Tuesday, August 12, 2008

Protect & Hedge Your Capital with Public Capital Protected Select Portfolio Fund

PublicMutual

The Public Capital Protected Select Portfolio Fund (PCPSPF) is a capital protected fixed income fund that offers investors principal protection with the opportunity for capital gains upon maturity of the fund. To ensure capital protection, the fund invests at least 85% of its net asset value (NAV) in Ringgit denominated zero-coupon negotiable instrument of deposits (ZNIDs) and liquid investments comprising high quality debentures and money market instruments.

To enhance the fund's overall return, the balance of the fund's NAV will be invested in a portfolio of Exchange-Traded Funds (ETFs), equities and equity-related securities of gold and oil & gas sectors in domestic and selected foreign markets which offer investors the ability to hedge part of their investments against inflation.

Consequently, investors with conservative risk-reward temperaments who wish to protect their capital and participate in the upside potential of gold and oil & gas sectors may choose to invest in the Public Capital Protected Select Portfolio Fund (PCPSPF).

Gold

Similar to other commodities, the price of gold is driven by supply and demand factors. On a global basis, 68% of gold produced is used mainly in the production of jewellery with investment and industrial usage accounting for the balance of 19% and 13% respectively. Demand for jewellery is influenced by factors such as income growth and cultural preferences. India, China and U.S. are the world's largest consumers of jewellery accounting for 23%, 12.6% and 10.8% respectively of world gold demand in 2007.

Demand for gold is also driven by its capacity as a store of value in environments of financial instability such as during a credit crisis, currency devaluation or rising inflation. Over the years, gold has protected investors' wealth and provided a 'safe haven' at times of market volatility. More recently, investor interest in gold has been supported by the perception that gold provides a hedge against inflation. During periods of rising inflation, the purchasing power of money falls. As the value of gold is considered to be more stable compared to other types of investments, investor demand for gold rises and thus, leading to higher gold prices.

On the supply side, the global supply of gold is limited due to declining production in South Africa (the second largest gold producer in the world after China) and North America.

Chart 1: Gold Spot Price, 1998-2008

Source: Bloomberg, July 2008

For the 10-year period up to 18th July 2008, gold prices rose from US$294.50 to US$955 per troy ounce (oz) or equivalent to an annual compounded growth rate (CAGR) of 12.5% per annum. Gold prices accelerated from US$636.70/oz as at end 2006 to US$ 925.99/oz as at end 2007 and hit a record high of US$1,002.95 per troy once) on 14th March 2008 as investors perceived gold as a safe-haven asset amid uncertainties in global financial markets, rising inflationary pressures and expectations of further weakening of the U.S. dollar. Looking ahead, demand for gold as an inflation hedge may strengthen if global inflationary pressures continue to persist amidst elevated food and energy costs.

Oil & Gas

Crude oil prices have also been driven by rising demand amidst limited supply. For the 10-year period up to 18th July 2008, crude oil prices rose from US$14.01/brl to US$128.88/brl or equivalent to an annual compounded growth rate of 24.8% per annum.

Crude oil prices accelerated from US$61.05/brl as at end 2006 to US$96/brl as at end 2007 on the back of rising global demand, the weakness in the U.S. dollar and geopolitical tensions in oil producing countries in Africa and the Middle East. After touching a record high of US$146.30/brl on 11th July 2008, oil prices subsequently pulled back to below US$130/brl on expectations of a slowdown in global demand for oil and easing geopolitical concerns. Crude oil prices, as measured by the West Texas Intermediate Cushing, has increased by 34.3% on a year-to-date basis to 18th July 2008.


Chart 2: West Texas Intermediate Cushing Crude Oil Price, 1998-2008 Source: Bloomberg, July 2008

In recent years, demand for crude oil was mainly driven by emerging economies such as China and India which account for 8.9% and 3.2% respectively of world crude oil consumption in 2007. On the supply side, the Organisation of Petroleum Exporting Countries' (OPEC) crude oil production has been on a downtrend due to slower production growth in Saudi Arabia, the largest oil producer in the world, since 2006.

Looking ahead, despite the slowdown in developed countries, demand for crude oil is expected to remain resilient on the back of rising demand from emerging economies such as China and India. Over the longer term, oil consumption in China and India will be driven by sustained economic growth, rising population and rapid urbanisation. China and India's economy is expected to grow by 9.3% and 7.9% respectively in 2008.

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