HOW many of us regard Nov 8, 2016 – the day when Donald Trump stunned the world and won the presidential election to become the 45th President of the United States – as a life changing milestone date in our calendar?
Under normal circumstances, events occurring 15,000 km away from our shores would have limited bearing or consequences on the average Malaysian. This time, however, we are by no means insulated from the ripple effect of the new economic policies of the world superpower, called “Trumponomics” by some, which had the stock market reeling from the shock waves.
As it is, the uncertainty of the world economy has already been manifested in companies shelving investment plans, households delaying big-ticket purchases, not to mention the confidence effects from the jittery markets. We don’t need a crystal ball to know that the future is going to be fraught with uncertainty.
If you have invested into unit trust, how does the current socio-economic environment affect you? Below are some checkpoints to help investors conduct a strategic evaluation on their investments to achieve better overall performance.
Criteria to consider in portfolio review
1. Asset allocation
Firstly, you need to know the breakdown of the asset allocation of your investment portfolio. What is the split among the key asset classes such as equities, properties and bonds? Is this ratio suitable for your risk profile and age? What is your exposure to local, regional or global equities? Should alternative assets such as gold or commodities feature in your asset classes?
Once you determine your ideal asset allocation, the next question is whether it fits in the current environment. In view of the weakening ringgit, it may be a better move to widen your exposure to more foreign investments. Having international diversification may increase your risk-reward ratio, therefore giving you better returns, while potentially lowering the volatility and performance drag of underperforming markets and asset classes on your overall portfolio. By diversifying overseas, investors are able to capitalise on stronger currencies while tapping on the growth potential of multinational corporations with access to larger markets.
Ultimately, it boils down to results.
Investors can measure the performance of their unit trust investment by comparing against the benchmark index to ascertain if the fund in question is performing well in absolute terms or only performing better relative to its benchmark.
Ask yourself how much you are getting in total returns, taking into account both the income distributions received and price changes. Should a fund declaring regular distributions despite giving negative total returns continue to feature in your investment portfolio?
On its own, a fund’s performance may look good but does not measure up equally well to its peers, i.e. other funds with a similar investment objective and invested in the same geographical markets or sectors?
If you’ve identified that your investment is indeed underperforming, the question then becomes – what’s next? Do you sell immediately to minimise further losses or adopt the wait-and-see approach, hoping that the fund will eventually turn around? If you decide to switch to a better performing fund manager, would it incur additional costs?
When it comes to investing, you cannot simply flip a coin and call it heads or tails. You ought to know your own strategy and objectives first, so that whichever decision you take is one that has been clearly thought out and is part of a bigger financial plan.
Investors who diligently monitor the fund performance will know when to sell the gains and capture the profits while leaving the principal intact. You may even consider selling off some, if not all your investments, so that the money can be channelled into other more suitable investments. At the end of the day, it is important that you know your options in order to best benefit your situation.
Being devoid of options is an investor’s worst nightmare - one which could potentially occur if you do not regularly check on the fund’s performance, resulting in you being none the wiser when there is profit to gain. As a result, whatever profit gained may get eroded away should the performance dip at any future point in time.
Think about the story of the goose that laid golden eggs. Imagine if you will, if the farmer got lazy and never bothered to harvest the golden eggs. He does not even notice when the goose’s health declines, affecting the egg production until one day she stops laying altogether.
Investors need to play the correct role of the farmer – keeping tabs on the goose (the principal investment), know when it pays out golden eggs (profits) and make wise choices with them.
Rebalancing is another integral part of unit trust review. Seasoned investors carry out periodic rebalancing, i.e. the process of realigning the weightings of asset classes in their portfolio. This is done by buying or selling funds in a portfolio to maintain the original desired level of asset allocation.
For example, say the original target asset allocation is 60% equities and 40% bonds. In a bullish market, the equity weighting of the portfolio could increase to 80%. The investor may then decide to sell some of his equities to reap the profit and buy more bonds to get the portfolio back to the original target allocation of 60:40.
Rebalancing is necessary to ensure the amount of risk involved is at the investor’s desired level. Besides giving investors the opportunity to sell high and buy low, rebalancing also allows investors to take the gains from good performing investments and reinvest them in areas that have not yet experienced such notable growth.
Portfolio review – checked. What’s next?
Various unit trust distribution channels will inevitably tout their best funds, but what is their definition of “best”?
This is where best of breed investing comes in. It is about looking for the best performing funds over a much wider selection across all the different fund managers in the market, rather than the best performer in one fund house.
By taking a little time to analyse and select your investment options before making the purchase, you stand to get better value for the same price and same risk level. In some cases, you may get additional 50% return or more.
Likewise, if you have decided that your asset allocation should have more exposure in the US market for example, would you able to access a sufficiently wide number of options via your existing unit trust provider? All your efforts in reviewing your portfolio may come to naught if the alternatives presented to you are little better than the ones you already have.
To DIY or not?
To be frank, reviewing one’s unit trust portfolio is easier said than done. Many investors may feel they do not have the necessary knowledge or time to sit down and do it and so may want a 3rd party to assist in the matter. This role could end up falling back to one of the intermediaries from whom the investor has bought the majority of his investments from in the first place. But is the person willing or capable to take on such a responsibility? Does he or she have a broad enough perspective to be able to evaluate all the contents of the portfolio?
Your unit trust investment portfolio is an integral part of your financial plan. If your investments are being affected by the changes in the economic environment, a review performed as part of a holistic financial plan is recommended. Even if the individual appointed is qualified to do all that, it should not stop there. You should still ensure that he/she is able to follow through the review with sufficient best of breed alternatives on hand to enhance the portfolio returns.
As we speak, our environment continues to change and challenge us. Every decision that we delay or fail to make today, may bring irreparable damage to our financial future. Act now before it is too late.
Yap Ming Hui is a best-selling author, TV personality, columnist and coach. He heads Whitman, a holistic wealth management company which has helped people to grow their money. For more information, please visit his website at www.whitman.com.my