Losing the Investment Game- Who’s to blame?


THE start to the year coincides with the time when fund managers are busy writing their annual notes and preparing their market outlook for the rest of the year.

Those who are contemplating investing in unit trust funds would be especially keen to listen to such talks to obtain information straight from the horse’s mouth, so to speak. Not surprising, considering that the person responsible for implementing a fund’s investing strategy and managing its portfolio trading activities is the fund manager himself.

More enlightened or confused?

Fund managers are highly regarded as the best source of information and direction on the funds under their purview.

But after attending such talks and seminars, most individuals end up being more confused than when they started.

Instead of receiving the answers they were hoping to hear, investors are often only told that the fund had outperformed its benchmark and various market indices. Furthermore, nothing is mentioned about how the fund will achieve the investor’s investment goals.

What’s more perplexing, investors are puzzled as to how is it that a friend or relative who invested in the same fund, made impressive returns, but they failed to do the same.

As a result, the investor turns to blaming the fund manager for not delivering what was expected. In the fund manager’s defence, the investor should have known what he was getting himself into to begin with. So, which party is right?

Stop blaming and start aiming

To quote Philip A. Fisher, one of the most influential American investors of all times, “The stock market is filled with individuals who know the price of everything, but the value of nothing”. Fisher’s observation is a testament to the fact that investing without education and research will ultimately lead to regrettable investment decisions. Research is much more than just listening to popular opinion or market gossip.

The moment the investor loses faith and starts blaming the fund manager, he is essentially writing off one channel of growing his money. It is human nature to take the easy way out and blame someone else when things go wrong; but if you were to reflect deeper, you may realise that the fault may not entirely lie on the other party. In fact, looking at the bigger picture, you – the investor, could be equally at fault, if not more. Why is it so?

To answer this. We need to understand, first and foremost, the respective roles of the fund manager and the investor.

What investors need to know about the fund manager’s role

As perceived by majority of investors, the main benefit of investing in a fund is that the investment management decisions are entrusted to the professionals, thereby relieving the individual of such a chore.

Fund managers decide where to invest and what to target. Their choices are shaped primarily by the mandate stipulated in the fund’s prospectus as approved by the regulators and agreed to by the investor at the point of investment.

For instance, if the fund in question is an aggressive growth fund, the fund manager will invest accordingly in order to achieve the highest capital gains but at a higher risk-return trade-off. The fund manager could invest differently for a bond fund which offers better stability for the more risk-adverse investor.

The fund manager then measures the performance of the fund against its benchmark indices and subsequently reports its performance to all its investors.

Despite the advantages of going through a fund manager, there are inherent limitations.

What you may fail to realise is that the fund manager receives money from thousands of investors like you from varying backgrounds, ages, financial standing and risk tolerance. It is virtually impossible for him to get down to a micro level and know the characteristics of every single investor. Even if it were possible, the very fact that the fund is generic in nature makes it non-viable to be customised for each individual investor.

Therefore, in order to discharge his role, the fund manager will adhere to the mandate of the respective funds when making his investment decisions, regardless of who the investors are or the timing of their investment. He operates under the assumption that the investor has already done the groundwork before investing into the fund. Those who haven’t done so would have put themselves in a disadvantageous position, and things may go wrong even if the fund manager is doing a perfect job.

What is this assumed groundwork that needs to be done?

Investor, know thyself

Essentially, each individual investor needs to know what he is looking for in a particular fund before he hands his money to the fund manager because at the end of the day, every investor is different.

Take for instance, two individuals are looking at investing in a China equity fund; one a young career professional and the other, a retiree.

If the investor has done his groundwork, he would know that the investment objective of the fund is to achieve long-term capital growth. And while there is a higher potential rate of return, it also comes with higher risks as they are less diversified than a global portfolio. The investor should be prepared to accept some short-term big fluctuations in the value of their investment.

The younger investor, given his age and earning capacity, would be more insulated from the short-term vagaries of the fund to eventually benefit from the high return. In contrast, the retiree, not having the luxury of time nor resources to withstand and afford the short-term losses, may have to sell the fund at a loss.

As the saying goes, one man’s meat is another man’s poison. Assuming that neither investor did any groundwork before investing in the said fund, one would feel the hit more than the other.

Therefore, when selecting a suitable fund, you need to determine the following three main criteria:

> Your targeted return on investment: You need to have in mind an expected rate of return, be it 6%, 8% or 12%. Importantly, don’t forget that the higher the targeted return, the bigger the risk. You must be prepared for any eventuality.

> Your investment time horizon: This is the time from the point of investment to when you need to use your money. This can range from short, medium to long term. If it is within one year, you should not be investing in equity funds which require a minimum of three years and above.

> Your desired asset allocation: What should be your optimal mix of asset classes? Should you include bonds, equity, REITs, etc? What about local or foreign assets, and in what percentages? Having a sound asset allocation strategy will ensure your investment portfolio is diversified and aggressive enough to meet your savings goals without unnecessary risks.

When you put all the three criteria together, you are in a position to develop a customised portfolio of unit trust funds that suit your individual circumstance and meets your investment objectives.

The best way to derive the above criteria is to have a holistic financial plan so that all the factors that potentially impact your choice of funds are viewed cohesively, with each having a direct bearing on the other.

To recap from the start of the article. many investors wonder why their investments underperform, despite being managed by a fund manager. When investors adopt the hands-off approach, and leave all the work to the fund manager, they do so at their own peril. Investing takes two to tango; you can know the steps and keep up with the beat, or risk having your toes trod on if you do not learn the moves. Investing in unit trust funds can be an excellent option towards achieving your overall financial objectives, so long as you get all the fundamentals right.
28-03-2017 Thestar

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