Investing in a weak or volatile market

StarBiz has invited local experts to advise investors on the form of investments in the current situation.

HwangDBS Investment Management Bhd chief investment officer David Ng said firstly, investing should not be about chasing the latest fad as doing so could work against the investor.

“Investors must always bear in mind their personal investment goals, risk tolerance level, time horizon and then asset allocate accordingly.”

“We think investors should consider having exposure to low-risk income-type funds as the returns from such funds will hopefully offset the impact of inflation on one’s purchasing power.

“Another interesting alternative would be to invest in commodities due to their historically low co-relation with the equities markets,” Ng said .

He added that if global growth continued to remain robust, especially in the emerging economies, demand for commodities should underpin prices due to tightness in supply and time lag in getting new supply on to the market.

HwangDBS Global Commodity Fund (GCF) has primary exposure to commodities futures, offering investors a closer link to the commodities industry.

However, one should also not ignore traditional equity offerings. Timing the market is never easy but if one adheres to the discipline of regular investing, market weakness should be viewed as opportunities.

On the benefit of such funds/investments, Ng said commodity funds are about asset allocation.

“Currently, supply-demand imbalances for certain commodities will continue to place upward pressure on prices. Looking at the demographics and rate of urbanisation in emerging economies, especially that of China and India, this trend is set to continue.

“Of course, there will be ups and downs as markets never move in a straight line. However, we think the trend remains positive. Historically, commodities have shown low levels of co-relation with other major asset classes. This has been evident of late when equities markets have undergone significant corrections while commodities prices remained buoyant,” he noted.

“One way of looking at investments in a commodities fund is as a hedge against inflation. Today, the high commodity prices are increasing leading to high inflation. For instance, as the prices of corn, soybean, and other food products continue to rise, the general population will have to pay more for food products. Whilst rising inflation erodes our purchasing power, investing some of our funds in these commodities can help offset some of the effects of inflation.”

Ng said investors could also look at mixed assets/income funds.

“In such funds, diversification helps reduce the volatility of an investment portfolio. It spreads the assets across a variety of different investments such as stocks, bonds and cash equivalents and may facilitate in decreasing overall risk,” he said.

He added a decline in one asset class might be balanced out by a gain in other asset classes.

“Regular dividends/income distributions from fixed income assets or high dividend yielding stocks may also help supplement income sources and minimise loss to capital.”

On return on investment, Ng said in the case of GCF, it provides the potential to profit from rising commodity prices mainly via futures contracts.

“The commodity price rally is expected to continue in the foreseeable future and investors should try to profit from this trend. The guided return for the fund is 12% to 15% per year. However, this would be the average annualised return. Returns for individual years will likely vary,” he said.

Ng said for balance and income-type funds, the guided returns tend to be within the range of 4% to 8%. They are targeted at investors looking for meaningful medium to long term capital growth with some income distribution along the way.

“It's important to see beyond the current turmoil and ensure that your current investments are fundamentally sound and with strong management. Prices are often dictated by sentiment and valuation parameters can be arbitrary.

Ng added that some stocks had been unjustifiably sold down despite strong fundamentals.

“As fund managers, we must continue to monitor these stocks and set various entry levels to establish or increase our positions in such stocks.”

Pacific Mutual Fund Bhd general manager (business development and marketing) Gary Gan said ideally in a volatile or weak market, funds should have multiple investment strategies, including going long and short.

“Funds that have a diversified portfolio include the traditional equities/fixed income plus non-equity related investments such as currencies, commodities and others,” he said.

Gan said given current restrictions on shorting and lack of related financial instruments, a fully flexible mixed asset fund would be a very good option.

“Such funds have flexibility in terms of asset allocation and investment style. However, it must be emphasized that having a very diversified mandate, while helpful, does not guarantee protection against volatility as in the end, it is still up to the experience and skill of the fund manager to make full use of such a flexible mandate to outperform other peer funds,” he said.

Gan said the benefits of such funds/investments was that they would not need to stick to a minimum holding of equities in a bear market (in the case of equity funds) nor restricted by a minimum holding of fixed income assets in a bull market (as in the case of balance funds), hence allowing for complete flexibility in shifting between asset classes.

As stated above, he said where possible, such a fund may even avoid both equities and fixed income entirely and move its assets into other investments such as currencies to protect gains or minimize portfolio volatility.

“These funds could consistently trade in and out of markets, seizing return opportunities and avoiding potential losses – thus enhancing returns while lowering risks,” Gan noted.

On returns, he said: “A well executed fund of this sort could produce anywhere from 2.5 to 5 times multiples of one year fixed deposit rates, depending on equity market conditions and of course, the experience of the fund manager.”

Gan said hedge funds, over the past decade, have often tried to provide the best solution to investors i.e. performing well irrespective of market conditions, however, not all such funds have been successful. “Even a well managed traditional equity unit trust fund, despite its general inflexibility, can perform well during market downturns if efficient active allocation strategies are timely executed.”

But cases like these are few and far, as traditionally, equity unit trust funds often remain invested to conform to its benchmark.

But therein lies the argument that while market volatility can be unpredictable and brutal, investing accumulatively over time, irrespective of what market conditions are, is often the best and most convenient solution to take,” he said.

On the fund manager's strategy in the current depressed/weak market, Gan said active asset allocation, often on a very frequent basis, was required to make the most of volatility.

“The usual buy and hold mentality may not be the most efficient strategy anymore in today’s market. Besides traditional economic indicators, sentiment and funds flow trends make it especially difficult to derive asset allocation moves but this is where fund manager experience will be telling,” he said.

Gan said properly executed asset allocation strategies could ensure that a particular fund is in a better position to accumulate quality, beaten down stocks. For example, properly executed asset allocation strategies could that ensure funds have healthy cash positions during the downtrend to accumulate stocks. To further complement the above strategies, it is important to ensure that stocks in the portfolio are liquid and highly tradable at all times.

“This is becoming an important feature amidst the severe ups and downs of today’s global equity markets. When appropriate, managers need to move their exposure to defensive stocks and lower the beta of their portfolios.“