Good time to rebalance and diversify

Written by Fong Min Hun
Monday, 05 October 2009 10:45

KUALA LUMPUR: There was a time at the peak of the economic crisis last year when no asset class was safe — equities, PROPERTIES [] and commodities all came tumbling down as a crisis of confidence quickly spread around the globe.

Holding cash, it seemed, was the only way that an investor could be assured of not losing, at least the nominal value, of his wealth as the classic theory about the safety of diversification collapsed.

Not surprisingly, investors poured their money into fixed deposits and fixed-income instruments despite the low interest rates that threatened to send their returns into negative territory. However, it looks like the worm may have turned, although market conditions are far from stable.

But with the recovery story, at least in Asia, seemingly less a fairy tale with each passing week, financial experts say investors should take a second look at all the different asset classes — equities, commodities, bonds, etc, apart from some cash holding, of course.

In this regard, diversification is still an important strategy, say wealth advisers, as a wholesale collapse of all asset classes experienced at the peak of the last crisis is not the norm.

While investors may have been shocked into rushing for safer instruments, the fact remains that a diverse portfolio will maximise returns while minimising risks, they say.

“No proper investment advice would advocate putting all your eggs in one basket,” a fund manager said. “Even at the worst of times, it is better to keep a diversified portfolio because you never know which asset class may recover first”, or under the present circumstances, have a sustainable recovery.

CIMB Wealth Advisors Bhd chief executive officer Tan Beng Wah said as a wealth adviser, he always encouraged holding a diverse portfolio whatever the circumstances and advised against investing for the short term.

He stressed that retailers needed to think more strategically, as they tend to start investing only when the returns have been proven. He said this was not the most effective investment strategy.

The risk-to-rewards profile had improved significantly and investors should take advantage of this, he said.

“This is the time to rebalance your portfolio if you’re an investor,” he said. “If you are less risk-averse, you may want to look at putting more into equities, but also put some into property, fixed income and cash.

“In the current environment, equities will probably have a higher chance of getting better returns over the short to medium term (short being less than three years, and medium being three to 10 years).”

Tan is bullish about Asia, saying its recovery would outpace that of the developed markets.

He noted that there was a sharp distinction between the economic recovery and a recovery in the investment climate. The latter, he said, had priced recovery into its rally, and was therefore outpacing the actual recovery.

Retail investors were left confused as a result, Tan said. It was important for them to start looking at diversifying their investment portfolio even if they have missed the extreme trough-to-peak appreciation of assets earlier this year, he added.

“The lag between the economic recovery and the faster improvement in the equity market is confusing for retail investors,” he said.

“This backdrop provides us the basis of advising our customers that the opportunity to invest is still there although the high returns environment has been missed, particularly in the equity market.”

Although Bursa Malaysia may have seen some clawbacks last week due to poorer economic numbers from the US, most observers agree that the recovery story does hold some water.

The International Monetary Fund last week revised its growth forecast for the global economy to 3.1% from 2.5%, although it acknowledged there would be disparate growth between developed economies and emerging Asian economies.

HwangDBS Investment Management Bhd’s chief investment officer David Ng told The Edge Financial Daily the fund management company had started to withhold funds from the market since mid-August.

“Our house continues to believe in the recovery story, and that’s more of a medium-term view,” he said. “A few weeks back, we decided we would redeploy our money back... only if we think the economic growth is sustainable or at attractive levels.”

Last week’s clawback could prove a useful entry point for those looking to invest domestically. Ng advised them to keep an eye out on market movements over the next couple of weeks to see the trend.

Though bullish on equities, he advised investors to be discerning since almost every counter had risen over the last few months. In commodities, he likes precious metals and metals, but is cautious on agricultural commodities, including crude palm oil, in the near term.