Private Retirement Schemes in Malaysia Part 2

March 2013: Private Retirement Schemes in Malaysia Part 1
After month of deliberations I have decided into putting some cash into Private Retirement Schemes, much better known as PRS. I will admit the biggest reason is the alluring PRS Youth Incentive. The other reason is that I am looking for investments outside Malaysia. Many already know I have exposure to Europe and US markets and now I want to increase my exposure to Asia exc Japan.


"In the 2014 Budget tabled on 25 October 2013, the Prime Minister had announced youth incentive of RM500 to contributors who participate in the PRS scheme to inculcate the importance of saving from an early age to ensure sufficient savings after retirement. The RM500 is a one-off contribution by the Government to young PRS members to encourage youth to undertake long-term savings for retirement through the PRS.

The Government will contribute RM500 per qualified person to be used to purchase units of PRS funds in the PRS account of youths, whom have accumulated a minimum gross contribution amount of RM1,000 within a year. This incentive will be made available for a period of 5 years from 2014 to 2018."

With the PRS Youth Incentive, a minimum of RM 1000 will essentially provide you a head start of 50% gain. Unfortunately it is only available to those aged 20 and above but have yet to reach the age of 31. The biggest winner would be the first time investors for they lack the experience and might be scared of losing capital from poor investment decisions. That 50% buffer is a huge advantage to begin with. Please DO NOT let it pass. 


What do you need?
[1] Provider’s joint account opening form cum transaction form. Initial subscription only for each provider. PRS Forms (not the full list of all fund houses)
[2] A copy of Malaysian NRIC or passport for foreigners. The front and back of the Malaysian NRIC must be on a single page.
[3] Additional RM10 for the opening of a PPA account for first-time PRS contributors.
**The above is via Fundsupermart platform (might be different if purchase directly). Fundsupermart offers 0% sales charge which is great.


Why did it take me more than a year to decide? 
First, to gauge the response of the scheme. - It has been lackluster. Part of the reason is its harsh penalties (RM25 fee and 8% tax) on withdrawal before retirement age (55 years old), another reason would be that the incentive caters to youths which very much lack any investment foresight and knowledge. Also the lack of track record makes it difficult for the experienced investors to decide.

Second, to see how the funds perform for at least the first year. Third, to examine what feeder funds they are feeding and their respective top holdings from their semi-annual/annual reports. Will talk about this below. **PRS has other exposure too (e.g. Malaysia/Fixed Income), unfortunately I will only cover funds with exposure to Asia exc Japan because that is what I am looking for.


Below are my observations back in March 2013. With more fund house entering the PRS since then, no.3 is no longer valid. The good news is no.1 and no.2 continues to meet expectations.

The below table will detail more:

Alpha: A +ve of 1.0 means the fund has outperform its benchmark index by 1.0%. The opposite goes for -ve.

Beta: A +ve of 1.2 means the fund is 20% more volatile than the index. The higher the beta suggest it offers the possibility of higher returns but also posing more risk. The opposite goes for -ve. 

R-squared: A higher R-squared will indicate a more useful beta value (85 to 100) aka good correlation. A low R-squared value means you should ignore the beta. It's a measure on well the fund is measured against an appropriate benchmark.

Standard deviation: A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.

Sharpe Ratio: The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. It describes how much excess return you get for extra volatility you endure in holding riskier asset.

Summary:
[1] I would disregard Public Mutual PRS funds due to their enormity (data not listed above). As of Nov 2014, its PRS Growth fund size is RM 91 million dwarfing even the closest rival Affin Hwang PRS Growth of RM 30 million. Its PRS Islamic Growth is RM 36 million beating its main competitor CIMB Islamic PRS Plus of RM 8 million.

[2] Manulife PRS have shown good performance for the 1st year but having the higher than average charges turns me off. They would have to prove themselves in the longer run since the funds feed on newly launched funds as well unlike the rest of the investment houses.

[3] AmPRS is doing so-so and its track record is overshadowed by Affin Hwang PRS Growth. Its Alpha values are weak and the Sharpe ratio is not good enough for the likes of a fund investing a majority of its capital into equities.

[4] AIA PRS is a recent new comer. I already have exposure in AIA funds via my ILP (insurance linked policy) so it would not be necessary for me to increase my holdings on the company.
Examining AIA's Investment-Linked Funds

[5] Both CIMB Principal PRS Plus AsPac Ex Jpn and Affin Hwang PRS Growth have good Sharpe ratio (with the former being better) with respect to their individual funds that they are feeding at. Affin's PRS Growth has slightly higher yearly charges so that would eat into some of your profits. Having said so Affin's PRS Growth is way more diversified as its mandated exposure is 70% equity and 30% fixed income so it's a less volatile fund (lower risk).


Conclusion:
I could go on, talking about fund deployed strategies, scrutinizing top holdings, the fund house/manager and etc but that's overwhelming for most readers - you can still however email me. All the above is the simplest way to convey the reasoning of my decision to go with CIMB Principal PRS Plus AsPac Ex Jpn. You will see this in next month's Aboi's Portfolio update and shall be part of my bi-annual Mutual Fund updates (Jan & July).

If you can stomach high 'calculated & understood' risk for high returns go with CIMB Principal PRS Plus AsPac Ex Jpn (Risk Factor 9/10). If you are just taking your baby steps into the investing realm Affin Hwang PRS Growth (Risk Factor 7/10) is perhaps a safer choice.

This is very useful for you-> Aboi's Mutual Fund Table Lists Nov 2014. For best experience, download and open file using Microsoft Excel. Data compiled by me and updated every Jan and July.

Let's Talk About The Shining Metal..Again

Precious Metal: Gold

Rating: UNDERPERFORM (KEEP IN VIEW)

Current Price: $1,179 (from $1,334)

Target price: $1,100 to $1,150 (unchanged)

Fundamentals: Long Term Outperform (5-year period)

Sentiment: Medium Term Bearish (6-month period)

Risk Level: High

**Outperform: Expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.


I have talked about gold a couple of times. 

First was back in late 2012 -> http://aboiwealthpot.blogspot.com/2012/10/the-yellow-fever.html. This was when gold was at it's all time high of $1800 and I have warned the perils of holding gold.

"To the disbelieve of ordinary folks, gold is just like any commodity. IT DOES NOT GO UP ALL THE TIME."
"If you have gold now, it's time to review your holdings. If you are thinking about getting into gold, think twice and HARD. A few useful indicators to look out for. 

No 1. If the central banks of major economies start raising interest rates, it is tough for all investment classes which includes gold. Because there is little point in putting cash into the banks when interest rates are low, people will buy gold as a hedge against inflation.

No 2. If the US dollar has strengthened, decrease in gold prices will follow. This is because people use gold as a substitute/hedge for the world's reserve currency."

No 2 is happening now. No 1 at the current trend would only apply to the US economy where it is foreseeable that the Fed will raise interest rate as early as 2015.


Next I posted in late 2013 -> http://aboiwealthpot.blogspot.com/2013/12/a-fool-and-his-gold-are-soon-parted.html. This was when gold of $1250 was experiencing a sharp decline.

" increasing demand does NOT come from jewelry or technology (I consider this a stable form of demand) it is from financial investments (speculative/hedging form of demand)."
"Equities or stocks are by far the best indicator to look at. It does not correlate with gold prices. E.g. if US stocks fly high, gold prices would be the opposite OR if interest rates goes up, folks would rather invest in cash rather than gold."

The US stock market is at it's all time high now, higher than pre-crisis levels of the 2008/2009 financial crisis.


Lastly I posted in early 2014 -> http://aboiwealthpot.blogspot.com/2014/03/speaking-of-recent-gold-demand-trends.html. When gold of $1350 made a small comeback.

"The only major factor keeping gold supported now is the RETAIL INVESTOR, people like me and you but actually not really us la. Whose buying them? The Chinese and Indians especially!"
"Back by India's restriction to limit gold import in mid 2014 and China's appalling just released PMI index, gold is going to meet resistance in the $13xx range."

It is did meet substantial resistance and is now hovering below $1200.

Let's examine what is happening now @ <$1200:
[1] I put the normal retail investor as either buying jewellery or investment such as physical bar demand. Both are running out of fuel. Though there is no Q3'14 data yet, judging by the current price it is safe to assume the trend is resuming.
[2] India's new PM Modi wants the Indian people to use banking instruments and hold less gold and is making it one of his to-do list and with the restriction to limit gold import (that will last to 2015) is hurting retail demand in India.
[3] China's demand is waning as well. Could it be President Xi Jinping's massive anti corruption drive (which will continue for years to come) hurting demand for luxury good such as gold? 

[4] Strong US dollar and with the US Fed finally ending its QE3 program, it signals that it is almost time that they will start raising interest rates which will further boost demand for the greenback that will hurt gold. This is because holding the shining metal has no yield (it does not pay any interest).

[5] Also BoJ's (Bank of Japan) just announced an aggressive QE program of it's own. This will boost the stock market of Japan, fueling the flow of money into equities. The ECB (European Central Bank) might be mulling the same idea considering that Europe (except UK) is re-entering recession. Money has to flow from somewhere and it will come from commodities like gold. Again because holding commodities has no yield.
[6] Russia might be selling some gold reserves to meet financial demands due to suppressing oil prices (which contribute a lot to the state budget) & also sanctions from Western countries.


How to get gold's fair value?
The answer is I don't know. It is not like an equity where various financial ratios can be used for in modelling e.g. PEGGY or DCF. What I do is simply identifying trends on the macroeconomics level - understanding what is happening around the globe e.g. be it financial or political. This is pretty much similar to how I did for palm oil where I was invested in BSDREIT and gained a nice 65% profit for holding it for 3 years. 

Back to gold, my target price ($1100 to $1150) and support line ($1000) remains unchanged. Pre-crisis financial crisis 2008/2009 prices were slightly below $1000 and at $800 as seen in 2007 when central banks were selling gold but now they are buying . Furthermore 100 tonnes each quarter for 14 consecutive quarters since 2011. In the long-term Jewelry demand should recover (with Asia's rapidly rising middle class), Technology demand to remain flattish, Total bar and coin demand as a form of investment will continue to slug as long as the markets around the world remains healthy. A majority of central banks should continue to hold and increase gold reserves as global monetary backup because the world economy remains unpredictable if not messier.

Thus I am assuming that demand will normalize to 2008 levels ~3800 tonnes per year. At the height of the gold price it was 4700 tonnes. Now it is trending to be similar to 2013. ~4000 tonnes per year.

In order to determine if gold is a good investment, one must have a view of the economic environment. Gold is a good investment when traditional assets are unlikely to maintain your purchasing power. That is, they are likely to depreciate when priced in gold, because they are tied to a declining economy. We are in one of these periods today and have been so for the last 12 years.

When growth is strong you will do better in traditional investments. They are exposed to growth and will outperform inflation hedges in such a climate. A classic example of such an environment would be the 1980-2000 period. Are we likely to enter such an environment again in the future? The key is to know when this new cycle has begun.

Warren does not believe in gold because it cannot produce anything, it has no output unlike holding companies and securities that offer yield. However I treat gold mainly as a CRISIS HEDGE and use the extremely long term horizon, holding for 10 years and above. With so much liquidity (money) in the system, there is plenty of fear in markets these days. Fear that paper assets will depreciate, fear that governments would not be able to repay their debts, fear that markets will collapse and etc. One thing I'm sure there will always be a NEXT CRISIS.


How to buy (approved by Bank Negara) gold in Malaysia?
You will need a current or savings account with the bank that is selling gold.
You will need to buy a initial minimum of 20g. At current price have at least RM 3000.
Subsequent buys must be done in bulks of 5g each. E.g. 5g, 10g, 15g and etc.
You should have a minimum of 10g in your gold account to avoid the monthly charges. If you intend to sell almost all just close the account.
UOB bank offers the cheapest gold price that you can purchase in Malaysia.
http://goldaboutinvestment.com/malaysia-banks-gold-price

On a side note:
Below is the US house price index. Post-WW2 house prices went up and stayed the same due to one sole thing: Population boom and rising middle class. The same goes to Malaysia back in 1980s to 1999 pre Asian Financial crisis. We have past that era. In fact our total % of working person to population will peak in 2020 according to the world bank. 

The America has had 3 housing boom & bust while Malaysia has had 1 before. My point here is everything that goes up above the trend will go down eventual. It applies to stock market, gold, house prices, even my Lego pieces. The difference is in the time frame due to the liquidity of the transaction. Why does it takes years for house prices to correct? Because it is illiquid. In the stock market I only need 3 days to cash out, can you do that for your home? As such you will need to look at a longer horizon. A decade (10 years) is a good measure. Go figure....

Anyway, we all know that my warning is WRONG and Malaysia continues to enjoy excellent growth in the property market. Have a nice weekend, please attend property expo(s), they seem to be the rage nowadays.

Aboi's Updates For November 2014

KLSE TECH REVIEW

Here's the link for my last month's market sense: Aboi's Updates for October 2014

For those who find it hard to follow I suggest reading through my previous posting on how I am using technical indicators as a trend seeker.

1. First Attempt on Tech Analysis Part 1
2. First Attempt on Tech Analysis Part 2

Recap - October's commentary. 
" Bursa did breach my support 1 @ 1860 and thus I've moved it to 1840. I shall define trading sideways as in +2% to -2% of total index points to make it really measurable. The most forthcoming event would be the tabling of Budget 2015 on October 10th. Until then we wouldn't know the winners and losers of the economic sectors so expect it to trade sideways in the next 10 days." - What an spectacular month. Not only did Bursa breached any imaginable support line all the way to less than 1800, it also bounced back extremely quickly above my same support line of 1840. Now it is trading at 1854. This is largely due to the US market correction. I think it would be difficult for Bursa to hit 2000 by year's end, more likely 1900. Budget 2015 was disappointing. It lacks substance and destined to be the same old thing. Construction sector stands to gain again from the budget as it always does due to a slew of government initiated infrastructure projects. You may read more from my previous post: Budget 2015: Same Old Thing. I will set a new resistance of 1875 and support line of 1840 for the month of November.

Key economic news and market update from AMP Capital's economic update (FoC, updated every Friday):
1. US Federal Reserve's long anticipated ending of its Quantitative Easing program (print money to buy bonds). 
2. This QE is being replaced by Japan where its Bank of Japan has announced a new EQ program of around ¥80 trillion annually. ECB will help fill the rest. 
3. US midterm elections is due in November, Republicans will likely increase their House majority and get a small minority in the Senate. Will this mean more divided government because the president is a democrat?
4. Reserve Bank of Australia will likely maintain the interest rate at 2.5% and not raise interest rates until 2015.


Portfolio - Marginal losses but recovering
The market correction has obviously hit my portfolio, nevertheless I did not perform any panic selling nor did I do any day trading. Holding on to fundamentals, the securities across all of my investments are recovering and almost back to pre-correction levels. In fact some holdings have been better - Supermax & Genting. Also worth mentioning is how quickly AmDynamic Bond is catching up as seen from the NAV returns (2.66% a month ago, it is now 3.38%). Thus I am changing it from a HOLD rating to BUY. You may read my response to questions from other readers: About Bonds - What? Buy, Sell or Hold?

In October I've taken a look into how to adjust my portfolio position. You may read about it in my previous post The Balancing Act. Due to BoJ's aggressive QE stimulus program, my remaining plans for 2014 would be to [1] possible purchase of gold commodity [2] small initial investment into a PRS fund (Asia Pacific exposure - non-Malaysia). I will blog about these within this month. I still have Padini, and MREITs analysis. I will try to accommodate.

PORTFOLIO REVIEW

Portfolio target composition. Equities 65%, Bonds 25% and Supplementary 10%.

Targets for returns p.a. Equities 12%, Bonds 5% and Supplementary 3.5%.

Notes
-Change AmDynamic Bond from HOLD to BUY.

Comments
#1 Portfolio target for the fourth portfolio year @ RM140k for April 2014 has already EXCEEDED. Portfolio target for the fifth portfolio year @ RM152k for April 2015. The TWRR (time weighted annual return rate is now at 9.16% (down 0.34% from Oct'14) vs my target of 9.40%).


Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.