Wednesday 29 December 2010

The Big Year End Rebalancing (29 Dec 2010)

As I promised, I have rebalanced my own personal portfolio just today, and now there will be a big piece on it. Rebalancing is actually a pretty personal thing, because everyone’s portfolio will look different. But the basic concept is to take profit from the funds which have done well, and invest into the funds which are underweight.

But first, just a few tips on rebalancing. Don’t look at your previous portfolio first. First, take a blank piece of paper, and imagine that you were starting out afresh! If you had no historical baggage, regrets, etc holding you back at all. Say you simply had X sum of money to invest into a brand new portfolio, how would you do it?

With that in mind, I jointed down some of the allocations I wanted to have in this 2011 portfolio of mine. It worked out to this:

Let’s focus just on the cash portion, which made up the bulk of my investments. These totaled $395,500. The kind of asset allocation I was looking to have in 2011 looked like this:

Type%Amount ($)
Bonds
10%
$40,000
Core Equities
65%
$256,000
Alternatives
5%
$22,000
Supplementary
20%
$77,5000
Total (cash)
100%
$395,500

I wanted to take profit from equities, but I remained overweight equities relative to bonds. Thus, instead I turned to the alternative investment space to park some of my profits.
My Bonds Portion Allocation would look like this:

Type%Amount ($)
Global Emerging Market Bonds
28%
$11,200
US High Yield Bonds
36%
$14,400
Asian High Yield Bonds
36%
$14,400
Subtotal
100%
$40,000

My Regional Equities Portion would look like this

Type%Amount ($)
US
10%
$25,600
US Small caps
10%
$25,600
Europe
10%
$25,600
Europe emerging
10%
$25,600
Latin America
8%
$20,480
Asia
30%
$76,800
Asia small cap
15%
$38,400
Japan
7%
$17,920
Subtotal
100%
$256,000


As can be seen. I remain overweight on Asia, though I have now moved US and Europe back to a more reasonable weightage within this portfolio. And Emerging Markets play a big part in my core equity portfolio as well (made up of Asia, Latin America and Emerging Europe).
My Supplementary equity portion would look like this:

Type%Amount ($)
Tech
20%
$15,500
Singapore
20%
$15,500
China
15%
$11,625
South Korea
15%
$11,625
Russia
10%
$7,750
Taiwan
20%
$15,50
Subtotal
100%
$77,500


As this part showed, my favorites remain Technology and Taiwan. Singapore gets 20% because of pure home bias. Russia is my hedge against high oil prices, which are a risk to Asian equities. China is simply too big and important to ignore, though the fact that its valuations now are really attractive is a big plus point as well.

Now that I have envisioned what it should look like. Then it’s a matter of adjusting my portfolio to look like this 2011 envisioned portfolio. So, I line my existing portfolio alongside the new one, and I see what I have to adjust. Small adjustments, I leave out since a $500 or $1,000 adjustment to a $400,000 cash portfolio won’t make much of a difference, and I see how I can make the adjustments with the minimum amount of switching possible.

Having said that, it still required a fair bit of adjusting. So, I will cover what I adjusted, along with why I did it.

Actual Actions taken on my portfolio.
CPF portion of portfolio – left untouched.
Comments: This part was easy. As mentioned above. There are a limited choice of funds within this space, and I generally don’t make much adjustments even in the long term. So I left this part untouched.
Bond Portion of portfolio
1) Switched 3611 units or $5200 from United GEMs bond fund into Fidelity US High Yield Bond.
2) Switched 2083 units or $3000 from United GEMs bond fund into Fidelity Asian High Yield USD Bond Fund.
Comments: I did not add to my bond portion, though I planned to take profit from my equity portion. Instead, I shifted money from global emerging market bonds to my two high yield bond funds. I think currency played havoc on some bond fund returns in 2010, but I expected it to be slightly less volatile in 2011. In any case, the Euro remains a large question mark, hence I am still avoiding Europe bonds in 2011. High yield and emerging market bonds, though riskier, still remain the best bets within the bond universe because their yields are higher, which would buffer them against inflationary pressures increasing interest rates in 2011.

Alternatives Portion of portfolio
3) Switched 5099.78 units, or $23,000 from Aberdeen Pacific Equity into Man AHL Trend
Comments: This marks the first time I am going into alternatives. I remain bullish on equities, but rebalancing meant I should take profit. But I was reluctant to add more into bonds. So, I looked into Alternatives investments space to park my equity profits. The Man AHL Trend fund was one with a very low correlation to equities, and would cushion any unforeseen shocks to equities market well. I took profit from my Asian equity fund (Aberdeen Pacific Equity), as it had done very well this year, and even though I remained bullish on Asia, I was simply far too overweight in it.

Supplementary Portion of portfolio
4) Switched all of Aberdeen Indonesia Fund into Fidelity Taiwan (about $9,881)
5) Switched all of HGIF India Fund into Fidelity Taiwan (about $5,864)
6) Switched 2,468 units (or $10,614 ) of Aberdeen Singapore Equity into Legg Mason Royce US Small Caps Fund
7) Switched 7092 units (or $6,600) from Lionglobal Korea to Parvest Europe Alpha EUR
8) Switched 7092 units (or $6,600) from Lionglobal Korea to BNPP1 Opportunities USA
9) Switched 2193 units (or $3,200) from Henderson Global Technology to BNPPL1 eq Emerging Europe.
Left Russia and China funds untouched.

Comments: After looking at the adjustments required. I realized that I would be doing two things. First, I would be cutting down the funds I had in my supplementary portfolio (I had too many), and I would be channeling profits here into my regional equity portfolio. As a result. I sold off my Indonesia and India fund completely. These had done very well, but the valuations for these two countries were now higher than I was comfortable with. That Indonesia had been one of the top two best performing markets two years in a row made it unlikely it would fare so well in the third. Both were switched into Taiwan, which is our favorite market for 2011.

I took profit from Singapore, and placed it into US. I also realized I had added too much to Korea during the year 2010, and though I still liked the market, I had to trim it, and so I did, shifting parts of it to Europe and US. Similarly, I had fallen too much in love with Tech, and though I am still very bullish on it, I trimmed it and shifted part of it to Emerging Europe.

Core Regional equity portion of portfolio
10) Switched 9170.81 units (or $14,765) from Aberdeen Asia Smaller Coys into Legg Mason Royce US Small Caps Fund.

Once all the other actions were taken. There was little left to be done in my regional equity portion. Effectively, I had taken a chunk of profit from Asia and put it into the Man AHL Trend Fund. I had also put back profits from my supplementary portfolio into this portion. The main focus on this part, was to increase the weightage in Europe, in US, and to trim down on Asia. All my prior actions had already done most of this. So, all that remained to do, was to shift part of my Asia smaller caps into US small caps. The US small cap fund from Legg Mason is a new addition to my regional equity portfolio. While I recognized that I was far too underweight on US, I wanted a heavy tilt towards small caps because I feel that 2010 will see small caps do well as they play catch up to the large caps. Thus, I added to this fund.
With that, I am now rebalanced and well positioned for 2011. Have a happy new year everyone. Here’s to a great year for funds in 2011!

Friday 24 December 2010

A Merry Christmas to All (24 Dec 2010)

It's Christmas time! When we do come back after Christmas, we will have our view on the new year 2011 and our favorite picks next week.

My own personal plans which included buying a car and moving house for next year is looking nervous because of the very sharp rise in COE prices. Being an investment professional makes buying a car even harder for me because I know how much of a depreciating asset a car is (at least $10,000 a year in expenses if not more depending on the car you buy), and the same amount invested over time each year will yield substantial gains. As such, I view the monthly increase in car COE prices with substantial dismay.
The increase in car COE prices does mean one thing though. Many Singaporeans are feeling richer now, and hence they are willing to pay increasing prices for car COEs. It also signifies a strong amount of confidence in the growth prospects of the Singapore economy, and strong job outlook.

I think when I finally do buy a car when I move house next year, it will likely be a used car … if I buy one at all. A brand new car does have a strong emotional pull to it (as with anything you buy that comes brand new). But would I pay so much more just so that I can get that emotional rush from getting a new car? Perhaps one of the new year resolutions for 2011 for me would be to control my emotional impulses on things like buying a car. If I can control my fear during a market crash, and greed during a bull run, then surely I should be able to control this!

Oh well, there’s still quite some time before I move house. And in the meantime, I wish all FSM investors a very merry Christmas!

Friday 17 December 2010

Concerns Subsiding, Enjoy the Christmas Week (17 Dec 2010)

Christmas week is just ahead. We are almost coming to the end of the year. I know I have talked of rebalancing, but there is time enough for that. After Christmas, there is exactly one week before we officially end the year, and that will be when I rebalance my portfolio. Will we have a Christmas rally? Its possible, and I certainly hope so, since volume is light, and it takes little to bring markets up. The Christmas cheer, putting everyone in a good mood will help too. The Singapore market has been kind of stagnant this month so far, but other markets like South Korea, Taiwan, and Russia have charged ahead.

In any case, it is shaping out to be a pretty good year for equities. While markets did not charge through the roof the way they did in 2009, the overall trend was still up. Even the US market is now starting to buck up. So, when I take stock in the week after Christmas, I may be surprised at the returns of my US equity fund.
As things quiet down towards the end of the year, I believe a lot of the concerns that have plagued this year will also subside. We don’t hear any talk about the Korean tension anymore. The red shirts in Thailand? Nobody is talking about that anymore, and Thailand is one of the two best performing markets this year. US double dip recession? We still hear every now and then from either experts, analysts, or economists expressing concerns about the state of the US economy, but earnings continue to surprise on the upside, and the US economy continues to grow.

How about China tightening? They are still tightening, but they have been putting in property curbs, raising bank reserve ratios for the entire year. If the China economy was supposed to have a hard landing, we should be seeing it by now. It simply hasn’t happened, and now it appears that while China tightening will continue, they won’t just keep on raising interest rates blindly until the economy stutters.
Europe will continue to experience volatility every time the next European country faces a spike in interest rates when it tries to go to the market to lend money, but I think the situation is mostly factored into the market by now. We have been seeing this European crisis flare up again and again since May this year, and its starting to look like a rerun of a bad serial. It will get old after a while.

Ultimately, diversification is the key. Diversify into equity funds, bond funds, and even alternative investment funds so that you won’t be totally caught out even if stock markets stumble. I have been getting my research team to look into the alternative investment space, and we should be having a research article up on that soon. For now though, enjoy the upcoming Christmas week. After that, I promise that we will have a 2011 outlook, plus I will rebalance my own portfolio in the last week of the year.

Friday 3 December 2010

How the Best Performers at the Start of the Year fare? (3 Dec 2010)

On 12th January, at the start of this year, I had a blog entry where I looked at the markets that was quickest out of the gate at the start of the year. At that time, it had only been one week into the new year 2010, but ranking up the funds in terms of category then then, Turkey equity funds was at the top, followed by Gold, Resources, Materials, Indonesia, and Energy. It has been 11 months now, and with only one month left to go, baring a huge shakeup in December, there shouldn’t be too much change in the rankings of fund categories. The list is not exhaustive in terms of categories, but this should be the majority of the ones of interest to investors. Let’s see how they stand towards the end of the year as compared to the start.

Fund Category
YTD Performance as at 8th Jan 2010
(%)
YTD Performance as at 1st Dec 2010
(%)
Ranking of performance YTD
Turkey
7.39
23.64
4
Gold
6.14
19.03
6
Resources
5.9
19.71
5
Materials
4.17
3.03
17
Indonesia
3.97
35.07
2
Energy
3.82
-6.39
23
Latin America
3.41
4.83
12
Global Agribusiness
3.37
4.23
14
Global finance
3.29
-7.78
19
Eastern Europe
3.29
0.44
25
Malaysia
3.16
23.68
3
Singapore small cap
2.72
16.08
7
Brazil
2.7
-3.36
22
Emerging Europe
2.28
0.44
20
India
2.2
11.61
8
Korea
2.13
3.72
16
BRIC
1.73
-0.59
21
Asia ex Jap
1.59
9.04
10
Middle East/Africa
1.57
8.31
11
Europe inc UK
1.52
-8.06
26
Greater China
0.92
3.93
15
Tech
0.8
1.85
18
Singapore
0.75
9.86
9
Thailand
0.48
42.36
1
Healthcare
0.43
-6.46
24
Property
-0.25
4.63
13

Performances are based on bid to bid prices and in SGD dollar terms, with dividends reinvested

From the table, Turkey equity funds, gold and resources equity funds have not disappointed, ranking 4th, 6th, and 5th as at 1st December in terms of bid to bid performances year to date. The same goes for Indonesia equity funds, which are currently the second best performer in terms of category. However, there are risks to going by this “fastest out of the starting block” strategy as well. Materials and energy funds ended up near the bottom of the table at 17th and 23rd respectively.

There were also some categories, which started out at the bottom of the table, which then surged up during the year. Thailand and Singapore equity funds are two such categories of funds. Both were really slow at the start of the year, but Thailand equity funds ended up the best performing category of funds so far year to date, and Singapore equity funds also ended up 9th, which is in the top ten.

On a regional basis, Asia is doing well so far near the end of the year, with category returns year to date of 9.04%. Given that many of our Fundsupermart investors are overweight in Asia, that is good news. Many should be up for this year, helped by their Asian equity funds. Europe has been hit badly, due to the European financial crisis, and understandably, many of the worst performing categories are situated in Europe.

As we come to the end of the year, don’t forget to rebalance your portfolio. I remain bullish on equities, and will be overweighting equities over bonds for next year. However, it doesn’t mean I don’t have to rebalance. It is likely that even with that factored in, my portfolio by now at near the end of the year is too overweight into equities and I will have to shift some out of equities.