HwangDBS Investment Management Bhd chief investment officer David Ng said firstly, investing should not be about chasing the latest fad as doing so could work against the investor.

“Investors must always bear in mind their personal investment goals, risk tolerance level, time horizon and then asset allocate accordingly.”

“We think investors should consider having exposure to low-risk income-type funds as the returns from such funds will hopefully offset the impact of inflation on one’s purchasing power.

“Another interesting alternative would be to invest in commodities due to their historically low co-relation with the equities markets,” Ng said .

He added that if global growth continued to remain robust, especially in the emerging economies, demand for commodities should underpin prices due to tightness in supply and time lag in getting new supply on to the market.

HwangDBS Global Commodity Fund (GCF) has primary exposure to commodities futures, offering investors a closer link to the commodities industry.

However, one should also not ignore traditional equity offerings. Timing the market is never easy but if one adheres to the discipline of regular investing, market weakness should be viewed as opportunities.

On the benefit of such funds/investments, Ng said commodity funds are about asset allocation.

“Currently, supply-demand imbalances for certain commodities will continue to place upward pressure on prices. Looking at the demographics and rate of urbanisation in emerging economies, especially that of China and India , this trend is set to continue.

“Of course, there will be ups and downs as markets never move in a straight line. However, we think the trend remains positive. Historically, commodities have shown low levels of co-relation with other major asset classes. This has been evident of late when equities markets have undergone significant corrections while commodities prices remained buoyant,” he noted.

“One way of looking at investments in a commodities fund is as a hedge against inflation. Today, the high commodity prices are increasing leading to high inflation. For instance, as the prices of corn, soybean, and other food products continue to rise, the general population will have to pay more for food products. Whilst rising inflation erodes our purchasing power, investing some of our funds in these commodities can help offset some of the effects of inflation.”

Ng said investors could also look at mixed assets/income funds.

“In such funds, diversification helps reduce the volatility of an investment portfolio. It spreads the assets across a variety of different investments such as stocks, bonds and cash equivalents and may facilitate in decreasing overall risk,” he said.

He added a decline in one asset class might be balanced out by a gain in other asset classes.

“Regular dividends/income distributions from fixed income assets or high dividend yielding stocks may also help supplement income sources and minimise loss to capital.”

On return on investment, Ng said in the case of GCF, it provides the potential to profit from rising commodity prices mainly via futures contracts.

“The commodity price rally is expected to continue in the foreseeable future and investors should try to profit from this trend. The guided return for the fund is 12% to 15% per year. However, this would be the average annualised return. Returns for individual years will likely vary,” he said.

Ng said for balance and income-type funds, the guided returns tend to be within the range of 4% to 8%. They are targeted at investors looking for meaningful medium to long term capital growth with some income distribution along the way.

“It’s important to see beyond the current turmoil and ensure that your current investments are fundamentally sound and with strong management. Prices are often dictated by sentiment and valuation parameters can be arbitrary.

Ng added that some stocks had been unjustifiably sold down despite strong fundamentals.

“As fund managers, we must continue to monitor these stocks and set various entry levels to establish or increase our positions in such stocks.”

Pacific Mutual Fund Bhd general manager (business development and marketing) Gary Gan said ideally in a volatile or weak market, funds should have multiple investment strategies, including going long and short.

“Funds that have a diversified portfolio include the traditional equities/fixed income plus non-equity related investments such as currencies, commodities and others,” he said.

Gan said given current restrictions on shorting and lack of related financial instruments, a fully flexible mixed asset fund would be a very good option.

“Such funds have flexibility in terms of asset allocation and investment style. However, it must be emphasized that having a very diversified mandate, while helpful, does not guarantee protection against volatility as in the end, it is still up to the experience and skill of the fund manager to make full use of such a flexible mandate to outperform other peer funds,” he said.

Gan said the benefits of such funds/investments was that they would not need to stick to a minimum holding of equities in a bear market (in the case of equity funds) nor restricted by a minimum holding of fixed income assets in a bull market (as in the case of balance funds), hence allowing for complete flexibility in shifting between asset classes.

As stated above, he said where possible, such a fund may even avoid both equities and fixed income entirely and move its assets into other investments such as currencies to protect gains or minimize portfolio volatility.

“These funds could consistently trade in and out of markets, seizing return opportunities and avoiding potential losses – thus enhancing returns while lowering risks,” Gan noted.

On returns, he said: “A well executed fund of this sort could produce anywhere from 2.5 to 5 times multiples of one year fixed deposit rates, depending on equity market conditions and of course, the experience of the fund manager.”

Gan said hedge funds, over the past decade, have often tried to provide the best solution to investors i.e. performing well irrespective of market conditions, however, not all such funds have been successful. “Even a well managed traditional equity unit trust fund, despite its general inflexibility, can perform well during market downturns if efficient active allocation strategies are timely executed.”

But cases like these are few and far, as traditionally, equity unit trust funds often remain invested to conform to its benchmark.

But therein lies the argument that while market volatility can be unpredictable and brutal, investing accumulatively over time, irrespective of what market conditions are, is often the best and most convenient solution to take,” he said.

On the fund manager’s strategy in the current depressed/weak market, Gan said active asset allocation, often on a very frequent basis, was required to make the most of volatility.

“The usual buy and hold mentality may not be the most efficient strategy anymore in today’s market. Besides traditional economic indicators, sentiment and funds flow trends make it especially difficult to derive asset allocation moves but this is where fund manager experience will be telling,” he said.

Gan said properly executed asset allocation strategies could ensure that a particular fund is in a better position to accumulate quality, beaten down stocks. For example, properly executed asset allocation strategies could that ensure funds have healthy cash positions during the downtrend to accumulate stocks. To further complement the above strategies, it is important to ensure that stocks in the portfolio are liquid and highly tradable at all times.

“This is becoming an important feature amidst the severe ups and downs of today’s global equity markets. When appropriate, managers need to move their exposure to defensive stocks and lower the beta of their portfolios.“

Seeking alternatives to the stock market

Monday, 24 March 2008

With the local stock market in bearish mode, investors might consider other forms of investments that offer more security. StarBiz examines some of the investment options available locally and abroad.

INVESTORS should look for alternative investment instruments to hedge against the uncertainties in the local equity market, according to fund managers.

“It’s not to say investors should stay away from the market completely but rather diversify their investment portfolio to include other forms of investments to reduce and spread their risk,” a local fund manager said.

He said fundamentally, there was nothing wrong with most of the companies listed on Bursa Malaysia , but the performance of local stocks could be affected by poor sentiment, as a result of uncertainties on the local front and elsewhere, especially in the United States .

So what are the investment alternatives?

Investors can buy gold, invest in the commodities market, acquire properties (residential and commercial), invest in unit trust funds with less equity exposure, or invest in structured products that are principal guaranteed by financial institutions.

Countries such as Britain , Canada and Australia offer sophisticated forms of structured properties that investors can park their funds in.

Many of the consultants for such structured properties profess that the returns are stable and provide good yield but require investors to place their funds for a minimum of three years.

But for extremely risk-adverse individuals who are not prepared for losses, financial experts advise them to place their funds in fixed deposits (FD), which currently provide a yield of about 3.7% per annum.

A local banker said the return on investment for FD is generally low but is guaranteed and many investors benchmark their return on investments against FD rates or bonds.

The banker said generally, investments that were of higher risk could potentially provide greater returns, adding that the choice of investments would depend on the risk appetite of the individual.

He also said investing in gold or the commodities market would be difficult as gold was already very expensive.

The banker said gold was used as a hedge against the weakening dollar and inflationary pressures.

“Historically, gold is favoured in times of high inflation,” he said, adding that gold was likely to continue its upward trend due to several factors including the growing affluence of China and India boosting demand for gold jewellery and other precious gems.

However, he said the upward trend in gold price, which had risen by about 17% this year alone, might not necessarily translate into higher prices for gold jewellers.

“Still, gold is a tangible asset and investors who can afford to buy gold view it to be a safer bet than investing in stocks, especially in times of economic uncertainties and to hedge against the weakening dollar.

A dealer said investing in the commodities market was less of a risk for investors compared with the equity market, which can experience extreme volatility over a short time.

He said investing in commodities could possibly balance out losses from other financial instruments in an investor’s portfolio.

“The risks are lower because commodity investing mainly deals with diverse items. Moreover contracts are entered for a future date at the current time and investors can exercise care to reduce risks,” said the dealer.

He said commodities such as crude palm oil, perishable and non-perishable items, finished goods, raw materials and semi finished goods were now generally trading at high prices because of surging demand from India , China and the rest of the developed world.

“Rising petrol prices also fuelled already high commodity prices,” said the dealer.

He said to invest in the commodities market, investors must have a sound knowledge of the various commodities traded and the fluctuations in their prices before investing or engaging the services of experts.

“There are numerous opportunities and scope for growth in this field for individuals and institutional investors,” said the dealer.

According to him, in most cases, the commodity market’s performance runs opposite to the bond and share markets.

“When the commodity market does well, the bond and share markets are likely to be down and vice versa,” he noted, adding that it was possible to determine the prices and contracts by assessing the ups and downs in other markets.

He said it was also important to ensure that assets purchased in the commodities market have little correlation with the stock and bond markets.

On investing in properties, property experts say there are many types of structured properties that investors can get into.

An Australian consultant/investment manager with Great Southern Pty Ltd said the company provides investors the opportunity to invest in agriculture. He said: “Our hardwood plantations produce woodchips which is highly in demand globally.”

The investment manager said Great Southern provided investors the opportunity to participate in a “fast tree-growing programme” on agricultural land, which then produced woodchips for use in paper production.

Over the past three years, the company has progressively expanded its product range.

“Wine grapes, organic olives and beef cattle have all been identified as meeting the rigorous criteria we apply to the products in which we offer investment opportunities,” he said.

The investment manager said Great Southern identifies agricultural products that are in demand globally, especially from Asian markets, and then packages projects to allow investors to participate in its development.

“You can invest as little as one wood lot costing A$3,300 inclusive of goods and services tax (GST). There are no ongoing payments apart from an annual insurance fee. When the trees are harvested, investors will receive the net harvest proceeds, less 5.5% (plus GST) for management and rental expenses.” Moreover, the manager said the investments were 100% tax deductible in the year in which they are made, as confirmed by Australian Taxation Office Product Ruling PR 2007/62.

“Our company offers outstanding tax advantages and the potential for sound returns with a high level of investor security,” he added.

Great Southern is listed on the Australian Stock Exchange since 1999, and it’s now part of the S&P/ASX 200.

Wine a good hedge in times of mart volatility

Monday, 24 March 2008

A balanced portfolio of a few types of wine will yield an average of 12 per cent annual returns, says a sales manager with a wine broker

WINE investment may be a new concept to Malaysians, but it can be a good hedge in times of market volatility.This is because the value of most investment grade wine will only appreciate as they age due to the high demand and tight supply.

“It almost never had a negative return. The lowest return was five per cent a year, while the highest was over 300 per cent,” said Saeed Shah, a sales manager with the Singapore-based wine broker Australian Wine Index.

“It’s important to note that you don’t own the title to a piece of vineyard in Australia . You own the physical bottled wines,” he told the audience of mainly retail investors in Kuala Lumpur yesterday.

A balanced portfolio of a few types of wine will yield an average of 12 per cent annual returns, he said, net of the five per cent commission charged by his company as the wine broker.“This is a good hedge against other riskier investments, especially now when the stock market is so volatile,” Saeed said.

“It is a fun investment that does not require daily monitoring because the price don’t fluctuate that much.”

Prices of fine wine can only go up due to scarcity. Many who chase the price up also see expensive wine as a symbol of wealth.

Saeed said companies only trade the top five per cent of fine wines in Australia , while almost 95 per cent of wines produced in the world are consumed in two years. Only 75 labels are investment grades, he said.

Similar to how stock brokers work, he said a wine broker helps investors buy and sell bottled wines, gives capital growth advice and defines exit strategies to turn the portfolio into profit.

His company for example, assists investors to source fine wines throughout Australia before importing them to the climate-controlled storage provided by Cougar Logistics in Singapore , which is a subsidiary of Singapore Shipping.

Investors are generally advised to keep the wines for three years before selling them at the international market, although investment grade wines can be drank after 15 to 25 years.

Minimum investment with the Australian Wine Index starts at RM23,000, Saeed said. This include three years of storage and insurance, as well as shipping cost.

In Asia , he said the rising wealth and a penchant for finer things in life has made wine investment a booming industry.

There are currently a dozen wine brokers in Singapore . Australian Wine Index alone has some 1,500 clients in Singapore . It has about 40 customers in Malaysia since it started promotion efforts here late last year.

“We predict that Asia will be the biggest market for investment grade wine. It is happening already,” he said, a reason why his company has recently moved its head office from Sydney to Singapore .

He said Hong Kong recently scrapped a tax on wine and beer, in the belief that a major move like this will help attract the auction houses to move their base to the island-city’s financial centre.

Even demand in newer cities like Ho Chi Minh City is fast catching up, he said.