Investment Case Study

Today we will be looking at a case study, something practical for everybody to implement.

This is A portfolio of a real life Unit Trust holdings. It may be similiar to yours, somewhat similiar to yours or you may not have reached this level of holdings yet.

epf

First is EPF. For those not in the know, EPF contributors may pull a certain % of EXCESS savings from EPF to invest in mutual funds.

cash

Next is cash. These are investments done with cash on hand. For a typical investor, he/she should have a healthy sum in both EPF + Cash.

Combining the two and running the numbers, we generate the following result:

breakdown.jpg

The performance difference compared to MSCI World Index is as per this graph:

backtest.jpg

So other than performance, is there anything else we see in this portfolio? Plenty.

One, there is no effective geographical diversification.

There are lots of funds, but there are overlaps. Example Sector Select, Savings and Index all have very similiar top 5 holdings (Malaysia geographical area concentration)

pssf holdings.jpg

psf holdings.jpg

pix holdings.jpg

Another example is Ittikal and Islamic Sector Select. Very similiar top 5 holdings.

pittikal holdings.jpg

pissf holdings.jpg

Which brings to the next question, which is the reason for choosing islamic funds and conventional funds together -> i.e. Sector Select AND Islamic Sector Select. If there is no requirement to be Shariah compliant or not, doesn’t it make sense to stick to which ever fund that perform better?

Which comes to the next problem, which is some funds are clearly superior to the other, although they are holding similiar shares. Perhaps Fund Manager Ittikal’s market call is better than Fund Manager Islamic Sector Select, or maybe the Fund management’s team are more experienced, etc. Shouldn’t we stick to the more proven fund?

Which carries on to the next question is why there limited global exposure? Is it because the Fund Management company have not enough experience in them? How do we get exposure then if the Fund Manager do not have the funds to offer the investor?

Which carries on to the next question is how is the geographical % determine? Is there an overall strategy of X% Local, Y% Asia Pacific, Z% World?

Which carries on the the next question, why is there no bonds in the portfolio? How do one do rebalancing since there are no Bonds in the portfolio? How do one capture the Stock/Bond rotation to buy low sell high? Is there a limitation that results in no rebalancing done?

In actual fact, this is the result of Top-down strategic investing vs Bottom-up fund investing. Conventionally, Unit Trust agents sell funds based on what is hot for the month. Perhaps in January Ittikal performs better than the rest, so the investor gets sold Ittikal. Perhaps Islamic Sector Select is new, so it gets promoted. Flavour of the month China, so China it is. Want property? we got infrastructure fund. So funds get add on on a dizzying rate which complicates and confuses the monitoring effort with questionable value add.

Some other wacky reasons include agency commissions. If an agent sells a fund which had been sold to a particular investor before, the first agent gets everything and the second followup agent gets nothing. This causes some agents to push funds that an investor have not touched before. Also, it sort of make the Fund management company to come up with more and more products for agents to sell which are in actual fact the same funds. Or, the agent might be tempted to push more and more funds to the investor in hopes that the next agent which comes along cannot penetrate their client.

This contrast with the top down strategy where we decide what geographical and sectors and instruments we want to diversify into first, determine the % allocation and expected returns, THEN choosing the best funds to fit our needs. We will then have a manageable portfolio size to monitor and take action on, diversifying effectively while capturing the performance.

So take a look at your investment portfolio and ask the similiar questions. What kind of investment strategy do you want and what sort of process you would want to to be in place to help grow your money?

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