Saturday, October 25, 2014

A look at the Conservative PRS funds

It is time for me to look at some of the PRS funds (due to taxes) and I thought that unlike last year, I want to do some research. Last year, I just went to a most convenient bank and picked an aggressive growth fund as I thought that with many years to reach 55 years old :), hence I might as well be slightly aggressive.

This year though, I wanted to take a back seat and be conservative (to also balance my investment in fund). This means that for this year I am for conservative funds perhaps. Taking a cue from AIA's Conservative funds (as below), a conservative fund basically invests 80% of the money into fixed income and money market instruments and remaining 20% into equity.


Fixed income as in the name is most of the time investment into bonds (usually high grade) while money markets are securities which are shorter time in nature and these are high grade securities. All in all, I expect to secure decent and above fixed deposit rates return. Add in the tax incentives, it should be good savings and return.

One way to look at which fund to choose is to look at its past performance (I know one should not measure performance on its past, but how else?). As PRS scheme is a new scheme for most of the funds, they have been in existence for slightly more than a year. These are what I have found - which is quite surprising. (Remember me saying I expect above FD type of return.)

CIMB Plus Islamic Conservative - 1 year return 2.8%
AMPRS - CONSERVATIVE FUND - CLASS D - 1 year return 1.6%

Affin Hwang Conservative - 1 year return 3.6%


AIA PAM - CONSERVATIVE - 1 year return 2.7%


Manulife Conservative PRS - 3.4%

RHB Conservative - 1 year return 3.2%
Manulife Shariah PRS - Conservative - 1 Year return 0.6%

Based on the above, among the conservative funds, it can be said that over a short 1 year period, the best performing one at 3.6% return is Affin Hwang while worst performing one is Manulife Shariah at 0.6% return. On average, these 7 funds I looked at provided 2.557%. If I were to compare against most of the fixed deposits, they provide return of between 3.2% to 3.4% over the last 1 year. Could I claim that these conservative funds underperformed?

In fact, if I were to eliminate the best and worst performing from the average, it is still giving average return of 2.74%.

The worrying thing is that these funds does not create much value, except for the government's incentive of tax deduction up to RM3000 invested. One can argue that we should not look at these funds over the short term. I agree as I myself pitch long term. But these are funds that largely invested into fixed income securities. Fixed income provide in most cases fixed return. Yes, they are tradeable in the secondary market, hence the fluctuation in prices, but aren't one been paid and taught how to look at the interest and bond market movement? In any case, these are conservative funds.

They are not creating value! To me. And without the incentives from government, these will not stick!

P.s. I did not include some of the funds e.g. Public Bank's but I hear that they do not perform well too despite the entrance fees of 3%.

Also the fund management guys will not like me, but these are FACTS!

Sunday, October 12, 2014

Market fluctuation

When there is market fluctuations or consolidation as experienced in recent times, it is time to revisit some of the best advice out there. This is from Berkshire Hathaway's Annual Report in 1997 at a time when there were some market challenges. Remember our "Tom Yam effect"?

How We Think About Market Fluctuations 

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
     
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
      
For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.
      
Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.
      
At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.
      
So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")
      
We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited. 

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The recent consolidation is hardly a time to think about opportunities yet, but would be good if it is to deteriorate further taking a cue from the above.

Wednesday, October 8, 2014

Quite interesting times

Should one catch a falling knife? I would not especially when we have seen that the knife is already been held high up. In recent times, useless stocks have reached all time high. The usual lesson is that if one is to hold on to those stocks, be afraid as we would never be comfortable with those companies. It may be a one time wonder. Good stocks would however pick itself up. I have seen that in old old stocks like Genting, BAT, Nestle etc. and they would reach all time high again and again.

Not for those useless ones as chances are some of these companies financials are tweaked to accommodate the good times. When it is bad times, no point for these companies to show good results right?

Good companies however would not need to tweak their accounts. They will perform and pick themselves up usually (not always). Anyway, the market has only been down for few days. I am not sure whether how far more it will deteriorate.

Globally, stocks are not performing as well with some fear that China and Europe will be slowing down again. As mentioned, commodities are taking a hit and that may impact our country as well being one country that is quite dependant on petroleum related and other types of agri products. Things are not well it seems now.

It should be interesting to see what Bank Negara and government will do if the fall is continuing... 

Monday, October 6, 2014

Financing: Why government and banks may have gotten it all wrong

We are pretty good at encouraging Malaysians to borrow more for homes, cars, other consumption purposes but probably not in the areas where it is probably more beneficial to the nation.

How much is my flexible rate loan from a bank if I am to borrow RM1 million? I can get as low as BLR - 2.5%. At the current BLR rate of 6.85%, my effective interest rate is 4.35%. That is historically very low although BLR is not at its lowest. It was as low as 5.5% back in 2009. Bank Negara is trying very hard to regulate interest rates and that in itself is only helpful towards owning a home or a car, which is why consumption loan is at its highest ever, EVER.

Now turn this around? If I am a business owner, and I need a term loan from a bank. What is the interest rate I am paying? I would still be charged something like BLR + 1.5% or even more. That translates to around 8.35% - a whopping 4% higher than if I am to get a housing loan. Would this be friendly towards business? Or would this action be friendly towards the property sector only?

With the differences in rate, if I own a property, I would probably be refinancing my home by taking opportunity of the lower rate (by 4%) to fund my business.

Banks would act upon where it stands to make from the most and it is not surprising that they have been focusing on home loan or other consumption loans such as automotive, credit cards and personal loans recently. Lending for these purposes however is less productive as compared to lending for businesses, which is also why Malaysia has not been very successful in churning out entrepreneurs.

If I am an young entrepreneur, one whom most probably would not be owning many assets, I would be probably be turning towards business loans with little collateral. That is expensive comparatively against buying a home where the collateral is the house. Where as a young person should I be looking at? That young person would probably be less inclined to startup his own business, but ended up investing in a home.

This to me is a move towards wrong direction where as a country, we should be more friendlier towards business entrepreneurship. Is there a reason why we are not entrepreneur friendly, but the type of corporations we have been attracting are only large ones who are able to get loans (non BLR) at much lower rates unlike the smaller corporations.