There was a lot of uncertainty in the past year, as the sovereign debt crisis in Europe, quantitative easing in the US and money tightening in China toyed with investor sentiments. Under the 15 single-country markets that we cover, who would have thought that Malaysia would be the third best performing market in the past year, with the FBM KLCI gaining 19.34% in 2010?

We immediately became curious: How many Malaysia equity funds on our platform bested the KLCI's performance? See Table 1 below for our findings.

TEN FUNDS OUTPERFORMED THE KLCI

Top Performing Fund

The top performing fund - Kenanga Growth Fund - has been a fund that everyone at Fundsupermart unanimously loves. The fund aims to provide unit holders with long-term capital growth by investing principally in Malaysian equities, and is mainly invested in sectors such as non-cyclical consumer stocks (22.8%) and financials (27.7%) as of 30 November 2010. In our fund focus article, the fund manager elaborated on their stock picking process: "One of our fund managers noticed that they [Dutch Lady products] were getting more and more shelf space when he was doing grocery shopping with his wife. We did some research on it [Dutch Lady Milk Industries Berhad], liked what we saw, and now it is one of our core holdings."

Traditionally, the higher the gains, the higher the risks. So let's take a look at the downside risks of these ten funds and of the KLCI.

Can You Stomach The Risk?

Table 2 shows how risky the funds were with respect to making losses. Just to be clear, downside risk is not a measure of risk-adjusted returns. A low downside risk indicates that the losses (if any) tend to be very consistent, whereas high downside risk indicates that the losses (if any) could be anywhere in between mild and extreme.

Those who monitored the KLCI's movements on a regular basis would know just how rocky its ups and downs were. The results show that seven better-performing funds had even shakier downward movements. Although a fund might have higher gains, investors would also need to be able to ride out periods of losses when markets turn bad.

That said, investors who are risk-averse could consider those funds which have lower downside risks than the broad-based KLCI, yet achieved higher returns than the index. The top three funds in Table 2 certainly fit the bill.

Fancy Small Caps?

One of our key investment ideas for 2011 is the expected outperformance of small cap companies. The definition of a small cap company within the context of Malaysia is not defined accurately as different fund houses apply different criteria. In the simplest terms, a small cap company is one that is listed on the Main Board, and is not part of the top 100 companies based on market capitalisation.

One KLCI-beating fund that invests in such companies is the Prudential Small-Cap Fund. Prudential Fund Management Berhad defines a small cap as a company with a market cap limit of RM1 billion and adds that this definition covers about 90% of the stocks listed in Bursa. In 2010, the benchmark FTSE Bursa Malaysia Small Cap Index recorded a total return of 28.41%, comfortably outperforming large caps by a wide margin. However, this fund has the highest downside risk as seen in Table 2.

IN CLOSING...

... ten funds on our platform managed to beat the KLCI in terms of total returns, and only three funds did so in a less risky manner. Our analysis is based on 2010 returns, and investors with longer-term investment time horizon may want to look into the longer-term performance and downside risk of the funds before making an investment decision. It's hard to say that would happen in 2011, so prepare yourself for another exciting year!

Got a comment? An opinion? Maybe an idea? Tell us! Drop us an email at editorial.my@fundsupermart.com

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