Category: Investments

Countless investment articles have continually espoused the benefits of having a long-term view. Forget about the short-term setbacks and keep your eyes on the prize. It is just a bump in the road. Stay invested and you will reap the rewards in the end.

But in reality, adopting a long-term view might be more difficult to practice. It can be a long journey riddled with sudden surges of volatility capable of wiping out massive gains in a portfolio.

Telling someone to be patient and ride through the volatility is the common refrain used in the industry to tell investors to stay invested and not part with their funds. But how convincing is it sometimes?

Here are a few tips on how you can practice long-term effectively in your investments:

1. Accept That It Is Going To Be Bumpy

Having a long investment horizon does not mean you will be spared from the volatility that is bound to happen in any market.  An investor with a 20-year investment horizon who started investing in the year 2000 would have to endure the dotcom bubble, September 11 terrorist attacks, the 2008-GFC, taper tantrum in 2013, and now the Covid-19 pandemic.

In fact, the longer your investment horizon, the more economic recessions, bear markets, geopolitical flares and market memes you have to endure. Saying that you have a long-term view does not automatically give you a free pass and allow you to bypass these short-term swings. Your portfolio will react in tandem and you might have to put up with losses for periods of time. This sounds painfully obvious, but few investors appreciate this fact.

Many still react immediately and make drastic shifts in their allocation because the sight of red just makes them nauseous. That is when you start making those impulsive decisions and kicking yourself later.

Learning to live with volatility requires a mental adjustment and some getting used to. But accepting it is the first step.  

2. Diversification Is No Fun, But It Works

The future is inherently unpredictable and no one has perfect foresight of everything including how an industry or a company will evolve in the future. So how do fund managers do it then and invest with conviction?

The answer probably lies somewhere in between. There are no absolute yes’ or no’s in the investment realm where the tide can turn at any time. Decisions are made by fund managers by determining what is probable and what is not based on information available.

That is also the reason why the holdings of a fund are diversified across different companies or sectors to avoid any overreliance on a single stock to drive returns.

In an age of instant gratification, where expectations for returns have only gotten higher and quicker, diversification almost seems passé today. Making concentrated bets in eye-watering meme stocks or cryptocurrencies with promises of double-digit returns is now considered à la mode.

But to succeed in investing is not about making no mistakes at all. Not even Warren Buffet can lay claim to that. Rather, it is about making sure you get more rights than wrongs in your investment journey.

The fact that we do make mistakes in investing is why it is critical for our portfolio to be diversified. That way, losses can be offset by gains in your portfolio to ensure that you still have skin in the game.

Setting aside some ‘play money’ to chase the next stock or crypto darling is unlikely to do much harm. But the real danger is when investors gamble their entire savings away and lose all their capital with no chance of ever returning.

3. Holding Power Is Crucial

The ability to think long-term can only happen when we feel secure about our present state. An investor with low savings and piling debts cannot be expected to stay ‘optimistic’ about the future and ignore the losses in his portfolio when his survival is on the line. Who bothers about the future, when they are worried about the now?

There were many lessons that Covid-19 taught us about managing money, but the most valuable one is undoubtedly the importance of keeping an emergency fund.

The future is becoming inherently more unpredictable. The only way to tide things over is to keep an ample margin of safety through cash reserves and liquid instruments such as money market funds.

To be fair, it is hard to know how each of us will react when a market meltdown happens. It is usually preceded by really scary events like a terrorist attack or this current pandemic. But if you are experiencing real anxiety, perhaps it is an indication that you might be taking too much risk or you actually do not have the financial endurance that you thought you had before.

This brings us to the final tip…

4. Revisit, Review And Rebalance

Change is constant throughout history and market cycles. But many of us underestimate the capacity for change in ourselves too. Major life events such as a new addition to the family, marriage or a career switch can affect our capacity for risk and investment objectives.

For example, an investor who is now nearing retirement might have to tweak the portfolio’s allocation towards more conservative asset classes like fixed income or balanced funds. On the other hand, an investor who has just become a parent may want to be positioned more heavily in equities for long-term capital growth opportunities.

While investors should commit and stick to their long-term plan, it is important that they also periodically review their portfolio to see whether it is still geared effectively to accommodate any new changes in their life. An investment plan should not necessarily be seen as being carved in stone; it is meant to be organic and fluid just as life is.

Lastly, throughout the year, an investor should also consider whether the asset allocation (for example, in equities and fixed income) has drifted away from the initial parameters because of market movements. In hot markets, the equity portion in a portfolio might climb higher than other asset classes.

Rebalancing is then necessary to ensure that the portfolio is reset back to its target allocation to ensure that it is compatible with the investor’s risk appetite. Otherwise, the investor might be taking more risk than originally intended which might be detrimental to his long-term goals.

Hold On And Sit Tight

Long-term investing is not so difficult when you focus on yourself and ignore the goings-on of markets. Some patience is needed, but what is also essential is the ability to endure and be willing to put in the time to compound returns.

As legendary American stock trader Jesse Livermore said, “It never was my thinking that made the big money for me, it always was sitting.”

About the Author

Lee Sheung Un is a Communications Officer at Affin Hwang Asset Management. A millennial, he is still finding that balance between wealth, freedom and purpose. Views expressed are his own.

“Should I invest in aggressive investment or conservative investment?”

This is one of the most common questions often asked by the public. We all know that aggressive investment implies potential higher return, but it always comes with higher risk. While conservative investment implies potential, or sometimes guaranteed lower return but it always comes with a lower risk.

There are usually two types of answer from the investors and non-investors. Investors will always argue that aggressive investment is the best choice because conservative investment can’t even beat the inflation rate. Non-investor will always defend that conservative investment is the best choice as it possesses lower risk of losing capital.

However, all the above said reasons should not be the primary factors when we decide on which investment tools to invest in. Instead, we should be more concerned on whether the investment tool can help us to achieve our goals.

Below are two scenarios to illustrate the above argument.

Mr. A
Current age: 40 years old
Desire retirement age: 60 years old
Life expectancy: 99 years old
Annual retirement income needed at current value: RM60,000
Inflation rate: 5%
Target annual return after retiring: 5%
Current investable asset: RM1 million

After some calculation, Mr. A find out that he needs to have a total of RM6.28 million of retirement fund at the age of 60 to sustain his life until 99 years old. With the investable asset of RM1 million that Mr. A has, he needs to expect 10% annual return for 20 years to grow his RM1 million to RM6.28 million.

For Mr. A to gain 10% annual return, he would have to choose moderate to aggressive investment tools. He can have a combination of few investment tools in his portfolios such as stocks, derivatives, equities unit trust fund and P2P financing to generate potential 10% annual return.

However, it is definitely a wrong decision for Mr. A to invest his money into conservative investment tools such as fixed deposit, money market fund or savings account. This is because these financial tools are not able to deliver a potential of 10% annual return for Mr. A.

Choosing any investment tool that is unable to help Mr. A to achieve his retirement goal, which is to have a total of RM6.28million at the age of 60, is considered a wrong investment decision.

Despite some of the aggressive investment might be risky and volatile, investor can still mitigate the risk by doing proper research regarding the investment tools before making decision, diversifying the investment portfolio, knowing the investment horizon, and only investing through the legal platform.

As what Warren Buffet said: “Risk comes from not knowing what you’re doing.”

But, does this means that if an investor choose to invest in conservative investments is wrong?

The answer is NO.

Mr B
Current age: 60 years old
Desire retirement age: 60 years old
Life expectancy: 99 years old
Annual retirement income needed at current value: RM60,000
Inflation rate: 5%
Target annual return during retirement: 0%
Current investable asset: RM6.85 million

Mr. B goes through the same calculation, he finds out that he needs RM6.85 million to sustain his life until 99 years old and he already has RM6.85 million in hand.

In this case, Mr. B does not need to invest his money at all as his retirement goal is already met. So, it is alright for Mr. B to keep all his retirement fund in conservative investment tools such as fixed deposit, money market fund or even savings account.

Whereas it might be a wrong investment decision to Mr. B if he choose to invest the retirement fund in an aggressive investment tool because he might risk losing the capital which will then affects his retirement plan.

Hope that these two scenarios can clear the doubt when making an investment decision.

About the Author

Angel Chan is a Licensed Financial Planner attached to UOB Kay Hian Wealth Advisors Sdn Bhd. Besides providing comprehensive financial advisory to her clients, she is also committed to educate the public about the correct financial management mindset and methodology through article, YouTube video and Financial Management Workshop conducted by her and the team.

FB page: https://www.facebook.com/angelchan.financialplanner
YouTube channel: https://www.youtube.com/channel/UCf5f7O3vuOhnwy_wflDuuKA
Smart Finance: https://smartfinance.my/planners/chan-aun-kei-rfp
To book a free 1-hour consultation with Angel Chan: https://forms.gle/8Ur46Dox9T6g3yKS8

In the past two years, we have seen the stellar ascent of environmental, social and governance (ESG) factors in the investment realm. Formerly a niche term popular amongst sophisticated and institutional investors, ESG investing has now found itself pushed into the mainstream and embedded firmly into public consciousness.

Global investors have become more aware about the broad sustainability challenges that we face in the world today as the pandemic exposes the wider rifts in society. However, a lack of standardisation coupled with overuse of the term has created a lot of confusion about what ESG actually entails.

Here is a closer look at ESG investing (sometimes interchangeably referred to as sustainable investing) and how investors can get started.

Definition of ESG

As alluded earlier, ESG are a set of non-financial factors that investors or fund managers use to assess the sustainability of a company through three distinct lenses namely environment, social and governance.

Environmental factors consider the company’s stewardship of natural resources including conservation of the environment as well as reducing its carbon footprint.

Social factors examines the company’s relationship and treatment of all its stakeholders including suppliers, customers, staff and the wider community it operates in.

Governance deals with the company’s set of policies and procedures related to its corporate governance to ensure clear lines of accountability between shareholder and management. These include safeguards to avoid conflict of interests such as the presence of independent boards as well an audit or remuneration committee.

By evaluating all three factors, investors can then screen out potential investments especially if they pose a material impact to the company’s operations and its financials.

Such information can be typically gleaned through the company’s annual report where enhanced disclosure guidelines require companies to provide information about its key sustainability indicators such as environmental and social footprint.

Steps to Building an ESG Portfolio

The first challenge for investors looking to dip their toes in the ESG arena is finding out where to begin. Given how large the investment universe has grown, it is important to take a methodical approach and establish several things first at the outset.

Step 1: Identify Investment Objective and Intent

The first question you need to ask is your investment intent and objective in wanting to incorporate an ESG strategy in your portfolio. There may be some introspection required to unpack your motivations to understand the specific causes or issues that you are prepared to invest/not invest in.

It is an important step because this would determine how deep you would go in this specific route:

• Is this a strategy to add diversification and reduce asset correlation?
• Are you looking to gain exposure to specific themes like green energy?
• Are there certain causes that you deeply believe in and want to include in your portfolio through purpose-driven solutions?
• Alternatively, do you want to embrace ESG wholeheartedly as an investment philosophy and want a pure ESG portfolio?

All investors have different goals and objectives which would in turn influence their degree of involvement in ESG.

On one end of the spectrum, investors may not be ESG-aware and does not consider ESG factors at all in their investment decisions. On the other end, investors are fully on-board with ESG and want it fully ingrained in their portfolio. More often than not, they are situated somewhere in between.

Wherever you find yourself, it is okay to pick a point to start and then move along the spectrum as and when you feel comfortable.

Step 2: Which Approach Suits You? 

Once you have uncovered your motivation to get started in ESG, it is now time to explore which approach suits you best.

Very broadly, ESG funds are grouped according to the following categories depending on the strategy it employs:

Negative screening is an exclusion strategy where companies with poor ESG scores are sieved through and ruled out from the portfolio’s investable universe. Common exclusions include those companies with a poor track record in environmental management or with a history of labour malpractices.

Values-based funds such as Shariah-compliant funds also employ a negative screen to filter out companies that to not adhere to the principles of the faith such as gambling or alcohol.

Positive screening seeks out companies with a strong ESG score to be included in the portfolio’s holdings. Companies are often benchmarked against their peers or the industry’s best practices in choosing the cream of the crop. Companies that are actively committed to improving their ESG scores may also be considered by the fund manager.

Thematic funds often use a positive screen to choose best-in-class companies involved in specific investment themes like decarbonisation or climate change.

However, both positive and negative screening are typically regarded as two sides of the same coin and are used concurrently by fund managers.

ESG integration is the inclusion of material ESG factors on top of traditional financial metrics in the investment decision making process. For example, a company’s emission data are evaluated alongside other financial measures to assess potential risks or opportunities. A more encompassing approach, ESG integration gathers data from multiple sources with an aim to deliver better risk-adjusted returns.

This approach is often used for funds which may not even have an explicit sustainability mandate or objective such as traditional equity or bond funds. This is because more investors realise that ESG integration offers enhanced risk management by identifying the mid-to-long term risks that could hurt the stock’s fundamentals. For instance, companies that have poor labour practices face increased risk of lawsuits, customer order cancellations as well as reputational damage.

Impact investing refers to funds or investment solutions designed to produce specific outcomes that are beneficial to society or the environment, alongside financial returns. It has a more explicit intent to generate social or environmental returns such as development of clean energy or microfinancing. Types of investments include green bonds or sustainability-linked bonds which are earmarked to finance specific projects or initiatives.

Depending on your investment objective, either one or a combination of the above approaches might suit your portfolio needs. There is no one-size-fits-all approach when it comes to ESG investing as the requirement of each portfolio hinges on very personal choices and values. It is all a matter of aligning the outcomes you want and your investment objectives.

Step 3: Make a Plan to Invest

Mutual fund investors can then integrate ESG into their portfolios either by:

• introducing ESG specific themed funds; or
• integrating ESG factors into their investment analysis for all funds.

With a growing array of ESG funds spanning different strategies and asset classes, there is plenty to choose from. Malaysian investors can find a list of sustainable and responsible Investment (SRI) funds on the Securities Commission Malaysia website.

Like picking any fund to invest, it is crucial that investors understand the fund’s objective and strategy by reading up its prospectus and product highlight sheet. Be on the lookout for greenwashing red flags in funds that make unwarranted or ambiguous claims.

Ensure that you actually understand what the fund aims to do and its strategy in achieving those outcomes. Is it to avoid certain industries or companies? Does it aim to make an impact in a sector?

Investors should also ensure the ESG characteristics of the holdings are also consistent with the fund’s claims. Traditional tools and resources in fund selection can help in ensuring that you’re picking the right fund for you by looking at its ESG rating and profile of its holdings.

Why ESG?

ESG or sustainable investing provides a platform for investors to demonstrate their personal values and play a role in financing assets that are contributing positively to environmental and social causes.

Besides that, ESG investing also offers several distinct advantages to investors in terms of enhanced risk management as well as a differentiated driver of returns.  Companies with higher ESG scores could mean more ethical business practices that leads to improved stakeholder engagement as well as staying on the right side of governments/regulators.

In recent times, we have seen the share price of companies with poor ESG practices being punished as global fund managers shun these companies. Many see ESG investing as a structural trend that will persist as long as social and environmental imbalances exist and there is a desire to address these gaps.

Invest with Purpose

The myth that investors have to pick between investing according to their values and sacrificing performance is an old one. Studies have shown that over the long-term, ESG funds can lead to improved returns and lower volatility overall. So, investors don’t have to worry about making trade-offs.

With a variety of solutions available in the market, investors can invest with purpose to reap rewards that go beyond just financial returns.

About the Author

Lee Sheung Un is a Communications Officer at Affin Hwang Asset Management. A millennial, he is still finding that balance between wealth, freedom and purpose. Views expressed are his own.

The world is recovering from the pandemic and global economy is poised to be fueled by the normalisation of economic activity globally. Over here in Malaysia, we just opened up our international borders and is seen as a good sign for our economic growth.

As a smart investor, we need to be aware of the market trends that are happening all around us.

Let’s hear from Germaine Share who is the Director of Manager Research at Morningstar, on the 3 market trends that an investor should look out for in 2022.

1. ESG (Environmental, Social, and Governance)

We continued to see growing interests in sustainable investing as investors become increasingly aware of ESG issues, and some of them believe it would lead to better investment outcomes.

Global sustainable fund assets grew to US$2.74 trillion as of 2021-end, up 53% from a year ago, according to Morningstar’s quarterly sustainable fund flows report. There are now almost 6,000 sustainable funds globally. Inflows grew as well, driven by continued investor interest in environmental, social, and governance issues and by regulation.

In Malaysia, despite a small base, locally domiciled ESG funds expanded by 50% over 2021 to US$877.1 billion. There were record 13 sustainable fund launches in 2021, compared to just two launches a year earlier. We see the rising number of ESG fund launches not unique to Malaysia, but a global trend on the back of greater ESG awareness amongst investors with the importance of climate change agenda championed by various governments.

As sustainable investing becomes more mainstream, we see more regulators in Asia launching practical guidelines to help avoid greenwashing and importantly, to better inform investors when they consider investing in ESG funds.

2. Inflation

For many years, inflation has not been a major concern for investors given the low interest rates and decent market returns. This year, the risk is real. Inflation is at 30-year highs in the US. Higher inflation tends to lead to higher interest rates, which hurt corporate profits and cause losses for bond holders.

Equity investors’ total return can also be in jeopardy: their dividend payments are worth less, and their earnings can suffer from higher input costs, particularly if they are not in a position to pass along higher prices to their consumers. As earnings come under pressure, so can their ability to generate inflation-beating returns.

There are many assets suited for inflation protection, such as short-duration bonds or cash, high-yield bonds or inflation-protected bonds, or stocks that are either positively correlated to inflation, for example energy stocks, or high-quality names with high degrees of pricing power that can pass along rising input costs. 

3. Yield

With negative yields on government bonds (after adjusting for inflation) across developed government-bond markets and corporate credit spreads at multi-year lows, the global fixed-income universe is looking at paltry returns.

In comparison, Asian and emerging market bonds continue to offer a reasonable yield for income-seeking investors who are comfortable with taking more risk.

About the author

Germaine Share is the Director of Manager Research at Morningstar