Pillars of good investing

MOST investors know the FTSE-Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI), but very few know of other indices that represent the main sectors listed on the market.

Among them are the FTSE Bursa Malaysia EMAS Index, the FTSE Bursa Malaysia Top 100 Index, the FTSE Bursa Malaysia Mid 70 Index, the FTSE4Good Bursa Malaysia Index, and the FTSE Bursa Malaysia ACE Index.

There are two main categories of the Bursa Malaysia index series.

The first are those that are developed in collaboration with FTSE Russell for the FTSE-Bursa Malaysia index series, while the second are those that are developed in-house by the exchange.

Today, including the recently released indices – the Bursa Malaysia Quality 50 Index (BMQ) and the Bursa Malaysia Quality 50 Syariah Index (BMQ-S) – the exchange runs 35 indices, of which 17 are based on methodology and guidance provided by FTSE Russell.

The introduction of BMQ and BMQ-S can be said to be Bursa Malaysia’s first attempt to bring a broad-based, factor-based index to the market, a significant breakthrough for the exchange in developing its own in-house capabilities.

The introduction of the two indices must be applauded, as it brings a different approach from traditional indices.

BMQ and BMQ-S use key factors that allow companies to be included in the indices, and these are purely financial factors, which capture three factors –profitability, a company’s capital structure, as well as the quality of its earnings.

Hence, a constituent is measured based on return on equity (ROE) for profitability, the debt-to-equity (D/E) ratio for a constituent’s capital structure, and the quality of earnings by applying the Operating Cash Flow to Profit After Tax and Minority Interest (OCF/Patami) ratio.

The third parameter is only applied conditionally to ensure interpretability. The above factors are measured using the past two years’ average audited figures for the two completed financial years available as at the index review cut-off date.

Size and liquidity

Both BMQ and BMQ-S measure liquidity by applying the trade velocity of an index constituent, and it must meet the minimum threshold of 10%.

Trade velocity is calculated by applying the average daily traded value over the average market capitalisation of the constituent and multiplying by the number of trading days in a year.

The 10% rule is not difficult to achieve, as a company with an average market capitalisation of RM1bil must ensure that at least some RM400,000 worth of shares are traded daily.

For the current BMQ index, the fact sheet of the index showed that the largest component has a market capitalisation of RM19.4bil, while the smallest is at just under RM300mil.

The median market value is RM1.1bil, while the average constituent in the BMQ index has a market value of RM3bil.

For BMQ-S, the numbers are not much different, as the non-syariah names in this index include Autocount Dotcom Bhd, Carlsberg Brewery Malaysia Bhd, Heineken Malaysia Bhd, Panasonic Manufacturing Malaysia Bhd, RGB International Bhd, and Scicom (MSC) Bhd.

The missing names in the BMQ index that are included in the BMQ-S index include companies such as GDB Holdings Bhd, MBM Resources Bhd, SAM Engineering & Equipment Bhd, Scientex Bhd, Signature International Bhd, and United U-Li Corp Bhd. A total of 44 constituents appear in both the BMQ and BMQ-S indices.

A second-tier index

While the FBM KLCI comprises 30 of the largest market capitalisation companies listed on the exchange, BMQ and BMQ-S are seen as an attempt to create a new basket of indices, which will see some of the constituents migrate to the benchmark index in the future, especially companies such as Westports Holdings Bhd and United Plantations Bhd.

These two alone accounted for just over 25% of the two new factor-based indices.

Should these two migrate to the FBM KLCI at future index review dates, it will provide an opportunity for the inclusion of new index constituents in either BMQ or BMQ-S, or both indices.

Both new indices exclude FBM KLCI constituents and only look at listed companies based on the three main factors.

In addition, the financial sector is also excluded from the two indices, as the D/E ratio does not apply to the sector.

With a total combined market value of RM150bil, these new indices are now seen as second-tier indices to the FBM KLCI, and this creates opportunities for fund managers to mirror a new set of growth companies with solid fundamentals as their mainstay.

This may include new Exchange Traded Funds as well as unit trust products that may use these two indices as their benchmark.

Solid growth

Both new indices have outperformed the benchmark FBM KLCI, especially over a longer time horizon based on back-testing results. BMQ outperformed the FBM KLCI in eight out of 10 years, while BMQ-S did so in three out of the last 10 years.

In terms of returns, BMQ provided investors with cumulative returns of 23.1%, 24.6%, and 86.6% over three-year, five-year, and 10-year time horizons, respectively, while BMQ-S has even stronger returns of 27.9%, 29.8%, and 93.9% over the same time horizons.

The FBM KLCI was a miserable performer, generating a three-year return of 12.3%, a five-year return of just 3.3%, and a negative 0.7% return over 10 years.

Since the start of 2026, BMQ and BMQ-S are higher by approximately 2.6% and 2.5%, respectively, just a little shy of the 3.0% gain on the benchmark FBM KLCI.

The slight underperformance vis-à-vis the benchmark index was due to the strong rally among banking stocks, which make up more than 40% of the FBM KLCI and have performed strongly since the start of the year.

For investors looking for growth and value, both BMQ and BMQ-S constituents are fundamentally strong companies, with strong balance sheets and quality earnings.

They should be on investors’ radar, as the two indices also capture the technology sector, with about 17.9% weighting each.

The largest sector that the two indices represent is the consumer sector, with a weighting of 24.8% in the BMQ index and 18.6% in the BMQ-S index.