Reposition and Re-balancing your Portfolio to Improve Performance and Returns

Transcription

1 Financial & Biz Ed Consultants Reposition and Re-balancing your Portfolio to Improve Performance and Returns Ben Fok CFP, ChFC, TEP, CMA Chief Trainer Part 1 Reposition your portfolio 1

2 Understanding Asset Classes Risk Return Tradeoff there is no free lunch High Returns High Risk Derivatives Commodities Equities Bonds Low Returns Cash Low Risk Asset Allocation Terms Diversification correlation Asset allocation Brinson study Modern Portfolio Theory efficient frontier 2

3 Types of Diversification Diversification is about managing risk and NOT returns. It can be among: Asset classes Traditional Vs Alternative Countries Domestic Vs International Managers Single Vs Multi Styles Value Vs Growth or Large cap Vs Small Caps Correlation and its Uses Diversification can also mean finding assets that has low correlation with each other. Correlation combining assets with different returns and risk Correlation coefficient - show us the strength of movement between two stocks 3

4 What is Correlation? An Example of Correlation 4

5 Correlation Analysis between KLCI and Foreign Markets From Correlation with KLCI 1.2 Correlation Coefficient KLCI Singapore Indonesia India Phillipines Hong Kong US (S&P 500) Thailand Taiwan US (DJIA) Australia (NASDAQ) Brazil Korea UK China Series Japan (Nikkei 225) Correlation Analysis between KLCI and USD From The red line is the movement of KLCI while the blue line is the movement of RM/USD currency exchange rate. 5

6 The Story of Value Vs Growth Valuation & PE Ratios Growth Rate Economic Theme Excitement level Orientation Pricing Returns Philosophy Value Lower valuation and lower PE ratios Lower Old economy Boring stocks Find bargain Margin of Safety Disappointments already factored into price Dividends plus appreciation (dividend can be a significant part of return) Buy $1.00 for 50 cents Growth Higher valuation & higher PE ratios Higher New Economy Concept stocks Ride the momentum as earnings growth Expectations already factored into price 100% capital appreciation (generally no dividend) Buy a rapidly growing $1.00 Valuation principle Buy below intrinsic value of business (Margin of safety) Buy current and future growth prospects (PEG) 1 5.0% Why Value vs Growth? Excess Return - International Shares 3 Year (p.a.) Rolling 15.0% 1 0.0% 10.0% 5.0% 5.0% 0.0% 0.0% -5.0% -5.0% 1 0.0% growth market orientated blend value % 1 5.0% % 6

7 Understanding Style Investing UNDERSTANDING INVESTMENT RISK 7

8 Why take Risks? When there are risks, there are losses. When there is no risk, there is no profit Systematic risks vs. Unsystematic risks Systematic risks cannot be diversified away Interest rate risk Inflation risk Market risk Reinvestment risk Exchange rate risk Why take Risks? Unsystematic risks can be diversified away Country risk Liquidity risk Business risk Default or credit risk Industry risk Financial risk Losses are just part of the game 8

9 Understanding Diversification No. Stocks in Portfolio Infinity SD of Portfolio Returns Ratio of Portfolio SD to SD of Single Stock Source: Meir Statman, How Many Stocks Make a Diversified Portfolio? Journal of Financial and Quantitative Analysis, September 1987, p Taking Advantage of Risk Total Risk Diversifiable Risk (Unsystematic Risk) Non-Diversifiable Risk (Systematic or Market Risk) Portfolio Size Diversification helps to reduce risks but does not eliminate risk! When investor burnt his finger 9

10 UNDERSTANDING INVESTMENT RETURNS Understanding Investment Returns The Fund (%) 10

11 Understanding Investment Returns BT- Compounding the issue Part 2 Re-balancing your Portfolio through Asset Allocation 11

12 Fundamental Meaning of Asset Allocation Blending underlying characteristics of various asset classes to produce a stronger composite than any single element. Recognizing and balancing tradeoffs, including time horizon, capital-preservation goals and constraints Setting minimum and maximum constraints to ensure sufficient representation, but not overconcentration Diversifying asset classes to align portfolio and personal risk/reward profiles, and to be compensated for bearing non-diversifiable volatility. 3 Components in Asset Allocation Investor related Market related Asset related Gauge the degree of divergence from historical mean and trend data Select asset classes for investment consideration Review Goals, personal and risk profile, Income needs, and time horizon Apply sound judgment Conduct worst most likely and best case scenario analyses for asset classes and asset allocations Consider the usefulness and applicability of models Assess past and projected returns, risk, and correlations Foundations of asset Allocation adapted from David Darst The art of asset allocation Estimate risk accordingly to multiple measures Evaluate the fundamental, valuation and liquidity outlook or each asset class 12

13 Favorable Financial Market Climate 30% Diversification 10% Avoiding Losses 60% Making Money Investors motives in a bull market Its Only a number Unfavorable Financial Market Climate 70% Avoiding Losses 15% Making Money 15% Diversification Investors motives in a bear market Making sense of Market Rallies 13

14 The Art of Asset Allocation Asset allocation distribution of a client s funds among various types of assets to achieve diversification, that is, to lower risk The Brinson study: 92% of your portfolio return is due to asset allocation (what you invest in) 6% is due to stock selection 2% is due to timing of the market The Art of Asset Allocation 14

15 The Art of Asset Allocation Equities Derivatives Fixed Interest Cash The Art of Asset Allocation Asset allocation accomplished the following: It minimizes investors fear It helps investors make sense of the market It helps investors maintain confidence in their investment positions 15

16 The Art of Asset Allocation Two main types Strategic Asset Allocation Tactical Asset Allocation The Art of Asset Allocation Strategic asset allocation involves: Setting long term policy asset weights Use average return of asset class to estimate future market results forecasting is required Use efficient frontier to generate asset mix Re-balancing is necessary 16

17 How to Re-balance Understanding your current investment portfolio. Have a feel of what is not performing Look at the correlation of the various asset class in your portfolio Re-balance the portfolio Why Re-balancing your Portfolio? If you invest RM4,000 in a bond fund And RM6,000 in an equity on 1/1/2005 As at 1/1/2010 your position 40% Bond Equi ty 32% Bond Equi ty Bonds Bonds 60% Equity 68% Equity To bring it back to the original allocation, you can switch some of your funds out of Equities and into Bonds 17

18 The Art of Asset Allocation Tactical asset allocation involves: Market timing Sector rotation Short term Time to change Strategy Market Phase Bottoming Early stage of recovery Mid-stage Bull market Peak of Bull market Bear market Market direction Fundamentals Valuations Psychology 20% improving but ignored 20% attractive but no takers 60% Exhaustion, disbelief, and demoralization 30% solid underlying performance 50% abundant bargains 20% Doubt, reflection and conversion 40% sweet summer of growth 30% Willingness to pay up 30% Faith, hope, and charity 20% optimistic, long duration projections 20% revised models justify stretching 60% Euphoria, greed and extrapolation 30% awareness of deteriorating conditions 20% shocked recognition at outlandish price paid 50% Fear panic and loathing Factors influencing asset prices in different market phases 18

19 The Art of Asset Allocation 19

20 Knowing When Asset Allocation will Work Rotating price leadership Stable relationship Low correlations Stable information flow Appropriate rebalancing activity Investor judgment and skills Knowing When Asset Allocation will not Work Unusual financial environments Unstable relationships Rising correlations Unstable information flow Inappropriate rebalancing activity Investor error 20

21 Personal Financial Statement Financial Plan Financial Goals Short and long run of Financial markets Asset Allocation Process Investment opportunities Investor Profile Investment Outlook Investment Universe Investment Philosophy Investment Policy Statement Asset Allocation Conservative Moderate Aggressive 21

22 Part 3 Portfolio Management Why Investors Failed? Lack of diversification Do not understand their portfolio Indulged in frequent trading Not adjusting risk when you need to Lacks discipline Chases the markets Takes profits too quickly Lacks emotional control Basically stick to gambling 22

23 Why investors fail? Investment facts S&P 500 from 1989 to 2009 average investor achieved 3.17%pa 8.20% pa inflation 3.0%pa Source: Dalbar, Quantative Analysis of Investor Behaviour 2009 Is Investment Equates to Gambling? People would rather be promised a winning lottery ticket next week than an opportunity to get rich slowly.. Warren Buffett 23

24 Becoming Disciplined Set sensible goals Have a strategy to follow Spreading of risk Most important thing to do is stay in game You must preserve capital, then grow it Stick to a money management plan planning without action is futile, action without planning is fatal Understanding your Portfolio The optimal return for any level of risk or the lowest risk for any level of return To build an efficient portfolio we need to know three variables: Historical returns Standard deviation Correlation between each asset class 24

25 The Efficient Frontier It represents that set of portfolios that has the maximum rate of return for every given level risk. Every investor would like to have low risk and high return, but is this possible? 25

26 Time in Investment Understanding your investments Expected Returns 5% p.a. Expected Returns 8% p.a. Expected Returns 10% p.a. 26

27 Efficient Frontier of Traditional Asset and Hedge Funds Towards Higher Returns Increased by 1.2% 11.8% 10.6% Towards Lower Risk Reduced by 0.4% 9.4% Unit Trust Quadrant 27

28 Monitor Performance 6/7/2010 Ensure Investment Portfolio is still appropriate for Financial Goals that it was selected for Ensure Performance is still consistent with expectation, after taking into considerations Economic Markets Performance that it operates in Any Negative Factors are only Temporary Monitor Performance 6/7/2010 Ensure Risk has not been increased over that Tolerated Some Resultant actions may include Rebalance Asset Allocation Increase liquidity to take advantage of possible downturn in markets Reduce risk or Increase it Take Profit and Realign Assets held to original or new to suit Strategy taken 28

29 Monitor Performance Change Investment Strategy Change Economic Markets to Invest eg. from Europe to Asia Refocus investments to long term once short and medium terms goals are met or more resources are available 6/7/2010 Monitoring Portfolio 20% 15% 10% Accumulator (Lump Sum) 1 SD -1 SD Exp Ret Portfolio Benchmark 5% 0% Dec- 02 Jan- 03 Feb- 03 Mar- 03 Apr- 03 May- 03 Jun- 03 Jul- 03 Aug- 03 Sep- 03 Oct- 03 Nov- 03 Dec- 03-5% 29

30 Putting it Altogether Understanding Risk: 1. Willingness 2. Ability 3. Need 4. Time Tech/New & Emerging Economies 30% Global Equities 30% Global Bonds 40% Choose your asset class 1. Look at Various assets 2. Look at returns/risk 3. Select them Risk Profile Asset Allocation Implementation Your Portfolio Allocation Amount (S$) US bonds 30% 300,000 Singapore Bonds 10% 100,000 US stocks 15% 150,000 Japan Stocks 15% 150,000 Asia stocks 20% 200,000 Singapore stocks 10% 100,000 Total 100% 1,000,000 Monitor 1. Economic, technical, politics, valuation, etc. 2. Monthly performance 3. Rebalance at least yearly Monitor Using the Portfolio Concept Best combination for the client Have an estimated returns of the portfolio Easy to monitor Able to managed clients expectation Truly professional 30

31 Part 4 Implementing Your Investment Strategies Investment Strategy Ascertain the Target Amount and the Time Horizon available to Accumulate Ascertain your available Resources Savings and Seed Money Select an Asset Allocation that is likely to achieve the Returns Targeted and Risk level Tolerated Consider all special opportunities and cost involved 31

32 Investment Strategy Ascertain the Target Amount and the Time Horizon available to Accumulate Short Term Goals need to be funded before Long Term Goals Goals must be quantified and Time Horizon determined, before appropriate asset can be selected to achieve these Goals. Assumptions need to be made and these would have to be reviewed along the way even after implementation of plan Investment Strategy Ascertain your available Resources Savings and Seed Money Limited Resources can affect the Type of Assets to select For those without much Seed Money, Regular Savings Plan would be the only way The lesser amount of Resources available and with limited time Horizon, the less Risk to take in Portfolio What about limited Resources but long Time Horizon? 32

33 Investment Strategy Select an Asset Allocation that is likely to achieve the Returns Targeted and Risk level Tolerated Time Horizon has a great impact on the type of asset to choose Generally with Shorter Time Horizon, should the portfolio be higher risk or lower risk, even for those with high risk appetite? With Longer Time Horizon, can those with low risk appetite afford to avoid higher risk instruments? Investment Strategy Consider all Special Opportunities and Cost involved What are the Regular Savings Plan available and the cost if any and ease in effecting such plan? Is it better to Drip In or to place One Lump Sum to take advantage of all time low prices? Is this the best time to go into such investments? 33

34 Investment Strategy Consider all Special Opportunities and Cost involved Prevailing Economic Conditions may affect the Investment Strategy to take Transaction Costs include Commissions and Fees payable at purchase, sale Transfer / Maintenance / Switching Fees Time and Effort involved in Investment Administration / Management Is this the right time to buy? YES NO 34

35 When To Buy? Market Timing is difficult and not always accurate - so avoid completely? With Expected Market Volatility should one invest anyway? Should one take advantage of Sharp Increase in Asset Valuation? What happens if your client instructs you to buy or sell? BT- PF Strategy & Yr Adviser Blue bridge When To Buy? Investments especially those for Long Term Financial Goals should be Strategic and invested for the Long-Term Can never catch Market Bottom or Top So take advantage of large Declines to buy more with the view to hold for Long-Term Dollar Cost Averaging through Drip Investing, avoid missing out on the bull and bear markets Stay invested or DCA 35

36 Dollar Cost Averaging Bull Market FPIL Allianz GIS RCM Philippines (NF) 200 Percentage Growth Total Return, Tax Default, In LC Value of USD 8,400 Lump Sum 31/05/2000 After 7 years: US$23, % Value of USD 100 per month 31/05/2000 After 7 years: US$27, % Percentage Growth /00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 7 Years From 31/05/00 To 31/05/07 Dollar Cost Averaging Bear Market FPIL INVESCO Global Technology (NF) 40 Percentage Growth Total Return, Tax Default, In LC Value of USD 8,400 Lump Sum 31/05/2000 After 7 years: US$2,517-70% Value of USD 100 per month 31/05/2000 After 7 years: US$8,310-1% Percentage Growth /00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 7 Years From 31/05/00 To 31/05/07 36

37 Dollar Cost Averaging Volatile Market FPIL GAM Japan (NF) 10 Percentage Growth Total Return, Tax Default, In LC Value of USD 8,400 Lump Sum 31/05/2000 After 7 years: US$8,615 +3% Value of USD 100 per month 31/05/2000 After 7 years: US$12, % Percentage Growth /00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 7 Years From 31/05/00 To 31/05/07 Investment Process Expected return model Volatility and correlation estimate Constrains on portfolio choice e.g. turnover constraints Portfolio optimization Riskreturn efficient frontier Choice of portfolio 37

38 In Conclusion It is only by understanding the emotions of others that an investor has a chance to produce superior results Sir John Templeton Times Thank you Please stay in touch My contact ben.fok@grandtag.com Hand phone: Before you leave, please complete the feedback form and return to us 38