“Cherry picking your investment basket”, featured in StarBiz, The Star, on 12th Nov 2016.
For the majority of middle-class Malaysians, smart consumer habits have become part and parcel of our daily lives. In these trying economic times where prices keep escalating, we all have to be smart consumers in order to get the most value for our ringgit.
Say you are shopping for fruits at the market and come across a display of oranges priced at RM10 for four. Do you simply take the first four oranges you see from the top of the pile without giving them a second glance? Or would you take your time to carefully select each orange, examining it for any flaws and ensuring they are the best four you could reasonably pick from the pile?
A shopper who practises the latter may be fastidious but without doubt, one who values the things he/she buys and wishes to obtain the best possible option for the same cost. Many people pride themselves to be highly discerning when purchasing consumables, but can they say the same when it comes to purchasing investment products? Do they practice similar cherry picking for their investment basket?
In other words, you want the best of breed investment in Malaysia. This simply means that if you are investing in one category of investments exposing you to the same level of risk, you should aim to select the best option available in the category market. For example, if you want to invest in Malaysian equity growth funds, choose the best performer in this category.
To get yourself started on the right track towards choosing the best of breed financial products, a little basic knowledge about your options is always helpful. For instance, you should know what category the investment option falls into – equities, fixed income, commodities, real estate or alternative assets. From there, list down a few available investment options within the same category. The key word here is same category. If you are selecting navel oranges, stick with navel oranges. Next, use various evaluation criteria to filter and select the best option to invest.
For example, you wish to invest in a Malaysian equity growth fund and you approach a unit trust agent at Fund House “P” who highly recommends Fund “M” as the best performing fund in the company. You are shown a chart comparing the company’s different fund performances and indeed, Fund “M” is clearly superior compared to the others, therefore convincing you that you are truly purchasing the best fund.
However, when you apply the concept of best of breed investing, you will have another chart illustrating a different picture. If you were to compare other funds from the same category as Fund “M” from different fund houses, you may even find that Fund “M” could only manage a mediocre performance when compared to Fund “K” over the same period. So evidently, the initial “best” could turn out to be the contrary. It is also worth noting that performance of the fund alone should not be the sole indicator to narrow down the best of breed selection, as there are other factors to consider, such as the people who make up the fund management team and the robustness of the investment process.
Leave no orange unturned. The same goes for your apples.
The significance of best of breed investing is not limited to choosing unit trust funds.
Best of breed investing is also applicable to choosing real estate. Many property investors rely on a sole factor to decide which property to buy – the purchase price. However, this may not necessarily translate into a good investment call. An application of best of breed investing principle is to use price per sq ft to group the options into a similar category (i.e. same “breed” of investment in Malaysia). For example, you should use the same price per sq ft range of RM700 to shortlist a few properties from various locations like Shah Alam, Petaling Jaya, Cyberjaya, Puchong or Cheras. Then only consider other variables such as location, rental propensity and value, developer’s track record, etc. After that, you can choose the best option available. By doing so, you make sure that you invest in the best of breed investment in Malaysia within the price range of RM700 per sq ft.
As we know, with all investments come an element of risk. If you do not apply the best of breed strategy when making investment decisions, chances are you will invest based on limited evaluation criteria, most likely the expected returns on your investment. But should the projected returns fail to materialise, you stand to lose a sizeable portion of your capital which could erode your overall net worth.
This is why best of breed investing is so important. By taking a little time to analyse and select your investment options before making the purchase, you stand to get better value for the same price and same risk level. This is a perfect example of money optimisation in action. When you optimise your money, your risk exposure is managed and your capital is protected from severe loss while the certainty of growing your net worth is increased.
There are many investment channels available in the Malaysia where you can go to for your investment needs. To be sure that you are choosing the right one that supports your goal of best of breed investing, let us take a look at the options out there.
First of all, we have what is known as “closed architecture” distributors. These are single fund houses which distribute their own financial products under one umbrella brand and do not cross-sell other companies’ products. Clearly these restrictive conditions are hardly conducive to provide an investor with best of breed investing opportunities.
On the other end of the spectrum are independent platforms bearing an “open architecture” model, where investors can access most funds available in the market with limited barriers. In order to take advantage of such a distribution channel, investors can either go for Do-It-Yourself (DIY) investing (which has its own set of challenges and risks) or opt for the investor-assisted route, such as by going through a fee-for-service Independent Financial Advisor (IFA).
As IFAs are not tied to any fund house or product proprietor, the client gets access to a far greater range of financial products compared to closed architecture distribution channels providing limited choice. This makes it possible for the IFA to recommend best of breed investments suited to the client’s needs and goals. All these options will be laid out bare for the client to consider, together with each of its pros and cons so that the client is properly equipped to make a fully informed investment decision. More importantly, best of breed investing will be incorporated as part of a holistic financial plan customised for each individual client by the IFA, with the goal of growing the client’s overall net worth.
So whether you realise it or not, if you are a smart consumer, you are already practising best of breed cherry picking in your daily life. Therefore, isn’t it natural to extend this mindset to investment selection? Just some fruit for thought.
Yap Ming Hui (firstname.lastname@example.org) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm. For more information, please visit his website at www.whitman.com.my