save&invest cash is no longer best
TRANSCRIPT
Lorna Tan
Invest Editor
The expert panel reversed its defen-sive position last month after beingcaught out like many people whoopted to build up cash levels aheadof the United States presidentialelection.
In the 14th part of the series intro-duced by The Sunday Times a yearago, we look at the performance ofthe three simulated portfolios lastmonth.
Our investors are 26-year-oldcommunications manager ShonaChee, entrepreneur Getty Goh, 38,who is married with two youngchildren, and retiree Wang MooKee, 62.
The Portfolio Series does not in-volve actual money as it is intendedonly for illustration and education.
All three portfolios are limited toinstruments listed on the Singa-pore Exchange to keep them sim-ple, accessible and easy to monitor,and to Singapore Savings Bonds,which can be bought via ATMs.
While there are similarities in thethree portfolio holdings, the alloca-tion for each profile differs, depend-ing on the individual’s risk-returnobjectives and preferences.
Each portfolio has a differentbenchmark that best reflects itsmix. Mr Goh’s portfolio, for exam-ple, is heavier on blue-chip shares,while Mr Wang goes for bonds to re-flect his more conservative stance.
The simulated portfolios are con-structed by CFA Society Singapore(CFAS) for an ideal investment hori-zon of five to 10 years. We will trackthem until the middle of this year.
PORTFOLIO PERFORMANCEMs Chee’s portfolio was down 1.07per cent for the month, trailing the
benchmark (0.09 per cent) by 1.16percentage points.
Mr Goh’s portfolio fell 1.51 percent, trailing the benchmark (0.77per cent) by 2.28 percentagepoints, while Mr Wang’s dipped0.83 per cent, trailing the bench-mark (-0.37 per cent) by 0.46 per-centage point.
The underperformance was main-ly driven by the selection of securi-ties, with the picks in all three equi-ty sub-asset classes trailing their re-spective benchmarks.
All the Singapore stocks under-performed the Straits Times Index(STI). In terms of real estate invest-ment trusts (Reits), A-Reit andCMT fell more than the S-Reit in-dex. The Asian exchange-tradedfunds (ETFs) and gold all correct-ed last month, underperformingMSCI World, whose positive re-turns were mainly driven by Eu-rope and the US.
The US ETF bucked the down-trend in the global ETF allocation.Only the corporate bond selection
outperformed as the sell-off contin-ued in government bonds.
ADJUSTMENTSThe CFAS made major adjustmentsto the portfolios early last month tofully deploy the cash.
For Ms Chee’s portfolio, it sold offthe gold ETF instead of selling halfof the position as its size was toosmall and doing so would have in-curred relatively high transactionfees. It also bought into SGX, Sing-tel, Japan ETF and India ETF and in-creased the exposure to the USETF.
The panel adjusted Mr Goh’s port-folio by trimming the gold ETF,bought Singtel, First Resources andJapan ETF and increased the expo-sure to SGX and the India ETF.
Mr Wang’s portfolio saw a cut inthe gold ETF while Singtel, First Re-source and Japan ETF were boughtand the exposure to SGX, India ETFand US ETF increased.
As a result, cash levels are now be-low 1 per cent in all three portfolios.
WHAT LIES AHEADLooking back, 2016 was indeed ayear of unexpected events and, insome cases, unexpected marketreactions.
Still, despite the volatility, the USequity market managed to close theyear 9.5 per cent higher and emerg-ing markets posted gains of 8.6 percent. Gold appreciated by 8 percent and the oil price jumped by 52per cent last year.
Singapore, on the other hand,seemed to have suffered both onthe equity market, albeit slightly,and currency fronts. The STI lostseven basis points last year and theSingapore dollar lost 2 per cent ver-sus the US dollar.
The CFAS panel said it will becarefully monitoring global eventsin an effort to diversify the risk asmuch as possible for the three simu-lated portfolios as political uncer-tainty will drive capital marketsand central bank actions will also re-main key.
For instance, if British Prime Min-
ister Theresa May does indeed in-voke Article 50 by the end of thefirst quarter, investors will need tomonitor the possible implicationsof a hard Brexit for trade and otherpolices.
Apart from a general election inItaly, this year will see presidentialelections in Germany and France.
“Investors in Asia will also bewatching the Trump adminis-tration’s expenditure plans in 2017and what happens with regula-tions, taxes and trade relation-ships,” said the panel.
“Donald Trump’s intention towithdraw from the TPP (Trans-Pa-cific Partnership) has alreadycaused quite a stir. Coupled with therise in the oil price, this could meanthat inflation returns, and the Fedcontinues on its rate-hiking cycle.”
For Singapore, the risks that in-vestors have to watch for are clear.They are predominantly geopoliti-cal in nature, given the events in Eu-rope and that Mr Trump’s “protec-tionist” rhetoric could have implica-tions for export-oriented econo-mies such as Singapore.
The panel added that this iswhere the Government’s restruc-turing agenda becomes increasing-ly important, although it will be aslow and gradual process.
Full-year growth for last yearbeat expectations, coming in at 1.8per cent, thanks to an improve-ment in manufacturing production.
This was higher than the initialforecast range of 1 per cent to 1.5per cent but still the weakest an-nual growth rate since 2009, notedthe panel.
Apart from global demand andtrade, higher interest rates in theUS and a continued rise in the dol-lar also mean investors will need tohedge their currency exposure.The Singdollar’s 2 per cent fallagainst the US dollar over the pastyear is a case in point.
The panel said: “If the Fed raterises are accompanied by continual-ly improving growth in the US andsupported by strong economic da-ta, this would be good news for equi-ty markets.
“But this would mean the huntfor yield will continue in other mar-kets where policy remains looseand investors will need to hedgecurrency exposures.”
Other central banks, like theBank of Japan and the EuropeanCentral Bank, have pledged to main-tain their quantitative easing pro-grammes, which means the worldwill still be flush with liquidity re-gardless of the Fed.
• The sixth seminar in the Save& Invest Portfolio Series, which willinclude a portfolio constructionexercise, will be held on Jan 21 from9.30am to 3pm at the NTUCAuditorium. To register, visitwww.sgx.com/academy
Wong Wei Han
Gold may have lost some of its lus-tre recently but analysts still see theprecious metal as a solid choice forlong-term investment.
The price sat at US$1,147.50 perounce on Dec 30, down about 16per cent from the 12-month high ofaround US$1,366 last July, amid apost-Trump surge on Wall Streetand a rocketing greenback.
By last Friday it had hit around
US$1,177, a 4 per cent recovery inthe past three weeks.
OCBC senior investment strate-gist Vasu Menon does not expect2017 to be a good year for gold, butinvestors should not rush to selltheir holding.
“Our view on gold is not overlybullish. Looking at 2017, we thinkgold may end the year at aroundUS$1,100 per ounce. But asset allo-cation is critical, so this shouldn’tmean you need to get out of gold al-together,” he said during a confer-ence last week.
“Gold will always be a goodchoice for diversification, and youshould always have some in yourportfolio. It’s almost like an insur-ance policy, and you never knowwhat lies ahead."
Indeed, the traditional strategy ofbuying gold as a safe haven has notbecome invalid due to recent pricemovements.
Mr Geoff Blanning, head of
emerging market debt and com-modities at Schroders, noted thelong-term value of holding gold.
He told the asset managementfirm’s recent annual briefing in Lon-don: “Gold is much more than just asafe haven. I think gold is, through-out history, the ultimate store ofwealth, the only thing that has main-tained its value.
“Now, with all the worry aboutvarious geopolitical earthquakestaking place, is particularly the timeto think about gold.
“What’s against gold now is theUS dollar and higher interest ratesin the US. From a sentiment pointof view, maybe it’s still too early togo back into the market, but the
long-term prospect is extremelysound. Gold will ultimately be, as ithas always been, a core element ofour monetary systems again.”
One factor to consider is that de-mand in China and India – the twobiggest gold importers and, hence,a decisive driver of the gold price –will likely remain intact.
Indian demand was subdued lastmonth, but Mr Blanning believesthe country’s recent policy to scrapabout 86 per cent of cash value incirculation will compel buyers tolook more towards gold to storewealth.
“We also see that in China, where(the yuan) is going down, the gov-ernment is trying to stop people
from taking their money out of thecountry, and the stock market isjust a casino,” he said.
“So what do they do? They buygold, and that alone could drive upprices because bank deposits in Chi-na account for nearly 40 per cent ofthe global total.”
Mr Matthew Michael, product di-rector of emerging market debt andcommodities at Schroders, said an-other reason to keep an eye on goldis that it has been a cheap commodi-ty to invest in for many years.
“If you look at gold in relation tothe value of other assets – say in a ra-tio to S&P 500 – you will see thateven at the seemingly high level ofUS$1,300 (last year), gold prices re-
mained very cheap compared tothe 1970s,” he noted.
Mr Michael believes history alsooffers signs that gold may be poisedfor a new rally.
“There is an established trend go-ing all the way back 16 years ago.The last time oil and gold pricesstarted to take off was when the USdollar – having appreciated forquite some time – started to weak-en, to the market’s surprise.”
This was to be the start of the2000s commodities boom.
That tantalising possibilityawaits... should the greenback losesteam.
Lorna TanInvest Editor
Mr Matt Eagan, portfolio managerfor multi-sector products atLoomis, Sayles & Company, discuss-es his outlook on fixed income andinvesting opportunities in the lat-est in our series featuring fund man-agers and leading market experts.
Mr Eagan, who has 24 years ofinvestment industry experience asa portfolio manager and fixed-in-come analyst, is a co-portfolio man-ager of the Loomis Sayles Multisec-tor Income Fund.
The fund invests in a global invest-ment universe, including US invest-ment-grade corporates, non-USdebt, emerging market debt, highyield, convertibles and equities.Launched in 1997, the fund becameavailable to retail investors in Singa-pore from June 2013.
It notched up a return of 10.31 percent (7 per cent after taking into ac-count the 3 per cent maximumsales charge) in the 11 months toNov 30, compared with 3.82 percent for the Bloomberg Barclays USGovernment/Credit total returnSGD Index.
Q Can you briefly explain yourmulti-sector income approach tonavigating market volatility andunearthing opportunities?A The fund is guided by the beliefthat financial markets are ineffi-cient over the short term. Our strat-egy tends to focus on where themarket is mispricing risk in credit,currency and rates. The benchmarkdoes not serve as a starting pointfor portfolio construction; we willlook across global sectors for thebest investment opportunities on arisk-adjusted basis.
Q What are the key opportunities in2017 in the global bond markets?A Looking ahead, the macro envi-ronment should gain momentumwith steady gross domestic product(GDP) growth globally and in theUnited States. Inflationary pres-sures are building and may acceler-ate, given the potential for fiscalstimulus along with strong employ-ment conditions in the US.
Risk assets can benefit from thisbackdrop and our current exposureto credit in the fund is more than 45per cent, which is driving the ex-cess return year-to-date. Cred-it-risk premiums have declined andcurrent valuations are pointing tolate stages of the credit cycle but, inour view, a rebound in corporateprofitability can extend this cur-rent phase of the credit cycle.
Q In view of the potential rate hikesover time, how do you manageinterest rate risks? What are theother risks investors should watchout for this year?A The US presidential election out-come raises the prospect for mean-ingful fiscal stimulus, less regula-tion and higher inflation in the com-ing years. We believe the fund iswell-positioned, given our forecast
for rates, which includes threehikes by the US Federal Reserveover the next 12 months.
A key risk we are monitoring isthe potential negative impact onglobal growth and our non-US$holdings under the assumption of astronger US dollar driven higher byloose fiscal policy, tight monetarypolicy and restrictive trade policies.
Q US President-elect Donald Trumpis an example of the trend of populistmovements, which are turning tofiscal spending. How do you see thisaffecting growth and inflation in theUS? What is the impact for the rest ofthe world?A Any Trump fiscal stimulus is ex-pected to have a greater impact inlate 2017 and into 2018. That said,post-election, we have seen apick-up in risk markets on the ex-pectation of faster GDP growth.
The rise in Treasury yields re-flects this view, along with improv-ing employment conditions and ac-celerating wage gains and inflationexpectations.
We have seen positive revisionsto the second- and third-quarterGDP growth and would expect thistrend to continue this year basedon the potential impact of fiscalstimulus.
Fiscal expansion along with tight-er employment is expected to pres-
sure US and global inflation higher.
Q Do you expect to see a change inthe investment landscape betweennow and when Mr Trump takesoffice? If so, why?A We are not expecting a materialchange in the near-term invest-ment landscape, beyond what weare seeing currently. Investors havelargely focused on certain sectorsthat may be positively impacted byless regulation, lower tax rates andincreased infrastructure spending.Specific industries include health-care, pharmaceuticals, metals, me-dia, technology and financials.
Q Moving into the year, what advicewould you give investors?A It will be important to remain pa-tient. At this time, we do not knowthe scope or magnitude of any poli-cy changes. In addition, there are anumber of key developments tomonitor – central bank action,Opec, regulatory changes – whichshould provide greater clarity.
We feel our portfolios are well-po-sitioned and have the flexibility toadjust as market conditions unfoldand investors attempt to appropri-ately price the financial implica-tions and risks.
Fixed-income investors havebeen conditioned to expect lowrates and inflation for many years,
but they also dislike today’s ul-tra-low yields and the exposuretheir portfolios have, should thesetrends one day reverse.
In fact, there are signs now thatsuggest inflation and yields are in-deed poised to rise on a more sus-tainable basis. We think investorsshould not be overly concernedabout this for two reasons.
First, rising yields will ultimatelybe good for fixed-income investorsas they will be able to earn a betterreturn by boosting reinvestmentrate returns.
Second, investors can reducetheir exposure to risk arising fromshifting market expectations of in-terest rates.
They can do that while staying inthe fixed-income space by invest-ing in multi-sector strategies thatcan move away from the developedgovernment bond markets that aremost exposed to inflation. They caninvest in corporate bonds andbonds that are less sensitive to gen-eral interest rate moves.
Diversification is the key to suc-cess in navigating today’s bond mar-ket. The goal is to get to a higher lev-el of yields while protecting princi-pal. We believe a multi-sector, un-constrained approach is the bestway to reach that goal.
Panel of expertsreverses defensiveposition and cutsexposure to gold
Gold positions have either beentrimmed or sold off following themarket rebound after the USelections. Cash levels are now below1 per cent for all three portfolios,with the money channelled toequities. PHOTO: BLOOMBERG
Initial investment ($)
Current portfolio value ($)
Net total return (%)
Benchmarkreturn (%)
Dividends and coupons ($)
Realised P/L ($)
Unrealised P/L ($)
Portfolio
NOTES:
Source: CFAS SUNDAY TIMES GRAPHICS
Portfolio performance
How they compare
40,000200,000400,000
42,677.47216,031.08429,157.31
• Portfolio start date was Jan 18, 2016.• Portfolio performance as at Dec 31, 2016.• As the Portfolio Series is intended for illustrative and educational purposes only, it will not involve actual money,
investments or solicitation of funds for actual fund management by CFAS or the advisory panel.• You are advised to seek independent �nancial or other professional advice for your own investments.• CFAS and the advisory panel may provide information and recommendations on investments which they have an interest in.• All views or recommendations made by the advisory panel are to be attributed to CFAS.• Figures may not add up to 100% due to rounding off.• To access past articles and portfolio reports, click on the Save & Invest Portfolio Series banner at www.sgx.com/academy
6.698.027.29
9.5212.737.36
996.604,033.5712,744.12
1,844.356,987.3815,419.74
1,112.986,500.11
2,285.88
Cash0.4%
Cash0.2%
Bonds9.1%
Cash0.1%
Ms Shona Chee Mr Getty Goh Mr Wang Moo Kee
Ms Shona CheeMr Getty GohMr Wang Moo Kee
Equities28% Equities
37.9%
Equities29.4%
ETFs18.9%
ETFs44%
ETFs30.5%
Bonds46.9%
Bonds33.1%
Reits8%
Reits4.7%
Reits8.8%
Mr Eagan, whohas 24 yearsof investmentindustryexperience asa portfoliomanager andfixed-incomeanalyst, is notexpecting amaterial changein the near-terminvestmentlandscapebetween nowand whenMr Trumptakes office.ST PHOTO:NIVASH JOYVIN
Cash is no longer best
The Save & Invest Portfolio Se-ries features the simulatedportfolios of a young workingadult, a married couple withtwo young children and a reti-ree over a 12-month period. Itguides retail investors in basicinvestment techniques and onhow to build a portfolio in linewith their financial goals andrisk tolerance.
This initiative involves theSingapore Exchange (SGX) col-laborating with CFA SocietySingapore (CFAS) and Money-Sense, the national financialeducation programme.
The CFAS panellists track-ing the simulated portfoliosare Mr Phoon Chiong Tuck,senior fixed income managerat Lion Global Investors; MrJack Wang, partner at LexicoCapital; Mr Praveen Jagwani,chief executive of UTI Interna-tional, Singapore; and Mr Si-mon Ng, CEO of CCB Interna-tional (Singapore).
Due to requests from read-ers, you can now access past ar-ticles in the series, as well asmonthly portfolio reports, byclicking on the Save & InvestPortfolio Series banner atwww.sgx.com/academy.
Save & InvestPortfolio Series
Avoid bonds that are mostexposed to inflation andsensitive to interest rate moves
GOODOPTION
Gold will always be a goodchoice for diversification, and youshould always have some in yourportfolio. It’s almost like aninsurance policy, and you neverknow what lies ahead.
’’MR VASUMENON, OCBC senior investment strategist.
Save&Invest
Prospects for gold stillgood for the long term
PATIENCEAMID UNCERTAINTY
It will be importantto remain patient.At this time, we donotknow the scopeor magnitude of anypolicy changes. Inaddition, there area number of keydevelopments tomonitor – centralbank action, Opec,regulatorychanges –which should providegreater clarity.
’’MR MATTEAGAN, portfolio manager formulti-sector productsat Loomis, Sayles &Company, on how investors should view themarket this year, at least in the near term.
Diversifyto findsuccessin bondmarkets
Gold historically cheap vs other assets
Source: SCHRODERS SUNDAY TIMES GRAPHICS
7
6
5
4
3
2
1
0
Gold/S&P 500 ratio
1973 1976 1979 1982 1985 1988 1991 1994 1997 1973 2000 2003 2006 2012
Cheap
Expensive
2015
B16 | Invest The Sunday Times | Sunday, January 8, 2017 Sunday, January 8, 2017 | The Sunday Times Invest | B17
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