Asset managers: Further upheavals expected within next decade

TheEdge

KUALA LUMPUR: The worst of the current economic crisis may be over in 2010 but asset managers have not ruled out further upheavals within the next decade.

According to a survey on 225 asset managers in 30 countries carried out by Principal Global Investors, most respondents do not rule out more systemic crises in the next decade. It said the scale of recent economic stimulus in G20 countries was expected to stoke inflation.

“We are not completely out of the credit crunch yet. Getting credit going is the key initiative for central banks for the next year. They have been flooding the market with liquidity in hope of getting credit moving again.

“But a lot of times, this is just simply liquidity. It is not generating new credit. And there is recognition that credit is a necessary evil in the economy,” COO of Principal Global Investors Barbara McKenzie said at a CIMB Principal Asset Management Bhd media briefing yesterday.

She added that until the market could get back on its feet again, it would continue to need access to credit and thus more government aid.

NEW CREDIT NEEDED TO FUEL ECONOMY... Markets need access to credit until they get back on their feet again, says Principal Global Investors COO Barbara McKenzie (right) at CIMB-Principal Asset Management Bhd media briefing in Kuala Lumpur yesterday. Also present were CIMB-Principal Asset Management chief executive Datuk Noripah Kamso (left) and Principal Global Investors (S) Ltd MD for Asia ex Japan Kirk West. Photo by Suhaimi Yusuf

The survey also found that 45% of its respondents did not expect the worst of the crisis to be over till the first half of next year while 25% expected it to be even later.

The 225 asset managers and pension funds surveyed were responsible for collective assets worth US$18.2 trillion (RM63.9 trillion) as at April 2009.

“We are now primarily driven by retail industries locally, significant fiscal stimulus and low interest rates. All these will naturally fade.

“However, the stimulus will eventually have to be removed and the key timing to withdraw this stimulus and how it is removed are important to consider as we are juggling between growth and potential inflation.

“But that will be in the second half of 2010,” Principal Global Investors (S) Ltd managing director for Asia ex Japan, Kirk West said.

On the survey findings, West added that although it was carried out during “the eye of the storm”, the results could be used to study investor behaviour moving forward.

“People have lost confidence in a lot of the longer-term growth assets. The whole concept of equity risk premium has made people feel uncomfortable. They will now be looking at increased liquidity.

“Several things eroded investor confidence during the crisis, especially the fact that diversification of assets hasn’t worked in the short term because of deleveraging. Going forward, however, we still believe in diversification,” said West.

He added that asset managers also expected further regulatory pressures to intensify over the next three years which may result in fee compression.

Consequently, West said a majority of firms had shown a significant revenue decline of 35%.

“One of the key issues we’ve seen in the last 12 months is compensation within the finance industry. We expect one outcome will be greater alignment in terms of compensation. So, maybe people will have lower fixed compensation, and a higher component of variable compensation and this will be more aligned with the performance of the underlying funds,” he said.

McKenzie said there was already a movement of money away from some of the traditional hedge funds centre that had light regulations to other offshore jurisdictions with higher regulatory standard as investors started understanding a need for greater regulation post crisis.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Fund managers cut exposure on China

TheEdge

KUALA LUMPUR: Fund managers have recently shifted their investment focus to Europe, the Middle East and Africa (EMEA) away from Asia, especially China, according to one Bank of America Merill Lynch (BOA-ML) survey.

It said based on its August survey, there was a "big rotation" to EMEA and away from Asia.

In a statement last Thursday, the bank said the main driver of this investment pattern was the "switching" to Russia and out of China, which saw its stock market entering bear territory last week, having plunged over 20% from the year’s peak.

A total of 204 fund managers, managing a total of US$554 billion (RM1.95 trillion), participated in the global survey from Aug 7-12. A total of 177 managers, armed with US$370 billion, participated in the regional surveys.

BOA-ML noted that in two years, China saw the lowest number of overweight positions by fund managers while South Korea got its first overweight call.

It added that investors had also sharply cut exposure to Chinese equities to "neutral".

The survey also showed more investors were becoming less optimistic in August on China economic growth compared to June while optimism on European growth prospects surged in August.

The most favoured global emerging market (GEM) markets are growth or liquidity plays such as Russia, Turkey, and Indonesia while the least favoured are the defensive markets such as Chile and Malaysia.

On specific sectors, BOA-ML said "consumer discretionary" and financials were the only sectors tagged with overweight calls.

"Most unloved sectors in GEM portfolios are utilities and healthcare," it said, adding that TECHNOLOGY [] stocks were the strongest engines behind the early recovery of GEM markets.

BOA-ML said globally, technology too remained the number one sector, with 28% of the global panel putting an overweight stance on the industry.

The bank said investors within GEM were positive about banks with a net 17% of fund managers in the regional survey overweight on bank stocks. It said 60% of the fund managers believed global corporate earnings could rise by over 10% over the next 12 months. Interestingly, it added, balance sheet repair was becoming less of a concern to investors.

Meanwhile, on the local front, fund managers like HwangDBS Investment Management Bhd is also bullish on finance stocks.

Its head of equities Gan Eng Peng told The Edge Financial Daily that the finance sector offered one of the best exposures to the economic recovery story.

Gan said despite a recent increase in volatility within the financial sector, valuations remained attractive over the next one to three years.

"Even at current valuations, the global financial sector represents a window of opportunity which has not been open for the last 10 to 20 years," he added.

Gan said as for the PLANTATION [] sector, shares of large-cap plantation companies in Malaysia had hardly corrected and their valuations remained too high.

"We think investors can get much better value and faster returns in the Indonesian names listed in Singapore," he added.

Gan said it also remained positive on the CONSTRUCTION [] sector, as it had performed relatively well in the current market rebound.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Islamic funds’ asset growth likely to slow

TheStar

But long-term recovery is certain, says KFH

KUALA LUMPUR: The rate of asset growth of funds in Islamic financial institutions this year is expected to be slower than in 2008, says Kuwait Finance House (M) Bhd managing director Datuk K. Salman Younis.

He said this was due to the prevailing global economic downturn but added that long-term recovery was certain.

“We believe asset growth of Islamic funds will be back to its strong level once the global economy improves,” he said at the Dow Jones Islamic Market Indexes media briefing yesterday.

Salman said there was huge potential for Malaysia to be the leading Islamic financial hub in the region and for Islamic financing to be the country’s key pillar of growth.

According to The Banker, a global financing intelligence magazine, the top 500 Islamic financial institutions charted a 27.6% asset growth to US$639.1bil in 2008 compared with US$500.1bil the previous year.

The major contributors to asset growth for Islamic funds are Gulf Cooperation Council (GCC) countries (US$262.7bil); Asia (US$67.1bil), led by Malaysia; Australia/Europe/the United States (US$35.3bil); and non-GCC Middle East countries, Middle East and North Africa (US$248.3bil).

PricewaterhouseCoopers Taxation Services Sdn Bhd senior executive director (Islamic financial services practice) Jennifer Chang concurred with Salman’s view on Malaysia’s potential as the region’s Islamic financial hub.

For instance, she said, Malaysia’s takaful industry had doubled in asset size over the last five years and its penetration rate was expected to reach 20% by 2010, compared with 6.5% currently.

She added that Malaysia was the largest player with 20% share of the global takaful business worth US$4bil.

Chang also said that as at end-November 2008, there were 149 Islamic funds domicled and managed in Malaysia, compared with 131 in Saudi Arabia.

“This is despite Malaysia’s total Islamic assets under management being only US$4.64bil, compared with Saudi Arabia at US$13.9bil for the period under review,” she said.

As at April 2008, the total Islamic assets under management worldwide is believed to be US$33.9bil.

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SC relaxes rules for fund managers

TheEdge

KUALA LUMPUR: The Securities Commission (SC) is giving greater flexibility for licensed fund managers to provide innovative products, including those which incorporate alternative investment strategies.

The SC said yesterday the new “Guidelines on Wholesale Funds” were rationalised and streamlined to make it easier for fund managers to offer wholesale and retail products.

They would replace the “Guidelines on Restricted Investment Scheme” and the provisions on wholesale funds in the “Guidelines on Unit Trust Funds”.

It said the new guidelines were to enable fund managers to meet the more complex needs of sophisticated or professional investors, like high-net worth investors and institutional investors.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

SC approves three new foreign IFMCs

TheEdge

KUALA LUMPUR: The Securities Commission (SC) has given approval for three foreign Islamic fund management companies (IFMCs) to start operations in Malaysia.

The regulator said in a statement that the three are Aberdeen Islamic Asset Management Sdn Bhd, BNP Paribas Islamic Asset Management Sdn Bhd and Nomura Islamic Asset Management Sdn Bhd.

It said the three companies already have presence in the conventional asset management industry in Malaysia as part of the five licences issued under a special scheme announced in 2005 to broaden international participation in the local capital market.

SC said the three companies' interest to further expand their fund management business indicated their confidence in the Malaysian fund management industry, and reaffirmed the growing interest among international players to make Malaysia the global hub for Islamic fund and wealth management activities.

In granting the approval, SC pointed out that it had considered among other things the scope of operations that would be established by the three IFMCs in Malaysia, their fund management experience, brand value, expertise in various markets, geographical presence, and compliance and risk management capabilities.

"Despite the global slowdown, the coming on board of these three international players reflects the strong growth potential in niche areas like Islamic fund management," said SC chairman Datuk Seri Zarinah Anwar.

Meanwhile, Tokyo-based Nomura Asset Management Co Ltd president and CEO Atsushi Yoshikawa said the company planned to position Islamic fund management as one of its important strategies, adding that the establishment of Nomura Islamic Asset Management would enable it to provide a wide range of products and services to Asia and the Middle East.

"We are very pleased to be awarded a licence for Islamic fund management in Malaysia. BNP Paribas Investment Partners is firmly committed to further develop its existing Islamic investment capabilities," said Vincent Camerlynck, global head of business development and member of the executive committee of BNP Paribas Investment Partners in Paris.

Aberdeen Asset Management Sdn Bhd manging director Gerald Ambrose said: "We're delighted that our application for an Islamic fund management licence has been approved as this enables us to expand into an important new area. The domestic Islamic finance sector has been growing rapidly."

Others who have been approved to establish operations are Kuwait Finance House (Malaysia), DBS Asset Management, CIMB-Principal Asset Management, Global Investment House and Reliance Asset Management.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Fund managers see muted recovery

TheStar

INVESTORS today are presented with attractive opportunities as considerable value has emerged from the downward spiral in asset values.

Many fund managers think the worst would soon be over and the markets on their way to recovery although it may be fairly muted given the severity of the losses incurred globally.

HwangDBS Investment Management Bhd chief executive officer and executive director Teng Chee Wai notes that investors may start investing again as they digest the bleak economic data in the first quarter of 2009.

“In fact, some investors have already been taking advantage of the lacklustre market to invest in equities that are now trading at relatively attractive prices,” he adds.

In 2008, every asset class – equities, bonds, commodities and properties went through a downward spiral.

Singapore’s Straits Times Index, Hong Kong’s Hang Seng and Japan’s Nikkei 225 plunged by more than 40% while crude oil was down 55% last year.

Dragged down by the equities markets, the net asset value (NAV) of the unit trust industry has dropped from RM169bil at end-2007 to RM135bil at end- November 2008. However, the 20% drop in NAV is relatively lower compared with the decline in the commodity and stock market indices.

“This is attributed to the nature of unit trusts – a collective investment scheme with reduced risks due to a diversified portfolio spread across securities, asset classes, managers and countries,” says Federation of Malaysian Unit Trust Managers (FMUTM) president Tunku Datuk Ya’acob Tunku Abdullah.

While volatility and poor economic conditions may persist in the near term, he says a well-diversified portfolio in a unit trust fund will be able to reduce risks and provide better cushion against market fluctuations.

Other industry experts observe that the general investor sentiment towards unit trusts, especially equity-based ones, will continue to be negative this year due to the crisis.

That is also due to the fact that many investors would be tightening their disposal or investible income in anticipation of a sharp economic slowdown.

However, they note that Malaysia’s banking system is still flushed with liquidity and hence, there would be appetite for investment products.

“Moreover, investors may be willing to consider investment products as we enter a phase of low interest rate environment,” HLG Unit Trust Bhd acting chief executive officer and executive director Teo Chang Seng said.

As such, the industry is expected to see more capital-protected funds being launched this year along with other low-risk fixed income products.

“In challenging times, many investors resort to the common notion that cash is king. They are also more concerned about capital preservation instead of potential yield,” says CIMB-Principal Asset Management Bhd chief executive officer J. Campbell Tupling.

Teng of HwangDBS notes that while the performance of some of its equity-based funds has been affected, its cash and money market funds have shown positive growth, year-on-year.

In view of the falling markets last year, most fund managers reported lower overall total sales and significant decrease in fund management fees as NAV of equity funds, whether local or global, declined considerably.

But on a positive note, redemptions were also considerably lower than in previous years, which is a good sign that investors are holding on rather than making panic sales.

The industry, which expects a rather quiet period this year, is stepping up its housekeeping efforts to improve internal and external efficiencies as well as enhance its delivery system.

For example, Pacific Mutual Fund Bhd is upgrading its administration and customer interface systems to achieve better connection and communication with its direct and third-party customers.

At the same time, HwangDBS is focusing on staff development and rewards to improve investors’ experience and after-sales service.

CIMB Wealth Advisors Bhd chief executive officer Tan Beng Wah says the company will continue with its plans to expand its agency force.

“At the end of 2008, we had close to 7,000 agents. We are targeting to recruit 2,500 agents this year,” he says.

According to FMUTM, it has not seen any significant number of unit trust consultants exiting the industry last year.

“For the year, it was less than 10%, which is much better than in any agency-related industry. The consultants are in for the long haul as they understand the recent market volatility is temporary,” says Ya’acob.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Global fund managers sees recovery this year: Survey

BusinessTimes

GLOBAL fund managers are optimistic that markets in most regions will begin to recover this year, according to a survey by consulting firm Watson Wyatt.

The fund managers, who collectively have assets under management of over US$10 trillion (US$1 = RM3.57), indicate that the period of recovery in most markets will be protracted.

They believe that the influence of hedge funds and investment banks will decline significantly while that of pension and sovereign funds will rise.

The respondents also expect to see their institutional clients opting for more conservative investment strategies as well as prioritising greater risk control.

"The views expressed by this influential group give us some valuable insights and should inform how, why and when key investment decisions are made," Carl Hess, Watson Wyatt global head of investment consulting, said in a press statement released in Washington.

According to the survey, which was conducted at the end of 2008, managers have overall bullish views of returns on public equities, investment grade bonds, high yield bonds and emerging markets over the next five years.

However, they hold fairly bearish views of returns on hedge funds, government bonds, money market and real estate during the same period. They remain generally neutral on private equities and currencies.

On equities, respondents expect stock markets to revert to historical return levels by 2012, while projections about returns in 2009 vary significantly by region.

According to the median view of respondents, the anticipated returns on global equities in 2009 is 6.7 per cent, with the US, the UK, eurozone, Australian, Japanese and other Asian equity markets are expected to deliver 8.8 per cent, five per cent, 5.5 per cent, eight per cent, 5 per cent and 10 per cent, respectively.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Crisis offsets Islamic fund management 2008 gains

TheEdge

LONDON: Market volatility wiped out all the asset gains made by the Islamic fund management industry in the year to September 2008, research and data provider Cerulli Associates said on Wednesday.

Islamic or syariah-compliant funds posted an 8% increase in the year to September 2008, due to new investments and returns on assets, Cerulli said. But assets were likely to have fallen to 2007 levels or even further by the end of last year, its report based on a sample of global asset managers said.

Syariah-compliant fund managers had assets of US$65 billion (RM227.5 billion) at the end of the third quarter 2008, including assets managed via discretionary mandates for institutions and high net-worth individuals and mutual funds.

The Boston-based company said Islamic-compliant equity investments performed like their conventional counterparts, while sukuk or Islamic bonds remained “rare” due to the illiquidity and scarcity of the underlying securities.

Once markets stabilised this industry could potentially expand at a rate of above 10% a year, driven by the large amount of Islamic bank deposits and increased regulatory support from governments, the report said.

Islamic mutual funds alone accounted for US$35 billion — up from US$23.2 billion gathered in 2005. — Reuters

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Fund managers cautious despite rally

TheStar

Many stay on sidelines while waiting for right time to invest

PETALING JAYA: The recent “mini” stock market rallies on rising crude palm oil (CPO) prices ushered in some much needed cheer in the new year, but fund managers have generally remained cautious.

Kurnia Insurans Malaysia Bhd chief investment officer Pankaj Kumar said it was likely that most fund managers and investment heads would channel their funds into several asset classes to reduce risk.

“They might be placing more of the funds in corporate bonds which are a safer bet, compared with investing in the stock market under the current global economic climate,” he told StarBiz yesterday.

A fund manager with a local bank said fund managers were waiting for more positive and consistent signals before investing in the stock market in a bigger way.

“The worst is likely not over and there is too much volatility in the market to make an assessment,” the fund manager said.

Areca Capital Sdn Bhd chief executive officer Danny Wong said most fund managers would likely wait until the release of fourth quarter financial results before deciding to invest.

“They want to see if the corporate results meet their expectations and also whether the general global economic conditions are conducive to invest more in the market,” he said.

Many fund managers were choosing to stay on the sidelines and waiting for the opportune time to invest, Wong added.

“When the investment climate is right, they will then not lose out on the opportunity to enter the stock market in a big way,” he said.

Meanwhile, Pankaj said the global economic downturn also presented opportunities for cash-rich institutions to buy into battered stocks that had strong fundamentals and a potential upswing in their share prices in the medium to longer term.

“Despite the downturn every economic crisis presents opportunities for those able to capitalise on the situation,” he said, adding that state agencies such as Employees Provident Fund (EPF) and Khazanah Nasional Bhd should consider investing in undervalued stocks, locally or abroad.

Pankaj said some of the stocks, especially those in the United States were worth looking at as their share prices had fallen significantly.

He said while the current downturn could not be compared with the Great Depression of the 1920s and 30s, the global economic crisis would undeniably impact stock markets around the world, including Bursa Malaysia.

“Malaysia’s economy and stock market are intrinsically link to the US economy,” Pankaj noted.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Unit trust still a good bet for the long term

TheEdge

KUALA LUMPUR: The past 12 months has seen the erosion of wealth in virtually every type of non-fixed income investment, and unit trust funds have not been spared.

Despite offering a modicum of security compared to traditional equities owing to its large pool of investors and its diverse portfolio of investments, trust funds have nonetheless declined alongside market indices, albeit at a slower rate.

According to data from the Securities Commission, the total net asset value (NAV) in Malaysia dropped by more than 20% to RM135.87 billion in November from RM170.1 billion in January.

There is, however, an anomaly within the figure, namely the decline in the NAV of Islamic-based funds. Unlike conventional funds’ NAV, which plunged 22% to RM119.77 billion in November from RM153.7 billion in January, Islamic funds declined only 2% to RM16.11 billion from RM16.4 billion.

A fund manager noted that this could be due to the fact that Islamic funds were not traded intensively and tended to lag behind the movement of conventional funds.

Case in point is the fact that the total NAV of Islamic funds only peaked in June with an NAV of RM17.98 billion, up 10% from January before starting its downwards slide. By that time, conventional funds’ NAV had already started to shed value since its peak in January.

On the whole, September’s figure also marked the first time that the total NAV failed to show positive year-on-year growth in at least four years. Subsequently, total NAV for September shrank 4% compared to the same month in 2007.

According to Eric Wong, Hong Kong head of research for global fund analyst Thomson Reuters Lipper, the last 12 months has seen unprecedented movements in the fund industry for both Malaysia and the region.

“The year-to-date (January to November) average loss of all funds registered for sale in Malaysia is the largest (-23.10%) since its average loss for the entire year in 1997(-43.30%),” Wong said in an email reply to The Edge Financial Daily.

He added that a similar trend had been occurring in other major regional markets such as Thailand, Hong Kong, Taiwan, Singapore and China.

The silver lining for Malaysian investors, however, is that the Malaysian fund industry has incurred significantly smaller losses then that of most other Asian countries. This finding is not surprising as the Kuala Lumpur Stock Exchange has outperformed other countries in the region.

Wong believed there were other considerations as well.

“This may probably be attributed to the capital control imposed by the Malaysian government, rendering foreign investors less interested to invest in Malaysian equities and bonds,” Wong said. “Their relative low participation reduces the volatility of Malaysian equities and bonds.

“This, coupled with the majority of funds that are registered for sale in Malaysia, are invested in Malaysian equities and bonds, limits the average loss of Malaysian funds in comparison to those in other Asian countries.”

Responding to reports that a majority of equity funds in Malaysia had increased their portfolio allocation to cash or other liquid securities in Malaysia as a precaution against a continued slump in the market, Wong said some funds made the switch to cash in the third quarter.

However, there was no evidence that a majority of equity funds were doing so, he added.

Time to buy and what to buy?

With equities trading at historic lows, common wisdom suggests that now would be a good time to cherry pick for good stocks at cheap prices. By extension, this would mean that equity funds also would trade cheaply.

Nonetheless, Wong believed it was premature to conclude that equities were undervalued, saying it was likely that equities would continue their slide in 2009.

“The values of equities are basically determined by two components: interest rate and earnings growth. Low interest rates and expectation that central banks around the globe will continue to lower interest rates will continue to support equities,” he said.

“However, with reports showing the global economic environment is projected to deteriorate further in 2009, the downwards trend of corporate earnings growth is less likely to reverse in the coming quarters.

“Such a scenario means equities will still face significant downside risk on their valuation in 2009 and, hence, investors should not at this stage park their capital in equity funds.”

Wong added that the same was likely true for commodity funds, which were traditionally even more volatile than equity funds.

For investors who are concerned about preserving the value of their investments, Wong advised continued investment in bond-linked and money market funds, although yields had fallen to very low levels recently.

Should investors stay away from unit trusts?

No, said Robert Foo, financial planner and managing director of MyFP Services Sdn Bhd.

So long as investing for the long-term is concerned, investors shouldn’t concern themselves too much with the current state of the market, as markets will grow in the long term.

Unit trust funds, he added, were not “opportunistic investments” that would yield massive returns in the short-term. As a managed basket of investments, funds offer the benefit of professional management in exchange for more normalised returns on investments.

“When we talk to clients, we tell them that they have to look at it from a period of time of five years and above,” Foo said. “Our objective is to help our clients achieve their investment targets and this means rebalancing their portfolios depending on the condition of the market.”

Meanwhile, markets will rise and fall in the long-term, he said. What investors have to do is to rebalance their portfolios during both the peaks and the troughs. In that respect, it is essential for investors to establish investment goals that correspond with their tolerance for risk.

Foo said a disciplined approach would allow for greater returns in the long-term. His clients, he said, averaged between 7%-8% in returns although they had differing investment targets.

“When the market was way up, we also rebalanced our clients’ portfolios. We said, ‘Look, 60% return is absurd for a fund, so we need to rebalance,’ and we rebalanced our clients down,” he said.

As for asset classes of funds, Foo said the type of fund was not as important as the revenue model of the underlying investment and consistency in performance, although he said MyFP’s policy was to stay away from “theme-based funds” such as those localised in a specific region or commodity.

Foo also advised that investors refrain from going on a purchasing spree based on the “cheapness” of a stock or fund, as pricing was not a good indicator of the value of the share.

“At the end of the day, it’s not the price that determines the value of the stock — that kind of analysis is too simplistic. You have to look at the intrinsic value of the underlying equity to determine that,” Foo said.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Cash is not lone option, advises fund manager

TheEdge

KUALA LUMPUR: Cash is not the only choice in difficult times as there are many investment opportunities to improve returns in the long term, said Prudential Fund Management Bhd John Lim Eu Hock(PFMB) chief investment officer Yoon Mun Thim.

In a media briefing last week on the topic Cash Is King, But For How Long?, he advised investors to carry out individual risk profiling to judge their own willingness for long-term investments as the market would continue to remain volatile for 2009.

“There is a great chance that you will lose money in the near term, and if you can’t take that kind of volatility, then you should go for something safer,” he said.

He said the situation was different from the Asian financial crisis 10 years ago, when fixed deposit (FD) rates of between 6% and 10% made it worthwhile to retain cash savings. However, with FD rates in recent years below 4%, playing it safe may not be such an appealing option.

Taking a worst-case scenario of the slowdown lasting five years, he advised investors to find investment opportunities that could yield more than 19%, which is the compounded FD interest rate of that period.

“I would advocate to have some risks. Bonds still give more certainty than shares as long as you choose carefully papers from companies that won’t default,” he said.

He added that while investing in the equity market was riskier, many stocks were priced at crisis lows with some values starting to emerge. As an indicator of increasing values, he cited that many listed companies now had lower price-to-book ratios, price-to-sales ratios, and price-to-cash flow ratios than the KLCI average.

“Equities have a history of bouncing back stronger, so the chances of you making a return are high if the companies you invest in survive,” he said, adding that it was vital to do one’s homework in picking the right stock.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

EPF better than stock market

TheStar

It never gives negative returns

IN general, most people have the impression that the money placed in the Employees Provident Fund (EPF) always generates lower returns compared with the returns from their own investments.

In this article, we will look into the returns from EPF versus returns from the KL Composite Index (KLCI). We assume that investors are able to generate their own returns equivalent to the returns from the KLCI.

Based on our 23 years of data compilation, it is generally true that the average returns generated from EPF are lower than KLCI returns. From 1986 to 2008, the average return of EPF was 6.7%, 2.3 percentage points lower than the average return of 9% from the KLCI (see table).

However, most people do not understand the risks they need to undertake when they invest by themselves. The standard deviation of EPF is only 1.5%, 22.2 percentage points lower than the standard deviation of 23.7% from the KLCI.

We use standard deviation to measure risks. Most investors only look at how to generate the extra 2.3 percentage point returns, forgetting that they need to undertake a much higher risk to generate the extra returns. The extra return is unable to compensate for the extra risks that investors need to take.

Let’s assume one investor invested RM10,000 in the EPF and the KLCI respectively at the beginning of 1986. Logically with the average KLCI return higher than the average EPF return, the fund in KLCI should be higher than the fund in EPF in most periods.

However, as the table shows, by the end of 2008 (we assume that EPF will only be able to generate a return of 4.25%), the fund placed in KLCI would have reached RM40,000 versus RM43,946 generated by EPF, a shortfall of RM3,946.

The main reason behind this shortfall is that the EPF never gives negative returns whereas the KLCI generated negative returns eight times over the past 23 years.


There is a market saying that out of 10 people who invest in the stock market, only one can make money, the others will lose money. Warren Buffett says if you want to win, you don’t lose. Hence, we disagree with some people who advise others not to place money in EPF because it generates lower returns.

In most periods, the money in EPF gets lower return than the money placed in KLCI. However, the main reason for the lower fund value in KLCI by the end of 2008 was the market crash during 1998.

The money in KLCI dropped by 47.1% to RM18,105 in 1998 from RM34,246 in 1997 whereas the money placed in EPF increased further to RM26,594 in 1998 from RM24,924 in 1997. After 1998, it took nine years for KLCI to catch up with the fund value in EPF.

Last year the fund value in KLCI (RM46,000) finally surpassed the fund value in EPF (RM42,154). However, as a result of the recent market crashes, we are anticipating the fund value in EPF to overtake KLCI again this year.

It will take a few years from now for the KLCI to catch up with the EPF again. Unless investors are constantly monitoring their own investments and are able to avoid most of the negative returns, we think it is safer to put money in the EPF rather than withdraw it for their own investments.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Money market-linked funds best performers

TheStar

They delivered positive returns over one year till Oct 31

PETALING JAYA: Money market-linked funds registered for sale in Malaysia were the best-performing asset type in comparison with commodity and equity funds for the year ended Oct 31, according to data provider Morningstar Asia Ltd.

On average, money market funds delivered positive returns (2.19%) over the period compared with commodity and equity-linked funds, which registered negative returns.

Morningstar told StarBiz that as a result of the uncertain global economic climate, investor risk appetites had been sharply reduced.

Higher-risk asset classes, such as equities and commodities, typically performed poorly in such an environment, while perceived safe harbours – such as money market linked-funds – generally did better, Morningstar added.

However, it must be noted that in the preceding year, commodity funds posted impressive performances with an average return of 70.61%, followed by equity-linked funds (41.53%) in comparison with money market funds (2.81%), according to Morningstar.

According to OSK-UOB Unit Trust Management Bhd, the fund manager of OSK UOB Money Market (the best performing money market-linked fund over the past one year), the fund had invested in short-term Islamic commercial papers and placed short-term syariah-based deposits with financial institutions to preserve capital and to generate consistent income streams.

The fund manager said it focused more on high-quality short-term corporate securities to limit credit and duration risks.

In the first quarter of 2008, the fund capitalised most of its profits when short-term government sukuk traded below overnight policy rate of 3.5% amid strong demand from offshore investors, it added.

“Subsequently, we adopted a more cautious approach given the increased market volatility amid heightened inflationary pressures and political uncertainties,” it said.

Meanwhile, fund manager Meridien Asset Management Sdn Bhd chief executive officer and managing director Nicholas Ng said its MAAKL Money Market Fund, another top-performing money market-linked fund, had consistently focused on commercial papers with top credit quality, hence sheltering it from the volatility associated with the bond market.

To further fortify itself, the fund decided to cease investments in short-term bonds, even though in the past it had prudently limited its short-term bond exposure to AAA credit ratings with less than six months’ duration and no more than 10% of its fund size.

Ng said he expected stability to continue in the money market, given the recent steps taken by Bank Negara to strengthen confidence in the financial system.

Going forward, the fund manager for OSK-UOB Unit Trust said the US financial turmoil would pose volatility and bode well for risk-aversion investment, namely money market-linked funds.

Also, current account surplus and ample liquidity in the banking system should continue to provide support for the money market, he added.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Fine prospects for wealth management

TheStar

Local industry prospers despite slowdown in developed economies

KUALA LUMPUR: The prospects of the wealth management business in Malaysia remain positive although the industry has taken a big hit in developed economies, industry players said.

Citibank Bhd head of wealth management products Aisyah Lam said the bank currently had more than 30,000 Citigold customers in the country and expected a double-digit growth in the next 12 months in the affluent customer sector, beating the industry’s growth of 7%.

“Despite the global market volatility, our current Citigold client base has grown by double digits this year,” Lam said, referring to the bank’s wealth management service.

“As clients’ sophistication increases, so will the demand for more comprehensive and tailored services,’’ she told StarBiz in an e-mail.

The bank recently launched its Citigold Global Banking, catering for clients with cross-border financial and banking needs.

Citigold is offered to customers who have a minimum portfolio value of RM200,000.

Forbes Asia revealed this year that the top 40 in Malaysia’s Rich List had a collective wealth of US$46bil, up US$3bil from last year, with 10 billionaires listed on the Rich List.

Standard Chartered Bank Malaysia Bhd (StanChart) head of wealth management Choong Wai Hong said proper wealth management was needed more than ever to preserve existing assets and protect investors’ “nest eggs.”

StanChart’s growth in wealth management over the years had been “significant” in tandem with the overall growth of the industry, he added.

Last year, the bank’s wealth management business grew by 65%.

Choong said, however, the bank was expecting more moderate growth due to the more cautious sentiment after the financial crisis.

Nevertheless, the bank plans to launch more innovative wealth management products “very soon.”

Meanwhile, OCBC Bank (M) Bhd head of wealth management Lim Wyson has been advising clients on how to invest amid a global financial crisis.

He said a key concern among investors was in deciding how much of their wealth to put in the various forms of investments like unit trusts, structured products, stocks and bonds.

“The smaller the percentage of wealth placed into such investments, the less the customer will need to perform significant portfolio changes,” Lim said.

“For those who are already investing in the markets, we advise that they should not panic as this may lead to irrational actions to their portfolios.’’

He noted that assets like capital protected investments, capital guaranteed investments, selected categories of bonds and the more balanced funds held up much better than equities.

Lim said research results from past crises such as the Asian financial crisis had shown that investors stood to lose more if they switched to cash instead of holding on to their investments.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

SC grants two more Islamic fund management licences

TheStar

KUALA LUMPUR: The Securities Commission (SC) has granted two additional Islamic Fund Management licences to India’s leading fund management company Reliance Capital Asset Management and Kuwait-based Global Investment House, said Deputy Prime Minister Datuk Seri Najib Razak.

Leading firms, including Prudential, were using the country as their regional centre for Islamic fund management activities, reaffirming their confidence in it as an international Islamic financial centre, he said.

“There are several other leading firms being reviewed by the SC for licences,” he said in his address at the opening of the 5th Kuala Lumpur Islamic Finance Forum (KLIFF 2008) yesterday.

The event was organised by the Centre for Research and Training and co-hosted by the Labuan Offshore Financial Services Authority and the Halal Industry Development Corp. - Bernama

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Hedge funds lose US$100b on investor withdrawals

TheEdge

TOKYO: The global hedge fund industry lost US$100 billion (RM360 billion) of assets in October, according to an estimate from Eurekahedge Pte, as firms including Sparx Group Co and Man Group plc were hammered by investor redemptions.

Funds fell an average 3.3%, based on preliminary figures from the Singapore-based data provider, as measured by the Eurekahedge Hedge Fund Index, which tracks the performance of more than 2,000 funds that invest globally. That compares with a 19% slide in the MSCI World Index last month.

The biggest market losses since the Great Depression and investor withdrawals hurt the US$1.7 trillion hedge funds industry that manages largely unregulated pools of capital. The index of global funds has lost 11% this year, set for the worst performance since 2000 when Eurekahedge began tracking the data.

“This wave of redemption in the hedge fund industry is going to last for at least another six months,” said Toyomi Kusano, president of Kusano Global Frontier, a hedge fund research firm here. “There are some funds that halted withdrawals, but those funds would eventually have to defreeze, and that means another wave of redemptions.”

Earlier this week, Sparx Group Co, Asia’s biggest hedge-fund manager with US$8.5 billion in assets, posted a first-half loss on redemptions and falling stock prices. Its assets under management on a preliminary basis were 839.1 billion yen (US$8.8 billion or RM31.68 billion) as of Oct 31, compared with a peak of 2 trillion yen in August 2006.

London-based Man Group, the largest publicly traded hedge-fund manager, reported assets under management, which stood at US$70.3 billion as of Sept 30, fell to US$61 billion at the beginning of November, the least since March 2007.

“As both hedge fund managers and fund of funds scramble to meet client redemptions, one thing is clear: the industry is going to shrink substantially over the coming months, perhaps as much as 50% in terms of both assets under management and number of funds,” said Kostas Iordanidis, head of hedge funds at Geneva-based Unigestion Holding SA, which invests US$3.2 billion in hedge funds worldwide.

Unigestion is investing in macro and commodity trading advisers, or CTA, funds, avoiding equity long-short portfolios, Iordanidis said.

Assets in Singapore-based Tantallon Capital’s flagship Tantallon Fund shrank to US$284 million at the end of October, according to data compiled by Bloomberg. The fund, managed by Nicholas Harbinson, a Tantallon co-founder and former Merrill Lynch & Co. head of sales, stood at US$877 million at the end of August, from as much as US$1.5 billion at the start of the year.

Still, hedge funds have outperformed relative to the MSCI World Index that has lost 46% this year. In October, managers who trade futures, or CTAs, and those who invest in Japan helped offset declines, Eurekahedge said.

In terms of regional mandates, the Eurekahedge Japan Hedge Fund Index was the best performer, declining 0.8% last month, even as the benchmark Topix index slid 20%, the firm said. Trades that involved selling regional stocks and took advantage of currency moves helped stem losses, Eurekahedge said. The yen strengthened more than 7% against the dollar in October, the biggest gain since October 1998.

Among Japan funds, the 2.7 billion yen Sparx Japan Stocks Long Short Fund, also known as “Best Alpha,” declined 2.2%t in October, according to monthly data posted on the company’s Web site.

The Eurekahedge Asian Hedge Fund Index lost 4.3%. Singapore-based Tantallon’s long-short fund, which seeks to profit from both gains and declines in stock prices, fell 28.6% this year through October. It was up 0.59% last month, Bloomberg data show.

“Although we are seeing and we will see attrition amongst Asian funds, it is unlikely to be as bad as the more developed markets,” said Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte, citing the cost of running a hedge fund in the region.

US hedge-fund managers may lose 15% of assets to withdrawals by year-end while their European rivals shed as much as 25%, Huw van Steenis, a Morgan Stanley analyst in London, wrote last month in a report to clients. Combined with investment losses, industry assets may shrink to US$1.3 trillion, a 32% drop from the peak in June.

The Eurekahedge North American Hedge Fund Index fell 4 percent, the firm said, while the index tracking Eastern Europe and Russia was the worst performer with a slide of 16%. The Eurekahedge European Hedge Fund Index slid 6.8%, while the measure tracking Latin American funds declined 4%, the data provider said.

Millennium Global Investments Ltd., the $14 billion firm founded by former Goldman Sachs Group Inc executive Michael Huttman, is planning to limit withdrawals from its US$600 million high-yield bond hedge fund after investors asked to pull more than a quarter of their money.

By strategy, CTA funds outperformed, with average gains of 6.2% as managers exploited directional trends in the commodity and currency markets, the firm said. Similar trades also helped boost the performance of so-called macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, Eurekahedge said.

Among macro funds, Astmax Commodity Global Macro Fund, run by former Sumitomo Corp. copper trader Tetsu Emori, rose 2.6% last month. The 1.4 billion yen fund takes long and short positions in global commodity markets.

The preliminary figures were based on 41.5% of the funds reporting their October 2008 returns as of Nov 12, Eurekahedge said. For CTA managers, the performance figures were based on 60% of the funds reporting, it said. - Bloomberg

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Commodities-linked funds take a beating

TheStar

Strengthening US dollar will continue putting pressure

PETALING JAYA: Commodities-linked funds in Malaysia have been the worst performers for the past one year and the outlook is not encouraging, according to data provider Morningstar Asia Ltd.

Economists said commodity prices would continue to come under pressure, going forward, given the current bullishness of the US dollar.

“The strengthening of the US dollar, to some extent, explains the weakness of commodity prices,” said Nor Zahidi Alias, chief economist of Malaysian Rating Corp Bhd.

“The current surge in the greenback against major currencies – except the yen – means many traders will continue unwinding their positions in the less attractive dollar-denominated commodities.”

Morningstar Asia’s data showed that, on average, commodities-linked funds slumped 37.32% while equity funds fell 36.36% in the past 12 months from October, underperforming other funds.

The CRB/ Reuters US Spot All Commodity index fell by 28% from its high in July this year.

Another closely watched barometer – the CRB/ Reuters US Spot Raw Industrials index – declined by 30% from its high in May.

Only money market funds delivered positive returns, climbing 2.19% over the same period.

However, it must be noted that the fund size for commodities was RM206.5mil as at end-September compared with equity funds, which had RM22.6bil, and money market funds RM13.1bil.

Morningstar Asia said the commodities market might remain subdued over the short term due to the slower global growth, de-leveraging by financial institutions and sharply-tighter global credit conditions.

Singapore-based Asian Forecasting Group economics director David Cohen said in view of the current downbeat outlook, investors were expected to make further redemptions from commodities-linked investments in the near term.

Does this mean that unit trust funds with primary exposure to commodities, especially those launched recently, are in a quandary?

One asset management company told StarBiz the commodities market were still volatile and was, therefore, unable to comment.

Another fund manager said sales had slowed and redemptions increased, but not at an alarming rate.

Some funds had lost their net asset value by more than 30% over the past six months due to the softening demand for commodities, the fund manager said.

Nor Zahidi said a downbeat outlook on global economic growth by the International Monetary Fund (IMF) also led to a drastic decline in overall commodity prices.

The IMF has forecast that the global economy will grow by only 3% in 2009, suggesting that the world is near a recession.

Nor Zahidi said China’s economy, for instance, had moderated to 9% in the third quarter this year, down from 10.1% in the preceding quarter.

“Prices of crude palm oil (CPO) have also responded to the expectation of a softer demand, particularly from China, and lower crude oil prices,” he said.

“Prices have recently fallen below its 12-year average of RM1,622 per tonne and will likely remain below RM 2,259 per tonne in the near term.”

The January 2009 benchmark contract for CPO closed unchanged yesterday at RM1,586 per tonne.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

In these troubled times do you hold stocks or cash?

TheStar

OVER the past few weeks, as a result of the sharp plummet on the stock market, some investors regret not selling their stocks early as almost all of their stocks have been incurring huge losses.

However, the market recovery over the past few days caused some investors to again regret — not buying stocks when the market hit the bottom.

The decision to hold more cash or stocks is one of the most difficult decisions to make.

According to a study by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower in 1986, 95% of the variance of fund returns was the result of the asset allocation decision.

Hence, the right asset allocation between cash and stocks plays a very important role in determining the returns of a portfolio.

In this article, we will look into two key strategies in asset allocation, namely the constant mix (CM) and the constant proportion portfolio insurance (CPPI) strategy.

The key principle behind the CM strategy is to buy stocks when the market drops and sell them when the market recovers.

As for the CPPI strategy, it is the reverse, which is to sell when the market plunges and buy when it recovers.

We should continue selling stocks until the portfolio drops near our pre-set floor level. Once the market touches our floor level, we will hold all cash and no stocks.


Under normal market conditions, the CM strategy is an excellent tool for rebalancing our portfolio.

This strategy requires us to rebalance our portfolio based on a constant mix, where we set a constant ratio of stocks to total assets.

Assuming we have only two asset classes, namely stocks and cash, we will maintain the desired invested portion in our portfolio regardless of market conditions.

If we have a portfolio value of RM100,000 and intend to maintain a stocks to total asset ratio of 60%, we invest RM60,000 in stocks and hold RM40,000 cash.

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Now, our portfolio will be RM94,000 (RM54,000 + RM40,000 cash)

Our invested portion will drop to 57.5% (RM54,000 of stocks divided by our new portfolio value of RM94,000).

In order to maintain a 60% investment, we need to have an invested portion of RM56,400 (0.6 x RM94,000).

So we will use RM2,400 in cash to buy stocks (RM56,400 - RM54,000).

After this portfolio rebalancing, our new invested portions will be RM56,400 in stocks and RM37,600.in cash.

This will bring the invested portion back to 60% with the total portfolio value of RM94,000.

The CM strategy will cause us to buy more stocks when the market drops. We will be able to acquire a lot of quality stocks at cheap prices.

However, we will continue buying more stocks while the overall market continues to plunge.

During a bear market, we will see our portfolio shrink in value as our earlier purchase price may get cheaper.

Unfortunately, not many investors can tolerate a drop in their portfolio value.

The CPPI strategy is appropriate for use in either a super bull or a super bear market.

It is not suitable for use on normal market periods as we need to sell stocks when the market drops and buy when the market is on the way up.

We may end up buying at high prices and selling them at low.

Under the CPPI strategy, the portion of money in stocks is based on the formula that:

Money in stock = M x (TA - Floor) Where M = stock investment multiplier (proportion), TA = total assets held in the portfolio, Floor = the minimum allowable portfolio value (zero risk level) and TA - Floor = cushion or funds that can be put at risk.

Assuming we have a portfolio value of RM100,000, if we set our minimum allowable value (Floor) = RM70,000 and stock multiplier (M) = 2, we will invest RM60,000 in stocks [2 x (RM100,000 – RM70,000)].

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Our portfolio will be RM94,000 (RM54,000 + RM40,000 cash).

Our invested portion needs to be reduced to RM48,000 as 2 x (RM94,000 – RM70,000).

We need to dispose of RM6,000 worth of stocks (RM54,000 – RM48,000) and bring the cash level to RM46,000.

Following this portfolio rebalancing, the portion invested in stock is RM48,000 with cash of RM46,000.

The total portfolio value is RM94,000.

We will continue to sell stocks and hold more cash as the market drops.

We will stop investing in stocks when our total portfolio hits the floor level (TA – Floor= 0).

The strength of the CPPI strategy is that our lowest portfolio value at any point in time will be RM70,000 whereas the CM strategy may cause our portfolio value to drop much lower if the market crashes further.

In conclusion, the choice of strategy will depend on the overall economic outlook.

Unless we know our economy will not drop into recession, otherwise — based on our current situation, the CPPI strategy has the advantage of protecting our minimum portfolio value at the floor level.


Ooi Kok Hwa is an investment adviser licensed by Securities Commission and managing partner of MRR Consulting.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Market slump takes RM21b toll on unit trust funds

BusinessTimes

Despite the slump, the percentage of the net asset value had grown to represent 19.31per cent of Bursa Malaysia Securities' market capitalisation

THE sharp falls in the equities market have cut the total value of unit trust funds by RM21 billion in the first nine months of the year.

The value dropped 12 per cent to RM148 billion from RM169 as at December 31 2007.

However, Federation of Malaysian Unit Trust Managers (FMUTM) president Tunku Datuk Ya'acob Tunku Abdullah said the percentage of the current net asset value (NAV) had grown to represent 19.31 per cent of Bursa Malaysia Securities' market capitalisation.

At the end of last year, the percentage was 15.32 per cent. This means that the price reduction for shares held by the funds was not as great as the overall market's.

A total value of RM335.61 billion in market capitalisation had been wiped out from the local bourse between December 2007 to September 2008.

"Our benchmark (for the NAV percentage) will be 20 per cent by year-end," he told reporters after his welcoming note at the annual convention of unit trust consultants in Kuala Lumpur yesterday.

Based on the Morningstar Fund table as at October 17 2008, the Malaysian equity funds posted losses of 29.36 per cent compared to global equity funds which saw losses of 40.07 per cent over a year.

Tunku Ya'acob said there would not be a slowdown in fund launches but a change in the type of new funds is anticipated.

"We will see more aggressive-type funds such as distress asset funds, which will pick up cheap assets. However, subscription to the funds may be affected," he said.

Conventional funds launched for the first nine months of 2008 had increased by 40 to 407 compared to funds launched in 2007. Islamic-based funds have also risen by 16 to 144.

While the redemption rate of funds has increased slightly, the level remains low due to strong saving habits practised by Malaysians, said Tunku Ya'acob.

FMUTM technical chairman Tan Keah Huat said unit trust investors should continue investing especially when prices are weak to enjoy the upside when markets recover.

He expects an increase in net inflows for existing funds since purchasing more units at a lower price will lower the average price paid for all units.

On FMUTM's ongoing initiative, it has appointed Mesdaq-listed Rexit Bhd to develop an e-Unit Trust system, which will shorten investors' application process for unit trust purchases using EPF (Employees Provident Fund) savings.

"The manual process takes roughly two weeks and with this automation system, it should not take longer than six days," said Tunku Ya'acob.

The system should be in place by the first quarter of 2009.

FMUTM will also introduce a fund volatility factor early next year for all funds with a three-year record and above.

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.

Great Depression versus now

TheStar

As much as there are similarities between the two crises, the damage caused by the current turmoil is likely to be less severe given the swift actions of central banks.

AS a result of the recent financial tsunami, some experts have started to ponder whether we are headed for a depression.

The current credit crunch and the meltdown in some financial institutions were quite similar to what happened during the Great Depression in the 1930s.

In this article we will analyse the reasons behind the 1929 Wall St crash, which kickstarted the Great Depression and compare it to the current situation to identify any signs that a depression is approaching.

Milton Friedman, the leading advocate of monetarism, argued that every great depression had been accompanied or preceded by a monetary collapse.

According to Ben Bernanke, the US Fed chairman, the main reason behind the Great Crash of 1929 was due to the tight monetary policies adopted during that period.

He said the high interest rates back then caused the US economy to fall into a recession that led to the great market crash in October 1929.

As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar.

The Fed continued to increase interest rates in an effort to preserve the value of US dollar.

As a result, high interest rates caused bankruptcies for many companies.

At the peak of the Great Depression, the US unemployment rate hit 25%

To rub salt into the wound, massive withdrawals of cash by panicky depositors were the last straw that brought about the total collapse of financial institutions.

In that period, bank deposits were uninsured and the collapse of the banks caused depositors to lose their savings.

And due to the economic uncertainties, the surviving banks were reluctant to give out new loans.

Another culprit in the 1929 crash was margin financing which caused excessive speculation in the stock market.

Investors needed only to put up 10% capital and borrow the rest from the bank to invest in the stock market.

The collapse of stock prices led to margin calls and further selldowns.

Coming back to the 2008 crash, the banking and credit-market crisis was mainly due to the property boom and subprime bust.

The collapse of subprime loans sparked the credit crunch, which dragged some financial institutions into trouble.

As a result of the securitisation and the creation of innovative financial products like collateralised-debt obligations and credit-default swaps, the collapse of one financial institution had a domino effect, leading to the collapse of other financial institutions.

Now, the pertinent question is whether we are in a long bear market and heading for a depression.

We believe a depression like the one in 1929 may not happen exactly the way it did before.

Given the fast actions taken by central banks around the world, the damage caused by this crisis will be less severe than the one in 1929.

Central banks around the world have been putting in concerted efforts to make sure the global economy will not fall into a depression.

The rescue packages being implemented throughout the world will help stabilise the financial system.

We believe the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch.

Besides, deposits placed with most financial institutions are guaranteed by central banks.

Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still far below the peak of 25% hit during the Great Depression.

In the 1929 crash, the Dow Jones Industrial Average took about three years to reach bottom in July 1932 from its peak in September 1929.

From the peak to the trough the Dow lost about 90%.

The Great Depression in the US started in August 1929 and ended only in March 1933.

The stock market started to recover eight months before the US economy ended its depression.

At present, the Dow has already dropped for a year from its peak in October 2007, currently down about 37.5% against its peak of 14,164 points on Oct 9, 2007.

In view of the possible economic recession in most developed countries, we think the Dow will drop further from current levels.

Nevertheless, we believe it will recover much faster and the magnitude of the fall will be far less severe than the one in 1929.

Lastly, we believe the stock market will eventually recover.

At this point, to be more prudent, we may take a “wait and see” approach until things stabilise.

> Ooi Kok Hwa is an investment adviser licensed by Securities Commission and the managing partner of MRR Consulting

Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.