Asset Allocation & Portfolio - v1.2

AGENDA
FMUTM
UTC Seminar, KL, 12 Feb 2009
Session 1: Risk & return

Session 2: Diversification
Session 3: Diversifying: asset classes, sectors,
region/countries, and style
Session 4: Asset allocation strategies
Q&A
Chris Gan, Feb 2009
1
For educational purpose only – Chris Gan 2009
Building blocks in unit trusts
To be “complete”, you need:
Knowledge
• Market, economy,
finance, etc.
• Products
• Selling & people skill
Action
Lots of Action & No Knowledge vs. No Action & Lots of Knowledge
Where is the balance?
2
Allocating Assets & Managing Portfolios
Objective: This seminar will introduce you to

the basics involved in: allocating your wealth,
managing a portfolio, and also, how you can
diversify your portfolio risk.
3
“Gentlemen, this is a football” – Vince Lombardi
z Why do investors invest in UT? The basic answer: to

make more money.
z More complex answer: Investors invest in unit trust
funds to generate a return that commensurate with the
risks.
z Investors’ returns come in two form: also known as
total return.
z Capital gains: buy at low price & sell high.
z Dividend distribution: money paid out by fund periodically
(either in cash or extra units).
z We know: The higher the risk of the fund, the higher
the potential return.
4
But, what retail investors actually do:

Buy Low, Sell High? Not!
HLG Global Resources Income Fund (03/05/07 to 19/10/07)
Redemptions are generally high, when NAV is lowest

12,000,000.00 0.7000
NAV 0.5842 on 18/10/07
A B
0.6000
10,000,000.00
0.5000
1. Redeemed: 18/6/07 -- 2. Redeemed: on
8,000,000.00 NAV 0.5327 19/9/07 -- NAV 0.5514 RM
0.4000
-RM5.7m Redemption
RM
6,000,000.00
NAV
-RM4.87m 0.3000
4,000,000.00
0.2000
2,000,000.00
0.1000
- 0.0000
5/17/2007
5/31/2007
6/14/2007
6/28/2007
7/12/2007
7/26/2007
8/10/2007
8/27/2007
9/11/2007
9/25/2007
10/9/2007
5/3/2007
Date
5
When should you sell?
z At inception on 03/05/07, NAV/unit = 0.50

z If sold on 18/06/07, NAV/unit of 0.5327, gain is
6.54% (in more than 1 month)
10.28% (in roughly 4 months)
16.84% (in roughly 5 months);
z The Fund’s NAV/unit is now: 0.3824
z When to sell? Would depend on your risk &
return profile.
6
What fund managers should do
90 180
170
80 Equity exposure 160
Increased 150
RHBIslamic Index/KL Syariah Index

70 140
Equity Exposure (%)
130
60 120
110
50 100
90
40 80
70
30 60
Equity exposure 50
20 decreased 40
30
10 20
2-10-98
5-11-99
28-01-00
14-04-00
30-06-00
15-09-00
1-12-00
16-02-01
4-05-01
20-07-01
5-10-01
21-12-01
8-03-02
24-05-02
9-08-02
25-10-02
10-01-03
28-03-03
13-06-03
Equity Expos ure (Market Value of Equity Inves tm ent/NAV)
RHB Is lam ic Index / KL Syariah Index
KL Syariah Index
v.1.0 7
Calculating total returns to investor
z Returns to customers’ investments come in two forms:
1) From capital gains (e.g.. Buys 10,000 units of Fund

A at RM0.50/ unit on 1 January 2007 & Sells 10,000
units of Fund A on 31 Dec 2007 at RM0.75/unit: Gain:
RM2,500, or 50% in 1 year (ignoring sales charges).
2) From income distribution which may be declared by
the Fund during the year (e.g.. Fund A paid a
distribution of RM0.02/unit during the year, on 30 June
2007:customer gains additional RM200.00 before
selling units.
Tot. return = (RM2500 + 200) / RM5,000 = 54%
8
Higher the risk, higher potential return
z It is important to understand the risk-return

profile of your investors before the fund
selection.
z Investors risk profile can generally be
classified as: Low risk
1. Defensive
2. Conservative
3. Balanced
4. Moderately aggressive
5. Aggressive High risk
9
Different types of unit trust
There are many different types of unit trusts now,

but in general, they can be categorized into:
z Money market & bond funds
z Balanced funds (mix of equity & bonds)
z Islamic/Shariah funds
z Equity funds – local, offshore, & thematic funds
z Capital guaranteed/ principal protected funds
z Wholesale funds – hedge funds, commodities
futures, etc.
10
Risk rating system for funds
z The risk rating system provides a scale of 1 – 5 for the

classification of Funds.
z A risk rating of “1” reflects the funds with the lowest
risk profile while a risk rating of “5” reflects the funds
with the highest risk profile.
z Can be used with Risk Profiler.
Risk Description /
Rating Fund Categories Description
1 Structured Capital Protected / Guaranteed, close ended / Money Market Instruments
2 Income Minimum 60% bonds; Sub-class: Income, Bonds & Money Market Funds
3 Balanced Maximum 60% and Minimum 40% Equity
4 Growth / Income/ Local Minimum 70% Equity, Growth & Income Strategy with Local Mandate
5 Growth / Enhanced Minimum 70% Equity, Aggressive - Thematic, Sector, Global Mandate
Note: this is a general description of funds & assignment of risk ratings.
11
Matching risk profile with funds
^
5
^
^
4 Equity -
H
i ngs
I r at offshore
k
G r is Equity -local
H o r’s 3
e st
In v
E
R
Balanced
R 2 fund
I n ds
Bond fund fu
S
i b le
K Money o ss
P
S 1 Capital
market
^
^ guaranteed
^
>>>>> HIGHER RETURNS POTENTIAL >>>>>
12
Risk and return explained
z Risk is the uncertainty of whether an investment that is

made will be able to earn the expected rate of return
z Investors invest in unit trust funds to generate a return that
commensurate with the risks.
z The higher the risk of the fund, the higher the expected
returns.
z Common measure of risk is variance or standard deviation
(s.d) which measures the volatility of returns around the
mean; the higher the s.d, the higher the risk of investment.
z Example: S.d of Fund X = 2, & s.d of Fund Y = 5; hence
Fund X is less risky than Fund Y but it will most likely
generate lower returns compared to Fund Y in favorable
market conditions.
13
Risk–return example using std deviation
OSK UOB Resources: 95% NAV Equities

Pheim Income: min 70% Bond, max 30% equities
14
Let’s talk about Diversification
15
What is diversification
z Returns from financial assets display random volatility;

and with risk being one of the main factor affecting
returns on investments, it is important that portfolio
risks be reduced through diversification.
z MPT*: it is possible to reduce portfolio risk without
giving up returns,
z By broadly diversifying into different asset classes,
which are less than perfectly correlated
z Hence, diversify across: Asset Classes, Sectors,
Regions/Countries, and Styles
* Modern Portfolio Theory: Markowitz, Modigliani & Miller, etc
16
Diversification- across asset classes,

regions & style
Markets move in CYCLES
17
Example of Diversification (Asset Class)
A Diversified
Portfolio Offers:
Portfolio with
z Lower Volatility
lower volatility &
relatively high
returns z Better
Performance in
downturn
z Minimizes risk
18
Example of diversifying portfolio
z Objective: to provide investors who wish

to save for their children tertiary
education needs
z Focus: consistent return, with long term
capital appreciation, inflation-adjusted.
z Maturity: 15 – 20 years
Internal Distribution Only 19

Portfolio – expected returns & risk
z Features of funds:
z Established track record of performance
z Expected return (between 8-10% pa)
z Moderate volatility (risk)
z Capital preservation – moderate.
z Target group for this fund: 28- 40 yrs
z Suggested portfolio: HLG Bond (50%), HLG
Penny Stock (30%), HLG Dividend (20%)

Performance vs. Custom benchmark

KLIBOR/KLCI 50 (MP) Bond/Div/Penny_New (MP)
Percentage Growth Total Return, Tax Default, In LC

32.5
30.0
27.5
25.0
22.5
31.3
20.0
Percentage Growth
17.5
15.0
12.5
10.0
28.2
7.5
5.0
2.5
0.0
-2.5
07/2005 10/2005 01/2006 04/2006 07/2006 10/2006 01/2007 04/2007
2 Years From 31/05/2005 To 31/05/2007

User may have modif ied the original chart and axis titles provided by Lipper.
Annualized returns over 2 years (to 31 May 2007): 14.6% p.a, s.d: 1.93 (higher vs.
retirement portfolio)

Correlation between funds in portfolio
z Portfolio Correlation matrix: 2 yrs (Lipper)
allocation: Correlation Bond Dividend Penny
z HLG Bond: 50% Bond - 0.28 0.39

z HLG Dividend: 20%
z HLG Penny Stock: Dividend 0.28 -
30%
Penny Stock 0.39 0.87 -
To increase diversification benefit, aim is to add negatively

correlated assets into the portfolio
An art and a science – how many funds, % allocation etc.

Determining assets to include
z Low correlation between HLG Bond (conservative)

and more aggressive Dividend and Penny Stock
z Dividend and Penny Stock highly correlated 0.87
(expected); both equities, & dividend should be less
volatile. But below 1.
z HLG Bond- provides steady& consistent income
z HLG Dividend: provides some income & cap growth
(secondary).
z HLG Penny stock: aggressive fund, provides capital
growth via small caps stocks – upside “kicker”
z Over 2 yrs, annualized return = 14.6% with s.d of 1.93
(low). Sharpe = 5.64.

Diversification
z Aim to build an efficient portfolio

z Assume normal distribution & using expected
return, s.d, and covariance to develop.
z Combining diff. assets with diff. return/risks
z Shifting the efficient frontier – same risk but
with higher returns.
z Key: Add less than perfectly correlated assets
to portfolio.
z The only “free lunch” in finance. Same price
but more value.
24
Efficient Portfolios
A
R •By adding new assets, with
e X B correlations less than perfect,
t the portfolio efficiency
u improves.
r •Portfolios on Curve A is more
n efficient than Curve B.
•Portfolio X = higher returns
for the same level of market
risk (beta)
Beta ß
25
The building blocks of an efficient
portfolio
What are the different assets?
26
What are stocks?
z Equity = Ownership in company

z Source of long term capital
z Equity = Assets - Liabilities
Balance sheet as at 30 June 2002
ASSETS LIABILITIES
Equity
Equity may be listed on stock exchange – hence,

market value (or price) can be determined.
Entitles to capital gains & dividends, has voting rights. 27
What are bonds
z Borrowings of the company (debt or i.o.u)

z Issued to raise funds:
z Short term = money market (or discount) securities; maturity <
1 year, Instrument issued at a discount to par value.
z Treasury & BNM Bills
z Banker’s Acceptance & NIDs
z Long term = bonds (or fixed income) securities; maturity > 1
year; pledge to repay a fixed amount of money with interest to
lender upon maturity.
z Corporate bonds e.g.. Gamuda, YTL
z Government bonds e.g. MGS, Sukuk
28
What about derivatives?
29
Risk profiles of bonds & stocks
z Stocks and bonds have different risk

profiles:
z Stocks represent ownership; have residual rights to
the assets of co.
z Bonds are financial obligations – like a loan, and as
such, have certain contractual rights (e.g..
Interests)
z Risk spectrum:
Risk: High Risk: Low
Stocks Warrants Bonds Cash
30
What’s a Portfolio?
z A portfolio consist of more than one financial

asset; example, more than one stock or one
bond.
z Portfolios are created for diversification i.e. to
achieve the same return but taking on lower
risks.
31
Stocks vs. Bonds
z Objective of buying a stock portfolio is usually

for Growth (but sometimes also for dividend
income)
z Stocks provide returns through capital appreciation
(growth) and some dividends.
z Objective of buying a bond portfolio is usually
for Income (yield)
z Bonds provide steady returns from coupon/interest &
gains from trading (buy & sell).
z By adding more stocks and bonds into respective
portfolios, there are diversification benefits.
32
Combination of bonds & stocks
z Combining a portfolio of bonds and stocks

together, would depend on the investment
objective, constraints & guidelines.
z Growth and/or income, volatility
z What is the hurdle rate?
z 95% Bond vs. Balanced (50:50) vs.95%
Stocks, vs. Money Market fund
z Or, it can be a dynamic swing (60: 40 & 40:60)
z Or a static index or tracker fund (e.g.. KLCI
Tracker)
33
Graphical illustration of risk & return
for funds
34
1) Money market fund

PRUcash management (MF)

15.0
12.5
10.0
Percentage Growth
7.5
14.4
5.0
2.5
0.0
-2.5
07/2003 01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008
1827 Days From 30/05/2003 To 30/05/2008

User may have modified the original chart and axis titles provided by Lipper.
95% of NAV invested in short term debt instruments (CPs, etc) – less
than 1 yr maturity
35
2) Bond fund
HLG Bond (MF)

22.5
20.0
17.5
15.0
12.5
Percentage Growth
10.0
21.7
7.5
5.0
2.5
0.0
-2.5
-5.0
07/2003 01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008
1827 Days From 30/05/2003 To 30/05/2008

95% of NAV invested in long term debt instruments (bonds, MGS,

etc) – more than 1 yr maturity
36
3) Balanced fund
HWANGDBS Select Balanced (MF)

80
70
60
50
Percentage Growth
40
61.1
30
20
10
-10
01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008
1768 Days From 28/07/2003 To 30/05/2008

Max 60% of NAV to Bonds, allocation to local equities (max 40%).
37
4) Equity fund
HLG Penny Stock (MF)

110
100
90
80
70
Percentage Growth
60
50 80.3
40
30
20
10
-10
07/2003 01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008
1827 Days From 30/05/2003 To 30/05/2008

Minimum 30% of NAV into equity, smaller cap stocks, disc to NTA.
38
Combining 2 portfolios
z We can also combine 2 or more portfolios

z Example: 2 portfolios.
z Portfolio A: consists of different stocks. ER = 12%,
s.d = 7%
z Portfolio B: consists of different bonds. ER = 5%,
s.d.= 3%
z (ER = expected returns, s.d.= std deviation)
z But let’s take a 60: 40, static, balanced portfolio
(Portfolio A: Portfolio B)
z Assume that the risk profile of individual investors are
the same.
39
Returns & risk of portfolios
z Portfolio Returns: ERp = (12% x 0.6) + (5% x 0.4) = 7.2

+ 2% = 9.2%
z Portfolio Risk: s.d (stocks) = 7% , & s.d (bonds) = 3%
but the sd (portfolio) is not 5.4% (i.e. (0. 6 x 7%) +
(0.4 x 3%))
z S.dp should be lower than 5.4% due to less than
perfect correlation between bonds and stocks.
z Assume correlation between stocks & bonds = 0.27
z If stocks go up/down by 1%, then bonds should go
up/down by only 0.27%
40
Correlations
z Hence, s.dp = 4.5%* which is lower than 5.4%

z Lower than s.d for stocks alone of 7%,
z The magic is less than perfect correlation,
between bonds & stocks.
z Diversification: the only “free lunch” in
investments.
z Getting higher returns for taking on same level of
risks.
z Basis of Modern portfolio theory (MPT)
* Sd2 = (0.62 x 0.072) + (0.42 x 0.032) +[ 2 x (0.4 x 0.6) x 0.07 x 0.03 x 0.27] 41
These are the formulaes…if you are

interested in the details
42
Diversifying: asset classes, sectors,
regions/countries, & styles
43
1- Asset classes
z Traditional assets: Fixed income (bonds),

equity, & cash (FD)
z Alternative assets: Private equity, hedge
funds, real estate investment trusts (REITs),
ETF, ELN, structured products & managed
futures.
z Commodities; Agriculture, metals (softs &
industrial), & energy.
z Others: Currencies, & real property.
44
2 - Sectors
z Sector rotation strategy: generally used by

managers to invest in domestic equities.
z Position portfolio to take advantage of next
market movement.
z Over or under-weight (vs. benchmark) certain
sectors/industries in response to next phase of
business cycle.
z Example: HLG Sectorial Fund
45
Stock market & economic cycle
Sector Rotation Strategy Peak
Basic industries
Trough Consumer staples

Capital goods
Economic cycle
Position portfolios in
Financial stocks
sectors likely to benefit
Consumer durables from next market
movement & economic
cycle.
46
Sector Performance - US
z Performance of US
sectors, represented by
Exchange Traded Funds
(ETFs)
z ETF =Listed funds which
tracks performance of
specific industries
z ETF are traded on
exchange like stocks
As at 23 Dec 2007
47
3- Regions/Countries
z Stock markets volatility worldwide – reason for

international investing
z All countries experience economic downturns but not
simultaneously (hence, global recession)
Source; World Bank Dev. Indicators

z Investing in different countries reduces impact of
downturn on portfolio (via diversification).
48
Stock market correlations
•Markets are not perfectly correlated with each other,

hence, benefits from diversification.
•DJIA & S&P 500 are closely correlated (0.96) but is
lowly correlated with Emerging Markets (0.16)
•DJIA & Nikkei are slightly negative correlated (-0.08)
49
Investing styles
z Style investing:
z Asset allocation decision is guided by the investors investment philosophy
(generally determined by the investor’s belief).
z Active vs. Passive:
z Active investors believe in their ability to outperform the overall market by
picking stocks they believe may perform well.
z Passive investors simply invest in a market index fund that may produce
potentially higher long-term results.
z Large caps vs. Small caps:
z Uses size of the company (market capitalization) as basis for investing.
S&P500 index consists of large cap stocks in the US, while the Russell 2000
is an index for small cap stocks.
z Growth vs. Value:
z Most equity fund managers tend to follow one of two general approaches to
stock selection: growth or value. Core manager combines elements of both
approaches.
50
Styles (and methods)
z Growth vs. Value Investing

CORE
Relative value
GARP*
Growth Value
•GROWTH investing: strategy to seek out stocks with higher rate

of return vs. other stocks in market with same risks. Normally
associated with companies with high earnings growth.
•VALUE investing: strategy to invest in undervalued stocks. When to
BUY? When: “Value” > “Price” of stock. When to SELL? When:
“Value” < “Price” of stock. (*Price is what you pay & Value is what you
get). Value is determined through rigorous research & fundamental
valuation process.
* Growth at Reasonable Price (GARP), a hybrid strategy

pioneered by Peter Lynch, of Fidelity 51
Let’s talk about Asset Allocation
Strategies & Managing Portfolios
52
What’s Asset Allocation?
z Process of deciding how to Asset Allocation
distribute investors’ wealth Market t iming

2% Ot hers
among diff. countries & Securit y select ion

5%
2%
asset classes for

investment purposes.
z Key to long term portfolio
performance.
z Approximately 90% of
success depends on asset
allocation, only 10% on
security selection.
Asset Allocat ion
91%
Reference: Financial Analyst Journal, May-June 1991
53
Example: Global Resources Portfolio
Sector
Performance allocation
Asset class:
Country - Global equities,
-- Natural Resources
Allocation stocks,
Stock
selection
HLG Global Resources Income Fund: 50% Newgate Global Resources + 50% local bonds 54
Asset Allocation: Strategies
z Process of deciding how to distribute an

investor’s wealth among different countries
and asset classes for investment purposes.
z A disciplined approach ensures success
z Largest exposure to risky asset gives highest
compounded returns over long term.
z Four (4) strategies: Integrated, Tactical asset
allocation, Strategic asset allocation & Insured.
55
Integrated asset allocation
z Separately examines: market conditions &

investor’s objectives and constraints.
z Factors: inputs into optimizer (to derive
efficient frontier); determines portfolio asset
mix that best meets investors needs given
market conditions.
z An iterative process (repeated over & over
again)
z Done by private banks for UHNWI.
56
Tactical asset allocation (TAA)
z Portfolio management strategy where manager

attempts to generate active value-added returns
(alpha) solely through allocation decisions.
z Instead of picking superior stocks, TAA managers
adjust asset class exposure based on changes in
relative valuation of asset classes.
z Shifts between Cash, Stocks and Bonds.
z Between large caps and small caps in practice
z Dependent on market timing skills
57
Example of TAA
Model portfolio as
recommended by Citi’s
Global Investment
Committee, April 2008.
Conservative
2% cash
73% fixed income / bonds
25% equities
Aggressive
2% cash
0% fixed income / bonds
98% equities
58
Strategic asset allocation
z Used to determine long term policy asset

weights in a portfolio
z LT asset average returns, risk & covariance
used to estimate future results.
z Efficient frontiers generated based on
historical data & investor decides which is
appropriate for the planning horizon
z Results in constant mix asset allocation with
periodic rebalancing to adj. portfolio to specific
asset weights
59
Example of strategic asset allocation
z Balanced portfolio: 50/50%, Equity: Bond.

z Equity increases 10% while bonds fall 10% in
value, mix now: 55/45%.
z To adjust back to desired level: sell some
equity, and use proceeds to buy bonds.
z In the long term, this should generate superior
returns that can meet investor’s investment
objectives.
z Used by majority of portfolio managers.
60
To aid Strategic Asset Allocation
Investment outlook, by Citi’s

Global Investment
Committee.
Global asset class weighting

-Equities – partial overweight
-Fixed income – Partial
underweight
-Cash – neutral
-Hedge funds – neutral
61
Insured asset allocation
z Assumes expected market returns & risk are

constant over time; while investors objectives
& constraints changes as wealth changes.
z As wealth increases, investors can take more
risk Æ increase exposure to risky asset & vice
versa.
z Results in continual adjustments in portfolio
allocation.
z Normally allocation between equities & cash.
62
Selecting asset allocation strategy
z Depends on perception of variability in

investor’s objectives & constraints. And
on relationship between past & future
market conditions.
63
Selecting asset allocation strategy.. cont
z Market conditions z Investor’s objectives &

relatively constant over constraints, risks
time: relatively constant over
z Strategic or time:
z Insured asset z Tactical or
allocation z Strategic asset
allocation
If both market conditions & investor’s objectives, constraints &

risk are variable; must be constantly monitored Æ Integrated
asset allocation
64
Strategies to manage portfolios

Once portfolio created, you need a strategy to manage & to rebalance:
z Wing-It
z Most common – no plan or structure
z “A little bit of this” and “A little bit of that”
z Least success: no consistency
z Market Timing
z Ability to get in and out of market/assets at the right time
z Aim to buy low and sell high but in reality, it’s buy high and
sell low
z No one can predict (or market time) consistently.
65
Strategies to manage portfolios -2
z Buy & Hold

z Most commonly advocated
z Statistically: markets up 75% & down 25% of time
z Make money 75% of the time?
z Easy to employ (not necessary better or worse)
z Rebalancing
z In between market timing and Buy & Hold
z Make adjustments to mix from time to time
66
Rebalancing…
z Is counter intuitive
z Sell some funds that have performed well & buy some of
funds underperformed.
z In investing, everything goes in cycles.
z Example:
z Initial allocation: Invest RM25k into each Fund A, B, C & D
(25% each)
z After 1 year, the weighting changes as some funds performed
better than others.
67
Rebalancing .. cont
Returns after 1 year
Fund Return (%) End Bal, Allocation (%)

1-year RM
A 13.6 28,400 26.28
B 6.8 26,700 24.71
C 8.5 27,125 25.10
D 3.4 25,850 23.92
108,075 100
Initial allocation is 25% each
68
Rebalancing…Returns
z Although, portfolio return is 8% after 1 year, inclined to

sell Fund D.
z Underperformed - 1-yr return 3.4%
z Buy more of Fund A?
z 1-yr return of 13.60%
z Buy low, sell high? – sell A, and buy D
z Rebalance fund every year
z Key is discipline. And, have a Plan.
69
Rebalancing .. Risk Adjusted Returns
Adding risks to the return equation
Fund Return (%) Risk (s.d) Risk Adj.

1 year % Return (RAR)
A 13.6 14.0 0.97 (4)
B 6.8 5.0 1.36 (1)
C 8.5 7.0 1.21 (2)
D 3.4 3.0 1.13 (3)
70
Risk Adjusted Returns
z Amount of risk taken per dollar of returns

generated
z Risk Adj. Return (RAR)= Returns / s.d
z S.d = measure of risk (also called volatility of
returns)
z RAR is a relative measure (not absolute); rank
the RAR relative to each other.
z On a returns basis: Fund D underperformed
Fund A ( 3.4% vs. 13.6%)
71
Risk Adjusted Returns - 2
z But, on a Risk adjusted basis: Fund D

performed better vs. Fund A ( RAR of 1.13 vs.
0.97) -- relative
z Important to take Risk into account when
evaluating portfolio returns (not just returns)
z Buy Fund D and sell Fund A,
z Fund B – buy some, Fund C – Hold.
72
Working example
73
Portfolio rebalancing
z You have allocated, RM20k to each of the 5 selected

funds.
z After one year, you are planning to rebalance your
portfolio.
z Given the expected returns (on next slide), calculate
the risk adjusted returns.
z S.d. for the funds are as follows: fund A(15%), B (7%),
C (5%), D (7%) & E (15%)
z Finally decide on which funds to sell, buy & hold. And
give reasons why.
74
Expected returns & risk
Fund Return (%) End Bal, Allocation (%) s.d (%)

1-year RM
A 15 23,000 20.3 15
B 10 22,000 19.4 7
C 8.5 21,700 19.1 5
D 4.3 20,860 18.4 7
E 29.0 25,800 22.8 15
113,360
75
Suggested approach
Initial RM20,000
Fund Return RM % Risk RADR Rank Remarks
A 15.0% $ 23,000.00 20.3% 15% 1.00 4
B 10.0% $ 22,000.00 19.4% 7% 1.43 3
C 8.5% $ 21,700.00 19.1% 5% 1.70 2
D 4.3% $ 20,860.00 18.4% 7% 0.61 5
E 29.0% $ 25,800.00 22.8% 15% 1.93 1
$113,360.00
•Decide which fund to buy & which to sell. Buy E and Sell D.
•No right or wrong answer. Subjective.
•Based on the above results & on RAR, this is the approach to take,
•More importantly: whether the fund performance is consistent with
mandate of fund.
•Depends on the overall objective of the portfolio & investors.
•Or you can rebalance based on target weights. To get back to 20%
each.
76
End
Q&A
77

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AGENDA

Session 1: Risk & return

Chris Gan, Feb 2009

Building blocks in unit trusts

To be “complete”, you need:

• Selling & people skill

Lots of Action & No Knowledge vs. No Action & Lots of Knowledge

Where is the balance?

Objective: This seminar will introduce you to

“Gentlemen, this is a football” – Vince Lombardi

z Why do investors invest in UT? The basic answer: to

But, what retail investors actually do:

Redemptions are generally high, when NAV is lowest

When should you sell?

z At inception on 03/05/07, NAV/unit = 0.50

What fund managers should do

RHBIslamic Index/KL Syariah Index

Calculating total returns to investor

z Returns to customers’ investments come in two forms:

1) From capital gains (e.g.. Buys 10,000 units of Fund

Higher the risk, higher potential return

z It is important to understand the risk-return

Different types of unit trust

There are many different types of unit trusts now,

Risk rating system for funds

z The risk rating system provides a scale of 1 – 5 for the

Note: this is a general description of funds & assignment of risk ratings.

Matching risk profile with funds

Risk and return explained

z Risk is the uncertainty of whether an investment that is

Risk–return example using std deviation

OSK UOB Resources: 95% NAV Equities

z Returns from financial assets display random volatility;

* Modern Portfolio Theory: Markowitz, Modigliani & Miller, etc

Diversification- across asset classes,

Example of Diversification (Asset Class)

Example of diversifying portfolio

z Objective: to provide investors who wish

Internal Distribution Only 19

Portfolio – expected returns & risk

Internal Distribution Only 20

Performance vs. Custom benchmark

Percentage Growth Total Return, Tax Default, In LC

2 Years From 31/05/2005 To 31/05/2007

Internal Distribution Only 21

z Portfolio Correlation matrix: 2 yrs (Lipper)

allocation: Correlation Bond Dividend Penny

z HLG Bond: 50% Bond - 0.28 0.39

To increase diversification benefit, aim is to add negatively

Internal Distribution Only 22

Determining assets to include

z Low correlation between HLG Bond (conservative)

Internal Distribution Only 23

z Aim to build an efficient portfolio

What are the different assets?

What are stocks?

z Equity = Ownership in company

Equity may be listed on stock exchange – hence,

What are bonds

z Borrowings of the company (debt or i.o.u)

Risk profiles of bonds & stocks

z Stocks and bonds have different risk