Blog

Should I Adopt Dollar Cost Averaging?

There are multiple ways to invest, with one of the more passive ways recommended by many is dollar cost averaging.

“Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.” – Investopedia

At the core of the fancy lingo used above, it means you put a fixed amount daily/monthly/yearly into a certain investment so that you average out your buy-in price.

Think of it like gardening where you need to tend to the plants regularly and conscientiously in hopes that it will grow well.

Dollar-cost Averaging Illustration

For example, let’s say you’re buying into a Real Estate Investment Trust (REIT) counter on any market in Malaysia. Why? Because in most cases, it gives you steady dividends and that’s why it’s a good place to exercise dollar cost averaging.

Assume that you allocate RM500 per month to contribute to REIT 1. Every month you diligently buy up RM500 worth of shares in REIT 1.

I want to present two scenarios here.

If the prices go up monthly by 10 sen:

	Amount Invested	Cumulative Investment	Price	Investment Value	% Gain
Month 1	500	500	1	500	–
Month 2	500	1,000	1.10	1,050	5%
Month 3	500	1,500	1.20	1,646	10%
Month 4	500	2,000	1.30	2,283	14%
Month 5	500	2,500	1.40	2,958	18%
Month 6	500	3,000	1.50	3,670	22%

If the prices go down monthly by 10 sen:

	Amount Invested	Cumulative Investment	Price	Investment Value	% Loss
Month 1	500	500	1	500	–
Month 2	500	1,000	0.90	950	5%
Month 3	500	1,500	0.80	1,345	10%
Month 4	500	2,000	0.70	1,677	16%
Month 5	500	2,500	0.60	1,937	23%
Month 6	500	3,000	0.50	2,114	30%

Can you see the effect it has?

Pros and Cons of Dollar Cost Averaging

As you can see in the illustration above, with a 50% increase/decrease in the stock price by month six, the total returns/losses are reduced.

Yes, it’s a double-edged sword. You minimise your potential losses and hopefully when it rebounds, you’ll get more returns. However, you also lose the full upside if the stock goes up in price.

The other potential risk here is that in most dollar cost averaging mechanisms, you set a fixed time in a month to invest that sum, such as the start or end of the month, when your salary is in etc. The issue here is that you could also be unlucky in that every time it’s time to invest, it’s at the higher price point for the month. That’s not fantastic but luck does play a part.

Then why do people recommend dollar cost averaging? If I were to guess, it’s because it gives people the “sense of calmness” that you don’t need to worry about the market’s ups and downs and just need to periodically invest a sum like clockwork.

I must add on that this was also popularised by mutual funds. At least, that’s where I heard this method being used the most, but I’m sceptical as they’re partially motivated by the sales charge.

Which brings me to… the case of commissions that we’re paying for any investments (depending on the amount). By doing a monthly dollar cost averaging investment, we’re technically paying 12 times a year at the highest commission rate (in most cases due to smaller investment size).

With that said, I do think there are uses for dollar cost averaging.

What Do I Use Dollar Cost Averaging On?

My journey on dollar cost averaging began with mutual funds. I’ve tried dollar cost averaging via direct debit on mutual funds a long time ago. The market was going up monthly and hence my cost was averaging up. Then one fine day the market decided to take a dip. That’s when I realised that the amount I’ve invested thus far actually suffered a much bigger loss due to my average cost being higher. Hence, I stopped doing dollar cost averaging.

Another asset that I’ve used dollar cost averaging on is bond funds via robo-advisors because their prices rarely fluctuate too much, but currently the only other investment asset that I practice dollar cost averaging on is gold.

Averaging Down vs Dollar Cost Averaging

What I prefer is to use the concept of “averaging down” in my investments.

I can’t control how the market moves and whether the prices will go up or down after I invest. What I can control is how and when I invest.

My approach is to always keep a basket of potential stocks in my watchlist. With this shortlist of stocks, I can then monitor where prices are heading. Rather than investing into a stock or any asset when the prices are up, I’d only invest when the prices fall to a target price.

When investing in a stock or asset, it’s possible that the price will fall below the invested prices. This is where averaging down shines as it takes on the benefit of dollar cost averaging to minimise losses and amplifies the profits via more investment in the particular asset. This is on the assumption that you’re investing in a fundamentally strong asset whereby prices will eventually turn around. However, it could take years in some cases, so patience is needed.

If prices are above my invested price, then I’d only think about when to realise that investment into profits. I’d seldom add on unless there is a particularly compelling reason to do so and would rather scour my watchlist for other stocks to invest in instead.

This approach is obviously not too relevant for short term traders but can be beneficial to the long term investors.

But how about non-stock related investments?

Modified Dollar Cost Averaging

For assets such as robo-advisors, bond funds and gold, I do recommend the use of some form of dollar cost averaging. However, I’d keep the monthly amount small.

Upfront I will invest a lump sum amount and when prices fall substantially, I’ll average down again with a lump sum amount. Hence, I keep a close eye on the prices of these investments and have a ready cash pile to go in when prices are right.

This is my take on dollar cost averaging. I don’t use a straight up dollar cost averaging strategy as I believe with some active management, I can reap more benefits from my investments.

About the author

This article was originally published at betweenthemoney.com, a personal finance website by Jason Loh that focuses on money matters and investment topics for Malaysians

19/02/2021

ESG Resilience: Is Green the New Gold?

As the COVID-19 pandemic continues to dampen financial markets, funds with Environmental, Social and Governance (ESG) strategies have seen their fortunes rise.

In fact, major ESG funds have outperformed classic indices like the S&P 500 during the first weeks of the pandemic, and several ESG funds were able to soften the blow to loss in value as compared to standard non-ESG benchmarks.

This is bolstered by the fact that worldwide investors had poured US$45.6 bil into ESG funds in the first quarter of 2020 as compared to outflows of US$384.7 bil for the overall fund universe, according to research firm Morningstar.

To capitalise on this growing demand for ESG funds, Affin Hwang Asset Management Bhd recently unveiled the Affin Hwang World Series – Global Sustainability Fund (the fund). Launched on 14 September, it feeds into the Allianz Global Sustainability Fund (Target Fund).

As a feeder fund, it will invest at least 80% of its net asset value (NAV) into its collaborating partner’s Allianz Global Sustainability Fund with the remaining 20% of its NAV into money market instruments, deposits and/or cash. The Target Fund is a Luxembourg domiciled fund managed by Allianz Global Investors.

For context, ESG funds are portfolios of equities and/or bonds for which environmental, social and governance factors have been integrated into the investment process.

Changing Demographics and Trends

Affin Hwang Asset Management chief marketing & distribution officer Chan Ai Mei says the new ESG fund provides an avenue for investors to buy into global quality stocks with sustainable growth, whilst investing according to their own principles and beliefs.

“Changing demographics and trends, coupled with the unprecedented impact of the Covid-19 pandemic, have only accelerated the adoption of ESG by both businesses and the investing community in their decision-making.

“Our belief is that good governance ultimately leads to better financial performance, with industry research showing positive correlation between ESG and stronger returns over the long-term,” Chan adds.

The base currency of the fund is the US dollar. The fund is offered in four currency classes, namely USD Class, MYR-Hedged Class, SGD-Hedged Class and AUD Hedged-Class. The minimum investment amount is $5,000 for all listed currency classes.

Commenting on how the ESG space has fared in the aftermath of the coronavirus-related financial crisis, Allianz Global Sustainability Fund lead portfolio manager Paul Schofield says the pandemic in and of itself may not have huge issues on ESG investing. Rather, it may highlight some areas and downplay others.

“The trend for ESG has long been established and has been increasing year on year. ESG is just one tool in the toolbox that investors may use when analysing companies. We do not believe Covid-19 will change that; the trend was already in place and it is only going one way,” he tells Smart Investor.

“I have been told again and again by people on the other side of the table that ‘ESG is a bull market phenomenon’ and ‘no one will care when markets are under stress’. Hence, the year 2020 has certainly been a good opportunity to test those theories!”

Shifting the Focus to ESG

Despite the existing trends surrounding ESG investing, there is no doubt that the focus has shifted a little in the face of the pandemic.

According to Schofield, the governance element of ESG was always the easiest one to talk about, as everyone understood this and was comfortable that good corporate governance is a ‘good thing’.

However, in the past few years, the clear focus of ESG was the ‘E’ – the environmental benefits. In particular, climate change was the area that clients had a particular connection with. The ‘S’ – the social part of the equation – has always been the difficult one to discuss with people, and the pandemic has helped to highlight some of the social factors a little more, he adds.

“The need to get the economy back and firing means working conditions, for example, will need to be managed closely all around the world. Companies will have to convince its employees, trade unions and regulators that workers will be kept safe.

“This will be much discussed going forward, and topics will include healthcare, access to medicine, education, and health and safety – all of which were areas that were less discussed pre-pandemic,” Schofield explains.

The Investment Strategy

The Allianz Global Sustainability strategy invests in a diversified mix of companies on the global stock market that aims to generate long-term out-performance and a positive, measurable impact on society.

The investment process is a collaborative effort consisting of four stages: SRI Ratings; Idea Generation; Team Stock Selection; and Portfolio Construction.

The strategy takes a ‘Best in Class’ approach to SRI, seeking to own companies which outperform sector peers on ESG criteria. ESG performance is assessed using AllianzGI’s proprietary SRI Ratings model.

The strategy also aims to avoid stocks with reputational risks, excluding stocks with significant revenues from coal, tobacco, alcohol, weapons, gambling and/or pornography.

The model ranks stocks as Best in Class, Average or Worst in Class. Thereafter, using bottom-up fundamental analysis, the portfolio managers construct a concentrated, diversified and long-only portfolio of c.50 stocks with superior financial and ESG performance.

The team analyses all potential investments from the bottom up, considering stocks in terms of their quality, growth and valuation characteristics. The focus is on high quality companies generating returns sustainably above the cost of capital, with a clear growth trajectory, on reasonable valuations.

These stocks tend to be excellent franchises, operating in sectors with low competitive intensity and high barriers to entry. The valuation discipline is based on reverse discounted cash-flow analysis.

“The strategy invests primarily (at least 75% of portfolios) in companies that are considered ‘Best in Class’ according to our SRI ratings. It can also invest up to 25% of the portfolio in ‘Average’ rated stocks that have demonstrated a commitment to improving ESG performance,” explains Schofield.

This flexibility incentivises the portfolio managers to engage with investee company managements to press for continued ESG improvements.

“We believe that superior ESG performance may ultimately translate into share price appreciation. As a result, this mechanism is an important source of alpha for the strategy, as well as positive, societal impact. The strategy cannot hold any worst-in-class rated names.”

By Bernie Yeo

This article was first published in the November-December 2020 issue of Smart Investor.

18/02/2021
The Importance of Financial Planning for Small Businesses in Malaysia

Are you concerned about whether you need to close your business during this MCO period? Most small businesses have been dealing with this concern.

For small business owners running SMEs, it’s arguably more important to be involved in financial planning as you must consider not only how it affects your personal finances, but also the financial health of your business and your employees in general.

That’s a lot of responsibility.

Based on SSM statistics, a total of 9,675 companies and businesses shut up shop during the first phase of the MCO from 18 March to 9 June 2020, while another 22,794 closed down during the recovery MCO (RMCO) phase from June to September 2020.

What are the reasons for small business owners to make such a tough decision? Here are some possible reasons why:

Lack of Crisis Awareness

Many business owners may overestimate their business operating model. They tend to feel that a higher degree of effort put into their business leads to a higher degree of success.

While this may be true, it doesn’t take into account emergencies and unforeseen circumstances like the Covid-19 pandemic. Without any backup or emergency funds in place, there’s only one possible outcome.

Misjudgment

There’s a common tendency for people to inaccurately assess the degree of risk in a risky situation. This happens mainly due to irrational behaviour and overconfidence in their personal judgement.

Therefore, losses may occur due to ignoring the possibility of wrong information and hastily acting without performing their due diligence.

Lack of Financial Planning

During the MCO, many small business owners applied for loans to sustain their SMEs. Many may have used all their resources in order to start the business at the beginning.

Thus, when business is not going well, they will need to find a way to raise funds to avoid going bankrupt.

Transformation of Small Business Model

Across industries, both small and large businesses are accelerating digital transformation processes for long-term growth and profitability. Yet, there are businesses that remain untested in the face of digital challenges, with their digital transformation readiness remaining uncertain.

As a result, these companies that cannot adapt to change will be knocked out of the business cycle.

So, what steps can small business owners take to prevent this?

Planning ahead is key to ensure businesses can survive periods of uncertainty, with preparations made before it occurs. Regardless of economic conditions, business owners can take several precautions to mitigate risk:

Plan Well for Financial Health

In football, strikers spearhead the attack but often have nothing to do with defending. Similarly, small business owners may be too focused on earning money and neglect other financial needs of the business.

Financial planning is key to ensure good financial health, which allows you to focus on your core business without any concern since a strong financial base has already been built.

Separate Legal Entity

All transactions associated with a business must be recorded separately from other business or personal transactions. If records are mixed up with that of its owners or other businesses, the accounting information loses its usability – this is an issue that still plagues many family-owned SMEs today due to a lack of management.

Many owners will feel that no matter how much they earn, it’s not enough for them to retire. By not recording business cash flow separately, they’ll never truly know how much their business can earn in comparison to their personal expenses.

Build Up an Emergency Fund

Strong cash flow allows a company to have more flexibility in regards to business decisions and potential investments. Therefore, it’s very important to have an emergency fund in place to survive tough phases like the current MCO period.

During this time, many SMEs have been forced to stop operations or close completely due to insufficient funds. However, businesses that were well-prepared have been able to sustain themselves and weather the storm accordingly. After all, “cash is king”!

Refinancing

Most people would like to settle their mortgages as soon as possible, and small business owners are no different. The feeling of being in debt is one that no one likes. In times of crisis, they may prefer to rely on overdrafts, credit cards, or term loans and personal loans that don’t require collateral.

These liabilities may have a higher interest rate and a shorter payment term. For small business owners looking to tough it out, refinancing a home loan is an option as a longer payment term and lower interest rate can be negotiated compared to the loan facilities mentioned. Plus, you’ll end up with a lower monthly commitment!

Asset Diversification

As mentioned earlier, “Don’t put all your eggs in one basket”. While properties and other physical assets may be tangible, it doesn’t provide liquidity during periods of low revenue. Therefore, it’s important to diversify assets accordingly.

Businessmen may select other investment vehicles such as REITs, shares, commodities, bonds, collective investment vehicles such as ETF and unit trust, and also other regulated investment tools that have high liquidity and can be easily converted into cash.

In conclusion, it’s very important for small business owners to have a sense of urgency about their personal finances. With proper financial planning, you’ll be well-placed to face any uncertainty ahead and can survive black swan events without panicking.

About the author

Alex Teoh Teik Shiang (FAR CMSRL) is a FA Director, Licensed Financial Planner and Bank Negara Approved Financial Adviser Representative. He can be contacted at alex.teoh@yesfinancial.co.

17/02/2021
FA Advisory: A Journey in Progress

If there’s a word to define FA Advisory, it would be ‘progress’.

This takes precedence over terms like ‘success’ or ‘achievement’, FA Advisory Sdn Bhd general manager Bryan Zeng muses. This is simply because the financial advisory firm adopts a progressive culture that allows its practitioners to be forward-looking in their unwavering purpose of helping their clients navigate their financial journey.

“We don’t believe in the status quo. As an organisation, we must continue to progress, and because of that we move the organisation towards innovation. We continue to innovate our processes, and build robust infrastructure so we are able to support our financial practitioners to carry out their duties to the highest standards of professional advice,” he tells Smart Investor.

But first, a quick history of FA Advisory.

Established in 2009 under the name Uniplan Advisory Sdn Bhd, the Kuala Lumpur-based firm changed its name to FA Advisory in 2013 when it became a member of the Financial Alliance Group based in Singapore which is, today, the largest independent financial advisory firm in Singapore.

Home to 67 licensed financial planners across Malaysia, FA Advisory is a one-stop centre for wealth management and financial planning solutions. It offers professional and unbiased advisory services based on detailed analyses of their clients’ financial situations and goals.

This is followed up with the firm’s capability to implement financial solutions – drawn from their comprehensive range of wealth management services – that best suit their clients’ needs, thus allowing them to enjoy flexibility in mixing and matching the financial benefits they seek.

Navigating Turbulent Times

The COVID-19 pandemic has forced businesses of all kinds to rethink how they work and interact with customers. While this is very much the case, it is business as usual for FA Advisory.

“What we do is regularly engage and communicate with our clients. We do this through various means, including holding talks where we invite our clients to either educate or inform them of the happenings in the markets, and this has been done since day one,” Zeng reveals.

And so, when the pandemic hit, FA Advisory diversified their touchpoints and increased the frequency of their outreach. This is done by making full use of online meetings/webinar facilities, as well as social media platforms such as Facebook and YouTube.

Despite the convenience offered by technology, Zeng is quick to point out that the significance of personal engagements is still very much emphasised in their daily operations.

“During the first month of the Movement Control Order (MCO), we held daily Zoom meetings with our financial planners to communicate, empower, share, and learn from each other,” he recalls, adding their financial planners in turn reached out to their clients with personal telephone calls and messages to show care and encouragement.

As FA Advisory is about the client, and providing the client with the best possible financial advice, Zeng reveals that when the pandemic led to a nationwide MCO, there were a myriad of issues impacting their clients’ lives.

“We acted swiftly to provide relevant information to enable our clients to make the right decisions. We have created over 15 YouTube videos to address the concerns related to the stock market volatility. In addition, we have been hosting a bi-weekly webinar on market updates for our clients since March,” he says.

In fact, the team at FA Advisory had rallied together to create infographics, slides and webinars to guide their clients on the deferment of life insurance premium payments and loan moratorium, alongside other Covid-19 relief initiatives by government agencies and private sectors.

“It warms our hearts when we receive acknowledgement and messages of appreciation from our clients. If anything, the pandemic has strengthened our resolve and conviction in our mission to champion purposeful financial advice for our clients and elevate life quality for all,” says Zeng.

The Road Ahead

Financial planning as an industry has witnessed impressive growth over the past few years, and the pandemic has all but accelerated it as the awareness about financial planning continues to grow and consumers become more informed.

So, what does this mean for the industry?

“One of the things that the Covid-19 pandemic has taught us is the importance of being financially prudent. Even as Malaysia progresses towards becoming a high-income and developed nation, the demand for quality advice will continue to grow, and the industry will offer a great career path for young people,” Zeng opines.

Positive growth notwithstanding, he cautions there are various challenges ahead. Among these is that we live in an age of information overload, with misinformation, fake news and outright scams threatening the financial well-being of individuals and households at unprecedented speed and reach.

“We must play our part to continue promoting financial literacy and dispensing sound financial advice to members of the public. The advent of fintech has disrupted the financial services industry by empowering consumers with innovative products and myriad choices with great efficiency.

“Thus, the job of a financial planner is increasingly demanding, and as a firm, we are constantly building our advisory capabilities to address the increasingly complex needs of tomorrow’s consumers.”

As such, continues Zeng, the future of financial planning will definitely be client-driven.

“We believe we are in a good position to capitalise on this as our business model has always been client-centric with a personal touch. We are delighted to be in this rewarding profession that enables us to make a meaningful contribution to improve people’s lives,” he concludes.

By Bernie Yeo

16/02/2021
The Financial Happiness Formula: Applying DMAS to Life
Life can be complicated if we choose to make it so. As adults, we should know what makes us happy. Yet, most of us adults have fewer happy moments now compared to when we were younger. Is there a financial happiness formula?

After years of working experience, I’ve come to realise that the easiest way for us to achieve Financial Happiness is by going back to basics.

Most of us started our experience in dealing with numbers during our kindergarten years. We learnt about numbers, how to count and perform mathematical operations, geometry, and other math concepts from young till high school and beyond.

Due to not regularly practising these equations in everyday life, it’s not surprising that most adults develop misconceptions with the order of operations to be performed while solving a mathematical expression (BODMAS – acronym for Bracket, Order, Division, Multiplication, Addition, and Subtraction).

How Does One Reach Financial Happiness?

It is normal for us to begin practicing Addition from young, and by the time we joined the workforce, we would’ve become experts at this. Our environment trains us to view the Addition of new “wants” or “needs” positively; as something to be desired.

However, it’s rare for young adults to be taught how to differentiate between wants versus needs. The perception that “more is better than less” leads us towards the trappings of the proverbial rat race.

We fail to leverage our understanding of BODMAS in our financial life and furthermore, we aren’t aware of how it plays a vital role in our effort to pursue Financial Happiness.

BODMAS is the golden rule for solving equations and guides us on how to solve mathematical problems by following the correct sequence, otherwise, our answers may be wrong if we fail to follow the rules. When we apply the BODMAS rule to solve equations, we must first solve the Bracket.

Subsequently, we solve the Order (that mean powers, roots, etc), then we continue with Division, Multiplication, Addition, and Subtraction. The key point to note is that Division and Multiplication rank equally, and in fact take precedence over Addition and Subtraction.

Applying DMAS to Life

Taking a leaf out of the BODMAS system, I’d like to suggest that DMAS (Division, Multiplication, Addition and Subtraction) can be the core approach to solve our personal financial matters.

Let’s go through an example to see how we can achieve Financial Happiness by applying DMAS in our daily life.

By following the proper arrangement, we always start with either Division or Multiplication.

Division is the action of separating or process of splitting things into equal parts. This action and process is so much more meaningful when we apply it to determine our life priorities, for example in areas such as health, relationships, career or how we deal with money.

Obviously, we all understand that these priorities are equally important and deserve equal attention throughout our lifetime.

In fact, changes in life stages and socio-culture environments might lead or force us to make disproportionate choices.

Common life problems such as financial or health, marriage and family, or career pressures often occur due to mistakes and failure to maintain the balance while fulfilling our needs.

Hence, a proper and systematic rebalancing strategy (also an important strategy in investment management) will enable us to review our situation and ensure we reposition ourselves at the appropriate ratio.

Multiplication gives the results of combining groups of equal sizes whereby we can consider it as repeated addition, creating a larger whole. Multiplication in finance is always related to the rule of compounding, and it amplifies our financial condition, either positively or negatively.

If we start off on the wrong foot, we’ll most likely end up with a bigger mistake. This can be clearly seen in the increasing number of Malaysians declared bankrupt or affected by overwhelming debts, especially credit card debts.

We should recognise that the rule of Multiplication is not limited to money but also other scarce resources such as our networks and knowledge.

As long as we’re able to identify the appropriate resources we want to grow, by putting enough time and effort, we will reap what we sow.

After applying both Division and Multiplication, you may now continue with Addition and Subtraction.

Addition of two whole numbers results in the total amount. In life, we tend to add new compartments by fate or chance. Given the same 24 hours a day or 365 days a year, we never tire of being attracted to new things and adding them to our bucket list.

All of us have a different threshold and we should know better the tipping point of fulfilling our own desires as we become older and more experienced.

Always take into consideration the results you will likely get from Division and Multiplication mentioned above. When the time is right, consider adding a new skill to grow your career, a new asset class into your investment horizon, or a good hobby or habit that helps you to excel in life.

Subtraction is the operation of removing objects from a collection. It’s not an easy task for us to practice even though more people are now attracted to the KonMari Method. With respect to financial matters, you may want to consider the two subtractions below:
1. Get rid of negative financial thoughts
2. Eliminate unwanted financial habits
There are no shortcuts to Financial Happiness. It only seems impossible if we don’t act at all. Apply the basic rules of DMAS patiently and wisely, and you will have an easier journey to achieve Financial Happiness.

About the author

Jess Hon is a Licensed Financial Planner and can be contacted at jesshon@finwealth.com.my.
15/02/2021
Does Value Investing Work?

For decades, value investing has been popular with financial luminaries like Ben Graham and Warren Buffett, who is arguably the most famous investor in the world. Buffett is renowned for his investing style which is “value investing”. Many are curious about what value investing is and whether the concept still works in an environment where the Covid-19 pandemic is plaguing the whole world.

Firstly, investors must understand how value investing works. In layman terms, value investing is a strategy for taking advantage of the market at the right moment. It’s based on the idea of “appraising” stocks, with value investing advocating hunting for stocks that are undervalued based on their “intrinsic value”, before buying them, holding them and weathering the volatility of the market. In theory, a company’s stock value should be the same as its market price but in many cases, this doesn’t hold true. It’s possible that stocks could be overvalued and at other times, it’s undervalued.

To carry out this strategy, the investor will be required to analyse the company’s fundamentals and project the future profits that the business is going to generate in its lifetime and with that the investor is able to assess whether the company is underestimated in the market or not. If so, you get to buy its stocks at a bargain in the hopes that the market will turn in their favour over the long run. These value stocks are being sold below their intrinsic value and have huge potential to grow in the future when the price is adjusted accordingly.

Although the concept seems simple, value investing is extremely difficult to implement properly and requires rigorous analysis to determine what the “underlying value” of a stock is. In today’s environment, investors must consider geopolitical factors, fiscal or monetary policies, currency, business model, supply and demand of the company’s services or products, and other underlying factors.

Understanding Value Investing is Vital before Making any Investments

If you look at the chart above, the red line indicates the company’s potential or intrinsic value. In the beginning, due to its low value, the market misinterpreted the situation and quickly undervalued its stock. Value investors wait for this golden opportunity to buy the shares at a discounted price. They know the company has future growth potential. Then, they sell their stock when the market price is overvalued, earning them a nice, big profit.

For example, let’s take Microsoft whose product is widely used and accounts for 76.56% share of its industry as of December 2020 according to Statista.com and has about 1.5 billion active users worldwide. On average, its net income margin is about 25% per year and it consistently manages to turn over healthy profits. Despite the Covid-19 outbreak, its products were still massively used but during the pandemic selloff in March 2020, it lost about 25% of its share value.

Putting the factor of the COVID-19 outbreak aside, this company maintained good, continuous growth, and its share value grew about 23,000% in the last 30 years. Using the value investing strategy, one will see a huge opportunity in this company due to its nature of business, as well as the demand for its service and product continuing even during a pandemic.

(*Note: This should not be taken as financial advice or a buy recommendation.)

Like all investment strategies, patience and diligence to stick to the investment philosophy is a requirement. There will be days when an investor may want to purchase some stocks because the fundamentals are sound, but he or she may have to wait if it’s overpriced at that time.

If investors are unable to properly carry out this strategy themselves or commit to the time needed to invest themselves, it’s always advisable for them to seek for professional advice or seek a proper licensed financial planner or financial advisor to assist them. These professionals will be able to offer advice according to the investors’ risk appetite, goals and objectives. Other factors will also be used to evaluate the investors’ current financial condition before such advice is given.

Conclusion

Therefore, do buy the stock that is most attractively priced at that moment, and if there is none that meets the criteria, just sit and wait and let the cash sit idle until an opportunity arises. The bottom line is, value investing is a long-term strategy, it requires hard, there is no short cut and it works as Warren Buffett is still a devoted advocate of this strategy.

About the author

Alex Ng Wern Ping is a licensed financial planner, and can be contacted at alexng.alpineadvisory@gmail.com.

10/02/2021
Kenanga Investors Bhd: The Art of Diversity

Kenanga Investors Bhd has always been guided by its unwavering conviction in the investment strategies that has weathered them through many challenging periods in the past. And this deep-rooted philosophy has proven its resilience, especially in these trying times.

The firm’s success isn’t a single-handed effort, however.

Rather, it is attributed to the organisation’s capable and dynamic investment team as well as the diversity of ideas, strengths and competencies that come from the team, Kenanga Investors Bhd chief executive officer Ismitz Matthew De Alwis tells Smart Investor.

“Diversity is strength, and together, all of us have worked tirelessly to uphold our firm’s philosophy that is ‘Consistent Top Performance’ and ensure sustainability in what we do,” he reveals candidly.

Key Drivers for Impressive Growth

Over the years, Kenanga Investors Bhd’s strategy to be a multi-segment, multi-distribution and multi-product platform has spurred the organisation’s strong growth.

“We are able to cater our services and products to meet different client risk appetites be it equity, fixed income, managed portfolios or even alternative investments.

“We achieve this by firstly prioritising the optimisation of our investment engine to create an alpha-centric performance culture – a culture that is the foundation of our consistent top performance,” De Alwis explains.

From a product perspective, Kenanga Investors Bhd has streamlined its entire suite of offerings to ensure their investors’ various needs are being met.

In addition to sourcing for new investment ideas and strengthening the distribution of the funds on their platform, much thought and effort has been put into ensuring their existing product line-up continue to contribute to their vision of being a market leader. This also provides a holistic approach to their clients’ investment and wealth management journey.

“We have also taken up the mantle of championing financial planning which will benefit our consultants and investors alike by focusing on a needs-based structure.

“This highly complements our goal of eventually becoming a one-stop wealth advisory firm with access to all capital market products while also providing holistic financial planning to our clients,” says De Alwis.

Pandemic’s Impact on Fund Management Strategies

Kenanga Investors Bhd’s investment strategy, reveals De Alwis, has always been premised on a bottom-up stock-picking approach on stocks that can offer a strong earnings trajectory.

As such, across its top-performing funds, the common performance contributors are their overweight positions in technology and rubber glove sectors, with the global outbreak of the Covid-19 pandemic leading to a surge in demand for glove products.

“This strong earnings profile coming from the tech sector especially is a showcase of not only their capabilities but the emerging importance of home-grown Malaysian technology companies in the global semiconductor supply chain.

“Kenanga Investors Bhd believes there are structural drivers such as the rising adoption of 5G, artificial intelligence, electric vehicles and industrial automation and thus the supply chain that provides the components to these industries will benefit.

“Besides growth, tech stocks also have solid balance sheets and strong cash flows which enable them to weather an economic downturn better than some other cyclical.”

For check and balance, De Alwis reveals Kenanga Investors Bhd adopts a holistic approach to risk management to prepare the firm for inevitable situations by identifying, assessing, reporting and managing the probability and impact of all related activities.

Indicators are used to provide early warning signals which then determine the responses required. For instance, during unsustainable bull markets, their indicators may help them to avoid companies with weak fundamentals or to avoid paying excessive prices for stocks relative to its intrinsic value.

“Kenanga Investors Bhd’s risk management policies that our returns commensurate with the risks we take which means achieving out-performance without taking on more risk.”

Navigating Market Complexities of Tomorrow

The economic fallout from the pandemic has many Malaysians questioning their financial security, with concerns such as needing to postpone retirement or tapping into savings to pay for basic expenses.

So how does Kenanga Investors Bhd address such concerns?

The firm, according to De Alwis, has always been known as an equities expert within the Malaysian landscape. Since 2019, however, they have expanded into the fixed income space after a strategic mergers and acquisitions (M&A) exercise, while in early 2020, Kenanga Investors Bhd launched Malaysia’s first leveraged and inverse ETF to be benchmarked against the FTSE Bursa KLCI.

“Investors now have the flexibility to diversify their portfolios further to suit changing needs and investment environments backed by superior and holistic investment expertise.

“Furthermore, Kenanga Investors Bhd’s on the financial planning model ensures we are a needs-based asset manager, instead of mere product-pushing which may not benefit investors in the long run,” says De Alwis, stressing the firm is now more equipped than ever to guide investors of today in navigating the market complexities of tomorrow.

By helping an investor map out their risks and goals to develop a plan (possibly comprising a diversified portfolio of various asset classes), they will eventually achieve their intended goal.

“Following that, we will work hand-in-hand with the investor to keep periodic tabs on their overall portfolio to ensure they are on the right track and to make adjustments where necessary.

“It is critical for the investor to stay diversified so that the various assets in the portfolio can take advantage of different economic conditions, leading to the best possible outcomes during crashes,” he adds.

De Alwis goes on to highlight the need for investors to avoid following a herd mentality, especially when they are caught in times of crises.

“It is easy to follow where the crowd goes because many believe there is safety in numbers. But when it comes to personal financials, one person’s risk appetite and goals can differ to the next person’s.

“With Kenanga Investors Bhd in the picture, we can help the investor to assess their situation before they indulge in panic selling and finding out later that they would have recovered or profited had they stayed the course,” he concludes.

By Bernie Yeo

09/02/2021
Alternative Investments for Individual Investors

Alternative investments for individual investors are financial assets that do not fall into conventional asset classes and often tend to attract younger investors. Firstly, what are alternative investments? They are labelled as such because these financial assets do not fall into the more conventional asset classes of equity, bonds, properties, or cash investments. Alternate investments can be further divided into subcategories such as commodities, private equity, collectibles, and cryptocurrencies. Typically, alternate investments do not form the core of your investment portfolio but instead form less than 10% of your overall portfolio.

No matter what you call alternative investments, this asset class has been grabbing headlines. At the forefront is cryptocurrency with bitcoin having skyrocketed to new highs above US$40,000 (RM160,000). Another increasingly popular alternative investment is gold which has gained some new followers with fintech now allowing you to buy fractional gold via an app. Lastly, we have P2P financing which allows investors to legally lend money to small businesses and entrepreneurs via an online P2P platform.

Why Do Alternative Investments Appeal to Young Investors?

Alternative investments are generally viewed as high risk and highly volatile. These investments are also more often embraced by younger (and young at heart) investors who are comfortable with technology, while older (or more risk averse) investors may shun away from investing online or via an app into an investment that talks about blockchain or fractional investing. Older investors may also have a preference towards more traditional investments such as stocks and property.

Younger investors tend to find investing in alternative investments, especially those powered by fintech, as more transparent and are often attracted by the lower fees. Alternative investments also provide higher potential returns while allowing investors to diversify and own assets that aren’t correlated to the stock market. As it’s more volatile, alternative investments also provide an avenue for trading which allows investors who like trading to scratch an itch!

How Do Alternative Investments Perform?

Along with the higher risk and volatility, alternative investments also enjoy potentially higher returns. For example, bitcoin’s price rise in 2020 was over 300%, towering above most if not all other asset classes, while the YTD rise for gold is around 23%. For P2P financing, returns can range from 10% to 18% according to data provided by P2P financing operators in Malaysia.

While alternative investments appear to be doing well, it’s a double-edged sword as investments could potentially go downwards significantly as well. For example, the Great Crypto Crash of 2018 saw the price of bitcoin drop 80% from its peak which is an even bigger magnitude of loss than the dot-com crash.

Gold is also often falsely perceived as a low risk asset and a safe investment during times of crisis. In fact, gold is highly volatile with an average volatility moving upwards (or downwards) of 16% a year! P2P financing investors on the other hand face risks in the face of rising default rates whereby borrowers are unable to pay and the losses affect investor returns.

What You Need to Know about Investing in Alternative Investments

This comes with its fair share of risks and know-how. For example, a common question when investing in alternative investments is whether you will be taxed in Malaysia. Cryptocurrency is not taxed if you are not trading crypto as your primary source of income.

However, for P2P financing, investors are required to declare gains and will be taxed. For gold investing if you are a Muslim, you will need to pay zakat, a mandatory form of Islamic obligation tax, if you hold gold above 85 grams. This applies even if you cannot see or touch the gold physically as halal gold must be backed up by actual physical gold to be Syariah compliant.

Let us narrow down good rules of thumb for investing in these alternate investments. Bitcoin is a highly speculative investment with massive gains and drops thus you may want to hold no more than 5% of your investment portfolio in cryptocurrency. It’s also important to note that cryptocurrency is not viewed as legal tender in Malaysia but there are three digital asset exchanges (cryptocurrency exchanges) recognised by the Securities Commission.

P2P financing also faces the risk of defaults, so you may want to ensure you spread your risk across different borrowers (or even different P2P financing platforms). Do read up on the borrower’s financial information before investing in any P2P financing notes. Gold has its fair share of criticism as well as it does not generate any returns but is a good hedge against times of crisis. Do be aware of the gold spread, which is the difference between the buying and selling price of gold, and any fees charged which will reduce your returns.

What Lies Ahead for Alternative Investments

Cryptocurrency especially is an interesting alternative asset to watch. It’s increasingly being viewed as a store of value, thus earning the nickname of digital gold. Digital payment platforms PayPal and Venmo announced that they will support transactions in bitcoin and other cryptocurrencies driving an increase in usage and liquidity. There is also a growing number of institutional investors in bitcoin as a reserve asset and an alternative to fiat currency such as the US dollar which is showing a decline in value.

Overall, alternative investments are becoming increasingly popular with financial technology and slick, shiny apps appealing to young and young at heart investors. Increased competition, lowered costs with fintech, and an increasingly global investment market will further spur growth in these risky but promising investments.

About the author

Stephen Yong (MBA, CFP cert ™) is a licensed financial planner and can be contacted at stev.yong@wealthvantage.com.my.

08/02/2021
How to: Achieve Financial Independence in 5 Years
In the digital age, many young Malaysians are eager to invest and grow their hard-earned money.

Through information, they have obtained on the internet and through their peers, they understand the importance of growing their wealth through investing and have a desire to achieve financial independence as early as possible.

There are also young adults who find it more comfortable to not invest until their financial situation becomes more stable or they have more money to invest.

For this category, they are looking to invest and will do so when they have the extra disposable income to set aside.

There are also others who have embraced the YOLO lifestyle, looking to live in the present and are accustomed to instant gratification.

They spend every ringgit they earn, and perhaps even more by borrowing through their credit card or personal loans and choosing to let tomorrow worry about itself.

Whichever category you may fit in, one key point to take home is that if you’re in your 20s, you have a big advantage over many others when it comes to investing.

Here are three reasons why your age can be your biggest advantage:

1. Time and Compounding Interest

There is a famous saying attributed to Albert Einstein where he called compound interest the “8th Wonder of the World.”

Whether Einstein said this or not, compound interest is the key that allows young investors to grow their wealth over time.

Compound interest requires only two things: the reinvestment of earnings and time.
- Compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than the simple interest which is calculated only on the principal amount.
- Interest can be compounded on any given frequency schedule from daily, to annually.
- When calculating compound interest, the number of compounding periods makes a significant difference.
Assuming a 6% interest rate per annum, the table below shows the stark difference in the final amount based on how long an initial investment of RM10,000 is put to work:

Starting Age Compounding Period (Years) Final Amount at Age 60

20 40 RM 102,857

30 30 RM 57,434

40 20 RM 32,071

The longer money is put to work, the more wealth it can generate in the future for you.

Here’s another chart that demonstrates how much you would need to set aside every month at different ages, assuming you are looking to accumulate RM1 million for your retirement.

As shown below, if you start investing at an earlier age, it is much easier to hit your financial targets through the sheer power of compounding interest.

2. The Ability To Take Risk

It goes without saying that higher-risk investments that are more volatile yield the highest return. Simply put, the higher the risk, the higher the return and the lower risk, the lower the return.

Younger investors are usually focused on growing their wealth and should invest in higher return investments.

This is because you have the time to recover if something were to go wrong, giving you the opportunity to make riskier moves. For example, when you are in your 20s, even if you suffer a loss today, you’ll be working for the next 25-40 years and have many years to earn an income. In short, you’ll likely recover from that investment loss.

Those who begin to invest late in life are often inherently more cautious with how they invest their money.

As one nears retirement, one usually starts allocating their investment portfolio to lower risk assets which correspondingly have lower returns. By starting late and having lower returns, one might fall short of their financial goals.

3. Learning by Doing

As a younger investor, you have the flexibility and time to study investing and learn from both successes and failures.

Since investing has a fairly lengthy learning curve, young adults are at an advantage because they have years to study the markets and refine their investing strategies.

You will make money, and lose money on some investments.

Examples of things one needs to learn can include opening a stock trading account, opening a mutual fund account, buying real estate, or even calculating investment returns – these are all best learnt through experience.

There are many other aspects when it comes to investing such as understanding how the market works, how the economic cycle affects your investment, or how mutual funds and Robo-advisor fees can affect your returns.

Gaining this experience at a younger age will give you the confidence and knowledge to invest and grow your wealth to achieve your financial goals in the long term.

Capitalise on Your Biggest Advantage

There are many factors that one looks at when designing an investment portfolio. Ultimately, it should be designed to allow you to achieve your financial goals, be it short-term such as planning for a wedding, or long-term such as retirement.

It cannot be overstated how beneficial it is to start early. In today’s information age, it’s your responsibility as a young investor to educate yourself on investing and take action to capitalise on the key advantage you have, which is time.

Time cannot be bought and unlike investment losses, lost time cannot be recovered.

Every day you delay is an opportunity loss to capitalise on the power of compounding interest and the ability to take risks.

When one starts early, you get to learn from experience and make mistakes when they are less costly (ie. you have less money to lose) compared to when you get older.

About the author

Nicholas Wong is a licensed financial planner and can be contacted at nicholas.wong@ipp.com.my.
05/02/2021
A Multi-Generational Wealth Manager for HNWIs

For many high-net-worth individuals (HNWIs) in the region, managing and growing their wealth has become ever more complex with the heightened uncertainties and volatility of recent times.

This is especially so given the Covid-19-induced global economic shock, US-China trade tensions, rising geo-political risks and prospect of Black Swan events. This is where the value of family offices and private wealth managers come to the fore in helping these HNWIs strengthen the pillars of their wealth.

And this is a business segment that Affin Hwang Asset Management has seen growth in recent years. In fact, the wealth segment will be a key business focus over the next five years for the asset management firm, which has total assets under administration of RM60 billion as of 30 June 2020.

“With more focus and resources, we can continue to grow this segment in line with Affin Hwang AM’s aspirations to be a distinguished wealth manager in Malaysia and the region,” says Shawn Kong, senior director, Institution, Corporate & High-net-worth individuals (HNWI) Business.

It also sees a transfer of wealth across generations with more millennials becoming high-net-worth individuals in the coming years. In reaching out to this group, Kong says Affin Hwang AM will continue adapting to become “a multi-generational wealth manager” by listening to their needs and growing together with its clients. Here are excerpts of our interview with Kong on the company’s fast-growing private wealth business.

Smart Investor: Wealth structuring whether it’s wealth creation, capital preservation or intergenerational planning has become more complex in light of heightened volatility and black swan events like Covid-19. What is your take on this and how do you think the private wealth landscape has evolved in the new normal?

Shawn Kong: Investments and markets today have evolved. Market cycles are a lot shorter and more volatile, as we saw this year with the pandemic. Interest rates are low and overall economic growth is slow. As such, investment and wealth management has become more complex and challenging.

In a world of complexity, the team at Affin Hwang AM is all for simplifying wealth management to our clients. It is crucial to first understand the objective of the wealth structuring for a person or a family before putting in wealth planning tools or products. Upon understanding the investment objective and risk tolerance, we can then craft a suitable diversified portfolio for our clients.

With heightened volatility, it is essential for clients to first understand the risks of their investment to ensure they are comfortable with the risk they are taking. A litmus test question that I always find helpful would be to ask clients if they are able to sleep at night with the level of risk or volatility that they are taking.

SI: What have your conversations been with private wealth clients and their main concerns today?

SK: As we enter a historically low interest rate environment, our recent conversations with clients have centred around the search for yield. There is renewed interest in fixed income and dividend yielders as investors seek to enhance portfolio yields to beat long-term inflation.

On the other end of the risk spectrum, another common conversation would revolve around the sharp equity recovery since the rout in March due to Covid-19. Many would have felt that they might have missed out on the strong rebound in markets.

A divergence between how well global and regional equity markets have performed due to ample liquidity versus poor economic fundamentals on the ground presents a dilemma for equity investors. Is it too late? Is the rally sustainable? Those are the questions that keep cropping up.

Eventually, our client engagements would lead to crafting a well-diversified core portfolio that would provide long-term exposure to a broad range of asset classes, investment strategies and regions. We would overlay that portfolio with some tactical ideas or strategies to capture shorter-term opportunities. It is also crucial to have an on-going portfolio monitoring and review with clients regularly.

SI: Is there strong appetite for risk including alternative asset classes? How are you guiding asset allocation for your private wealth clients?

SK: Alternative asset classes like private equity, private debt/ mezzanine funding or private real estate can be very attractive diversification opportunities aside from public equity and fixed income.

Private equity will provide clients with the opportunity to participate in the growth of a business in the earlier stage before it goes public, thus enhancing the long-term returns.

On the other hand, private debt or mezzanine funding, which behaves more debt-like instruments, will give recurring income via coupons (typically higher than tradable bonds in the market). The trade-off for these asset classes would be liquidity and usually a longer investment horizon, compared to the public markets.

We would guide our clients to invest into these asset class according to their risk profile and investment horizon. A more aggressive client may have a higher allocation to private equity while a more conservative client would be more suitable to private debt.

It is key to know what t he underlying investment is and to understand the risks as well as how the returns are generated. In the case of investing into private funds, it is also important to understand the style of the manager and their track record.

We have recently provided clients with access to private real estate related deals, from asset-backed securities (ABS) to private REITs; whereby the listing of the asset 3-5 years down the road would give investors a decent total return. All these alternative options provide ways for investors to gain further diversification especially from traditionally listed equities or fixed income that are publicly traded.

SI: We are seeing a massive transfer of wealth across generations with a larger number of millennials becoming high-net-worth individuals. How is Affin Hwang AM adapting to this demographic shift and catering to the needs of a new generation of wealthy investors?

SK: The millennial generation has access to infinite amount of information via technology. How Affin Hwang AM can add value is to make sense of all that information or data to help clients translate them into investment decisions. Digitalisation is also important to enhance their investing experience whether it is portfolio monitoring or smoother execution of transactions.

We have also been running various “future leaders” programmes which include seminars, workshops, study visits and networking sessions to create value for the younger generation of our investor base. Seminar topics range from investment and market updates, wealth preservation concerns as well as leadership and business innovation.

We are mindful of the large transfer of wealth that is going to take place across Asia (Malaysia included) over the next 20 years. Thus, it is imperative that Affin Hwang AM continues to adapt to be a multi-generational wealth manager over time by listening to their needs and growing together with our clients.

SI: What further plans does Affin Hwang AM have to grow its private wealth segment?

SK: This wealth segment is one of our key business focus over the next five years. We have made some encouraging initial progress and growth over the past five years. With more focus and resources, we can continue to grow this segment in line with Affin Hwang AM’s aspirations to be a distinguished wealth manager in Malaysia and the region.

Among our plans is to continually expand our investment offerings and solutions (e.g. asset classes, strategies, regions and currencies) to help our clients achieve optimal diversification in their portfolios.

Within the wider wealth management ecosystem, we can then also build other pillars of our client’s wealth including wealth preservation and distribution. We are also continuously upskilling our people and talents as we grow the team.

Our key proposition as a wealth manager is that we are investment-led, given our roots in asset management as well as client-focus, where we strive to live up to our mantra to always put our client’s interests first.

Our long-term growth and success has been anchored by this singular trust that we have built with our clients over the years.

This article was originally published in the September-October 2020 issue of Smart Investor.

02/02/2021