Sell bonds and buy equities? Maybe not
Written by Celine Tan of theedgemalaysia.com
Tuesday, 06 December 2011 09:40
KUALA LUMPUR: Which was the best asset class in the first three quarters of 2011?
Given the volatility on Bursa Malaysia’s Main Board, it may not be surprising that the local bond and money-market funds performed better than equity funds in the one-year period ended October 28 (see table), but still, the institutional investors were caught flat-footed.
“This [underperformance of equities] was not expected early in the year. But seeing how the Greek sovereign debt issue has remained unresolved and the situations that followed the US’ credit rating downgrade, the underperformance is not a surprise [now],” says Koh Huat Soon, chief investment officer of Pacific Mutual Fund Bhd.
Similarly, Azian Abu Bakar, executive director of Apex Investment Services Bhd, did not expect bond portfolios to outperform their equity counterparts until Bank Negara Malaysia (BNM) hiked interest rates and the macroeconomic situations in developed economies kept “turning turtle”. BNM hiked the overnight policy rate by 25 basis points to 3% in May.
Throughout the year, the local bourse’s performance was mainly news-driven. “The poor performance of equity funds was due to major sell-offs in 3Q2011, as investors sought refuge and shifted to safer assets such as bonds and money-market instruments,” says Yeoh Mei Kei, research analyst at Fundsupermart.com.
Koh says the local bond market benefited from foreign investments while Azian attributes demand for sukuk issued during the year. For both, the interest-rate hike in May was also a factor.
The equity funds’ performance was attributed to the bearish sentiment on the local equity market throughout the year, says Azian. “Generally, the performance of the banking sector affected conventional equity portfolios. Islamic equity portfolios were impacted by the doldrums in the plantation sector and, to some extent, the construction sector.”
What to do?
Everyone has heard of the old adage — what goes up must come down. “We advise investors — be they conservative or aggressive — to rebalance their portfolios from winning positions [bond and money-market funds] to losing positions [equity funds],” says Yeoh.
“This prevents investors’ portfolios from [suffering a] ‘style drift’, which means a divergence from the original investment objective or investment style. Also, it forces investors to be disciplined and to manage their emotions when investing.”
Koh suggests switching to European equities. “The eurozone had bought more time to resolve their crisis. This region managed to avoid a messy default in the near term. Since many equity funds are holding cash, the potential for short-term gains is there.”
But this move requires a stomach for risk and constant surveillance of the situation in Europe. Key risks — such as the success of austerity measures in countries such as Greece and inadequate amounts of bail-out funds — remain.
This means that conservative investors should hold on to their performing bonds and money-market funds as equities are likely to remain very volatile, given the uncertainly in the global economy. Institutional investors are also likely to take their time before acquiring equities.
“Most asset managers have implemented trading or benchmarking tactics. This conservative approach is taken in lieu of the global uncertainty,” says Azian.
Written by Celine Tan of theedgemalaysia.com
Tuesday, 06 December 2011 09:40
KUALA LUMPUR: Which was the best asset class in the first three quarters of 2011?
Given the volatility on Bursa Malaysia’s Main Board, it may not be surprising that the local bond and money-market funds performed better than equity funds in the one-year period ended October 28 (see table), but still, the institutional investors were caught flat-footed.
“This [underperformance of equities] was not expected early in the year. But seeing how the Greek sovereign debt issue has remained unresolved and the situations that followed the US’ credit rating downgrade, the underperformance is not a surprise [now],” says Koh Huat Soon, chief investment officer of Pacific Mutual Fund Bhd.
Similarly, Azian Abu Bakar, executive director of Apex Investment Services Bhd, did not expect bond portfolios to outperform their equity counterparts until Bank Negara Malaysia (BNM) hiked interest rates and the macroeconomic situations in developed economies kept “turning turtle”. BNM hiked the overnight policy rate by 25 basis points to 3% in May.
Throughout the year, the local bourse’s performance was mainly news-driven. “The poor performance of equity funds was due to major sell-offs in 3Q2011, as investors sought refuge and shifted to safer assets such as bonds and money-market instruments,” says Yeoh Mei Kei, research analyst at Fundsupermart.com.
Koh says the local bond market benefited from foreign investments while Azian attributes demand for sukuk issued during the year. For both, the interest-rate hike in May was also a factor.
The equity funds’ performance was attributed to the bearish sentiment on the local equity market throughout the year, says Azian. “Generally, the performance of the banking sector affected conventional equity portfolios. Islamic equity portfolios were impacted by the doldrums in the plantation sector and, to some extent, the construction sector.”
What to do?
Everyone has heard of the old adage — what goes up must come down. “We advise investors — be they conservative or aggressive — to rebalance their portfolios from winning positions [bond and money-market funds] to losing positions [equity funds],” says Yeoh.
“This prevents investors’ portfolios from [suffering a] ‘style drift’, which means a divergence from the original investment objective or investment style. Also, it forces investors to be disciplined and to manage their emotions when investing.”
Koh suggests switching to European equities. “The eurozone had bought more time to resolve their crisis. This region managed to avoid a messy default in the near term. Since many equity funds are holding cash, the potential for short-term gains is there.”
But this move requires a stomach for risk and constant surveillance of the situation in Europe. Key risks — such as the success of austerity measures in countries such as Greece and inadequate amounts of bail-out funds — remain.
This means that conservative investors should hold on to their performing bonds and money-market funds as equities are likely to remain very volatile, given the uncertainly in the global economy. Institutional investors are also likely to take their time before acquiring equities.
“Most asset managers have implemented trading or benchmarking tactics. This conservative approach is taken in lieu of the global uncertainty,” says Azian.
