though, there could be excess biodiesel capacity two years from now, he said. "You need $60 to $70 a barrel to be profitable."

 Lower petroleum prices are likely to drag down palm oil, Ngo said. The price of a barrel of oil rose above $60 this week on the New York Mercantile Exchange. Its record of $78.40 was set July 14.

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, or $5.18. Kuala Lumpur Kepong, 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, which Ngo manages, held 19,000 shares of Kuala Lumpur Kepong and 3,000 shares of IOI at the end of 2005.

Ngo, whose family has operated a company that trades palm oil since the mid-1970s, said that he had been slowly reducing his stakes in the plantation companies because of uncertainties about the price of crude oil.

It is not just palm oil that Ngo is worried about. Because he is concerned that slowing economic growth and weaker consumer demand in the United States will affect economies in Asia, including Malaysia, Ngo is keeping as much as 20 percent of assets in the two unit trust mutual funds that KIM oversees in cash.

"We're making sure we're shifting more toward a defensive posture for the portfolio, as opposed to growth," Ngo said. "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 that KIM oversees is 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.

Funds that comply with Sharia do not buy shares of alcohol or gaming companies because those activities are banned under Islamic law. It also does not invest in banks because Islamic principles bar the payment of interest. The fund was up 15.3 percent in 2006 as of Nov. 21.

The other unit trust, the $4.5 million Kenanga Growth Fund, has no Sharia restrictions and can invest in any stock in Malaysia. But it has performed worse than the Syariah fund, gaining 14.4 percent from the beginning of 2006 through this week. To help increase returns in the non-Sharia fund, Ngo is turning to companies that have been providing steady earnings growth and paying dividends, he said.

"Companies know now that they want investors to stay with them," he said. "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, or Maybank, as the biggest lender in the country is known, for the non- Sharia fund. The lender's dividend yield, or the ratio of payout to stock price, is nearly twice the average dividend yield in the broader market.

Malaysian Palm Oil Board ( MPOB ) Lot 6, SS6, Jalan Perbandaran, 47301 Kelana Jaya, Selangor Darul Ehsan, MALAYSIA.
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