As an Old Year ends, a New One Begins (24 Dec 2009)

As we approach the end of the year, let’s take stock. It has been a tough year for many people, a global recession, many job layoffs, uncertainty in markets, have no doubt also caused a certain amount of anguish in many people.

Although stock markets looked as if they were on the edge of an abyss in March, the darkest time was followed by a huge rebound in the months that followed. I remember writing at the start of the year in my GM column in the Fundsupermart magazine that this year (2009) will surprise many an investor as it would turn out to be a positive one. Markets did in the end surprise on the upside, with many markets moving up 50% or more.

Despite the positive performance by markets this year, I suspect many investors remain in the red in terms of their investments which were bought at higher prices. The economic turmoil has wrecked havoc on many company’s earnings and in turn bonuses, increments, has been cut, amidst much job uncertainty. Many would heave a sigh of relief to put the year 2009 behind them.

But enough of looking back, it is more important to look forward. 2010 will usher in a new year. A new year, with new resolutions, worries, as well as new hopes. While challenges and concerns remain plenty, the economic environment is definitely on the mend. US, still a key export market, is clearly coming out of recession, its housing market showing signs of improvement. China is continuing its high rate of growth, and many Asian economies have also all swung out of recession.

Along with the recovery in the various Asian economies, companies are likely to see their earnings improve in 2010. 2009 saw earnings of many companies plunge as demand plummeted and fear made everyone cut back drastically. 2010 will see much needed confidence return to consumers, helping to drive earnings of many companies back up again. While we are still along way off from the highs of 2007, it would still be a significant improvement from the lows of 2009.

There are many concerns aplenty amidst this tide of growing positive news. But this is precisely why I am confident that there is still lots more upside to stock markets. Trading volume remains weak at this point, and there are huge amounts of money remaining in cash. From Greece going under scrutiny, to Dubai World’s troubles, from worry over hyper inflation, to worry about double dip recessions. All these concerns means that investors will not so quickly forget about fear, that greed will not set in so quickly. This means that markets will trend up steadily based on fundamentals rather than rocket up, carried by greed and over exuberance.

2010 will be a good year for investors, in particular those who are patient. I look forward to the new year in great anticipation, but tempered with prudence. We won’t see the kind of eye popping returns of 2009, and there will be volatility mixed in with times when the markets seem dead and stagnant. But ultimately, by the end of 2010, I expect that investors who persisted throughout the whole year will see decent returns. I expect Asian markets could return 20 to 30% for 2010.

So, after rebalancing your portfolios at the end of the year, look forward into the new one and take heart. 2010 will be a good year. Here’s wishing everyone a Merry Christmas and a Happy New Year!

Rebalancing My Portfolio (15 Dec 2009)

I am putting my own portfolio through a rebalancing exercise. I only do this once a year. The basic concept is to take profit for your winners, put some of the profits into your loser or laggard markets, and also, ensure that you don’t have too much into one particular area.

Looking at my portfolio. I remember that at the start of the year, I made a conscious decision to avoid US totally, more or less avoid Japan, and focus on Asia with some exposure into Europe. The strategy has paid off in 2009, as Asia led US and Japan markets by a mile. All the Asian funds have done at least over 50%, if not more, while the Japan fund is up 28%. I looked up the US equity funds on the fund selector and none of them did better than 34% over one year. The Europe funds I had though, did well, keeping pace with the Asian equity funds over one year.

However, its been one year in such an extreme position. Its time to move back to a slightly less extreme position. However, if you were to ask me, I would still say I favor Asia at this stage, though I also like Emerging markets as well. I am still rather iffy about Japan and US, but that’s the point about rebalancing, it forces you to put money even into areas you might not like. So, I came up with a new target allocation for my core allocation. Previously, the 60% I had in my core portfolio had 6% in Europe, 0.2% (negligible) in Japan, nothing in US, and 54% in Asia, including Singapore. My new target allocation would have 10% in Europe, 5% in US, 5% in Latin America, 5% in Japan, and the rest in Asia (35%)

Within my bonds portion, I wanted its total to make up 15% of my portfolio. As I made sure to add a portion of my new investments into my bond funds, and as the bond funds I choose this year had pretty eye popping returns over one year, they were actually not too far behind many of my equity funds. (Fidelity high yield bond fund was up 72% over one year, Fidelity US high yield was up 36%, and INF emerging market was up 64%). I was clearly too heavy into emerging market bonds though, so I decided on a final allocation of 4% into US high yield, 3% into Europe high yield, and 8% into Emerging Market Bond. So, I would be shifting some profits into my bond funds, and the US high yield bond fund would receive a bigger proportion since it was clearly the laggard.

Now, we come to my supplementary portfolio. This added up to 17.5%, and had seven funds in it! Three of these, the India, Russia and Indonesia fund had a return of 124%, 99%, 94% over one year. The South Korea fund and China fund were the laggards. Looking at South Korea, I found that I liked the valuations of the market, and its earnings growth for next year. Its one of my favorite markets for next year, so I decided to overweight it. Hence, I took profit on Russia, Indonesia, Asian financials, and added most of it all into South Korea. I left the precious metals fund and HGIF Chinese Equity alone as they were close to where I wanted their allocation to be.

I also left my CPF funds untouched as at this stage, I couldn’t add to them, and I was comfortable with their allocation.

My final portfolio had a target allocation that looked roughly like this:

Core Portfolio
Parvest Europe Alpha EUR	5%
FLF equity Emerging Europe	5%
LionGlobal Japan Growth	5%
Aberdeen Pacific Equity	25%
Aberdeen Asia Smaller Cos	5%
Aberdeen Singapore Equity	5%
Schroders Latin America	5%
FLF Opportunities USA	5%
Bonds Portfolio
Fidelity Europe High Yield Bond	3%
Fidelity US High Yield Bond	4%
INF RF Emerging Market Debt	8%
CPF Portfolio
AIGIF Acorns of Asia	7%
Lion Capital Balanced Singapore	1%
Supplementary Portfolio
HGIF Chinese Equity	3%
LionGlobal Korea	4.5%
HGIF India	1.5%
FLF Russia	1.5%
Aberdeen Indonesia	2%
DWS Noor Precious Metals	1.5%
Fullerton Asian Financials	3%
Total	100%

This actually looks like a lot of funds, and indeed, there is no necessity to have quite so many if you don’t wish to. A much simpler portfolio with a similar allocation would look like this:

Aberdeen Asia Pacific Equity	46%
Global Equity Fund	23%
BRIC Equity Fund	11%
Global High Yield Bond Fund	7%
Emerging Market Bond Fund	8%
LionGlobal Korea	5%

So, there you have it. Once you have established what kind of target allocation you want to have. To get to it just involves making the various switches to adjust to the new allocation. Don’t sweat the small amounts. For example, if you find you want adjust something from 5.5% to 5%, and it involves switching a very small amount, then don’t switch, it won’t make that much of a difference either way. It does not have to be a strict rebalancing either. I personally continue to have a heavy bias towards Asia, and it shows in my portfolio. But what the exercise does, is that it forces me to take some profit from Asia, Russia, India and add to some areas which have underperformed, like US, Japan, South Korea. Sometimes, these decisions, forced upon us by rebalancing, can be very surprising in their results. For instance, this year I never expected my high yield and emerging bond funds to do quite as well as they did this year, nor did I expect my Europe funds to actually keep pace with many of my Asian equity funds as well. I will update my portfolio when all the switches have been put through and updated in my holdings.

Year End is a Good Time for Rebalancing (4 Dec 2009)

We are in the month of December now, in the blink of an eye, it seems like the year has passed. The Lehman Brothers crash is now more than one year ago, and while it may not feel like it, most markets have been rising steadily for several months. I remember writing in a column in the Fundsupermart magazine at the start of 2009 that it would be a good year with positive surprises. So far, it hasn’t failed to disappoint. Many markets have shot up 50 to 70% year to date. But now that we have been through two such turbulent years, one with a massive crash, and almost through another with a big recovery, it is a good time to pause and rebalance our portfolios.

What exactly does rebalancing our portfolio mean, why bother to rebalance? The rebalancing method works as follows: Say we start an investment portfolio with $10,000. And as we have often suggested, we spread the investments so that the money is invested in stock markets all over the world. For example, we allocate 35% to US, 30% to Europe, and 35% to Asia. After 1 year, regardless of how well each region performs, we re-allocate our investments so that the percentage of money invested in each region remains the same. So, in a nutshell, rebalancing is about taking profit from your winners and adding money back into your losers on a consistent basis.

We back tested the results over the last 39 years on a $10,000 portfolio using rebalancing every year compared to one that just held throughout with no change. At the end of 29 years, the rebalanced portfolio with 80% into equities and 20% into bond had $176,586 whiel the buy and hold portfolio had $114,731. Hence, the rebalanced portfolio outperformed a buy and hold portfolio while being less volatile.

“Why does this rebalancing method work?” You may ask. It does seem weird because while it looks simple in execution, it requires you to sell off some of your funds that have been giving you the highest returns to invest in funds that might be causing you to lose money.

The clearest example would have been the massive swings in markets we saw from 2007 to 2009. In 2007, stock markets were on a roll, many Asian markets were up 15 to 30%, but bonds were having a flat year. Rebalancing would have resulted in money shifted from the strongest Asian equity funds, moved into bond funds. Then, in 2008, when most equity funds were down 50%, while bond funds were holdings steady, rebalancing would have resulted in money being shifted back from bond funds into equity funds

The whole crux of why rebalancing works, and why we should rebalance, is based on this “that all markets go through its ups and downs, and no single market will be best performing market all the time”. So, the markets that look so bad now, which people are trying to avoid, may eventually have their turn to shine again, and regardless of how hot or good a market looks now, rebalancing forces us to take profit from this market because it believes that such a market will eventually fall from its top spot.

While selling your winners and buying into your losers is tough to do in practice. Another key thing to remember about rebalancing is that it does not require that you sell all of your winning markets or funds. It just requires that you take profit on it. Hence, if one or more markets you selected happen to go through a multi year bull run with very strong performances, you will still benefit from having exposure to such a market. Rebalancing only requires that you take profit occasionally (I usually look to rebalance once a year).

The other part of it, which is to add money to your losing markets is also very hard in practice to do. But again, this method is based on losing markets eventually bouncing back, and the harder they fall, the stronger the eventual rebound would be. Think back again to 2008. The Asian markets fell the hardest compared to other markets like US, Europe, or bonds as a whole. Many Asian markets were down 50% or more. However, rebalancing your portfolio would have meant that you were forced to shift monies from bond funds, US, and Japan into Asia, and your actions would have yielded a handsome return in 2009, with Asian markets rebounding much more strongly than US, Japan or bonds as a whole.

This rebalancing method does not always work so well every single year, like how it did in 2009. (A market could be a strong performer over 2 to 3 years!). However, if practiced consistently over a long period of time, it would do better than just a simple buy and hold method. The reason is because while markets might remain strong, or weak over more than one year, but over a long period of time of ten years or more, then eventually, the strong markets suffer their crashes, and the weak markets get to shine.

In conclusion, as we approach the end of the year, it is a good time to take a good look at your portfolio and rebalance it accordingly. A very simple way could be just to take some profit from your winning investments, and to shift some of that profit into new or existing investments which have underperformed this year. One big caveat though, rebalancing your portfolio works far better with unit trusts and it may work with stocks. The reason being that unit trusts tend to invest into many stocks or bonds and into a broad market. While an entire stock market is likely to go through its cycles of ups and downs, an individual stock could fall flat, never recover or even go bankrupt eventually. Hence, insisting on adding and adding to such a stock will be terrible for your investment returns.