These fallacies include the oft-repeated maxim that diversification reduces risk, and that risky assets such as stocks become safer as the holding period gets longer.

According to Zvi Bodie, Norman and Adele Barron Professor of Management at Boston University: “In the US, there is a movement towards consumer (financial) literacy which is completely misdirected. The idea is to make consumers capable of deciding how much to save for retirement over time, and how to invest money. But the professionals don’t even know how to do that. It’s silly and counter-productive and disingenuous. It’s a kind of fraud, an excuse for transferring risk from the corporate sector to the consumer sector.”

Prof Bodie singled out ‘target date’ retirement funds as flawed instruments that only further the fallacies and ultimately do little to provide investors with a secure stream of income in retirement. Target-date funds, also called life-cycle retirement funds, are designed to mature at a point in time that should coincide with one’s retirement age. Asset allocation and rebalancing are done automatically, so the allocation to equities reduces with age. In the US, such funds are a default option in retirement accounts.

They have, however, come under scrutiny since the financial crisis last year. Citing Morningstar data, Bloomberg has reported that target-date funds labelled 2000 to 2010 lost an average 23 per cent last year, with some dropping as much as 41 per cent. The average 2050 fund declined 39 per cent in 2008, while the Standard & Poor’s 500 Index fell 38 per cent. There are a number of target-date funds here, including those managed by Fidelity and UOB Asset Management.

Prof Bodie says target-date funds are a misnomer and misleading. This is because they are mutual funds, and some allocate money to other mutual funds, which do not have a maturity date. This is unlike bonds, which pay income regularly and at maturity will deliver an investor’s capital. “What consumers want and deserve is a pension, where they make contributions and the contributions can vary,” he said. “The end result at retirement should be a secure lifetime income that lasts as long as they live, with inflation protection.”

Prof Bodie contends that the technology exists to create such a product, but it will require active government involvement, and not just the private sector. “We have the technology to do the right thing to satisfy the requirement for at least some minimum level of guaranteed inflation-protected income at that stage in people’s lives when they are most vulnerable to risk,” he said.

Debunking investment myths

Prof Bodie cited three common investment fallacies:

1) Saving is for the short run and investing for the long run. But according to financial economics, saving means income minus consumption. Investment means selecting a portfolio of assets.

2) The only way to reduce risk is to diversify. In finance, however, the way to reduce risk is to hedge, insure or hold safe assets.

3) Stocks become safe in the long run due to ‘time diversification’. But if this were true, stocks would not carry a risk premium, says Prof Bodie.

An indication of how risky stocks are, the longer the horizon, can be gleaned from the pricing of put options. The price of such protection rises with the time horizon – a put option that matures in 25 years costs five times as much as a one-year option, says Prof Bodie.

He argues that conventional advice based on the mistaken principle of time diversification leads to portfolios that are riskier than consumers realise.

The starting point for a retirement portfolio should be 100 per cent inflation-proof guaranteed annuities, he reckons. This, however, is a big challenge in Singapore, where there are no inflation-linked bonds. Even CPF Life, the CPF’s new annuity scheme, fails to provide any inflation protection.

Even with US Treasury Inflation Protected Securities (TIPS), the real yield has dropped; on 10-year TIPS, it stands at about 1.3 per cent.

If you have ever been sold a financial product labelled ‘capital protected’ or ‘principal protected’ and did not know what the terms really meant, there is good news.

Singapore’s financial regulator has decided to ban their use because too many investors do not understand them.

What is more easily understood is ‘capital guaranteed’ — meaning the investor’s principal sum is fully protected – and this will be one of only two types of products allowed to be sold.

The other category? Everything else that is not capital guaranteed.

The Monetary Authority of Singapore (MAS) announced its decision yesterday as part of its response to feedback that it had received on a slew of changes proposed in the wake of the collapse of Lehman-linked structured products.

These proposals, first released in March, were mooted in response to controversy over the way complex investment instruments were sold to people, including elderly and lowly educated folk.

Some of the key changes include requiring financial institutions to provide customers with simple, user-friendly ‘product highlights sheets’ and providing ‘health warnings’ on complex investments in appropriately large font.

MAS had also proposed that bank tellers should not sell investments and there should be a seven-day ‘cooling off’ period during which an investor could change his mind and pull out of his investment.

In a 19-page document yesterday, the financial regulator outlined public responses it had received, and said that it would adopt most of the proposals.

The ban on the use of the term ‘capital protected’ will apply to mass-market products familiar to retail investors, including structured notes, unit trusts and investment-linked life insurance policies.

Some investors had previously raised concerns that they had difficulty understanding what those terms meant, MAS said.

A ‘capital protected’ product is where the principal sum is ploughed into investments like bonds which, on maturity, are expected to provide the 100 per cent capital protection.

But this is not a certainty. ‘The bonds could turn sour and affect the value of the investment, and people may not get back 100 per cent,’ said First Principal Financial’s chief executive Mohamed Salim.

This is to be distinguished from ‘capital guaranteed’ products where an investor is guaranteed to get back at maturity the money that he invested on day one.

Financial advisers told The Straits Times that many retail investors, even more experienced ones, cannot differentiate between the two terms.

MAS said yesterday that one way around the problem was for the industry to develop a standard definition for capital protected products.

But it had found that all the suggested definitions tended to be too lengthy or not easily understandable by investors.

Capital protected products were popular in the years just preceding the recent financial crisis. One banker told The Straits Times that ’30 to 40 per cent’ of retail investment products here carried this label.

This is why consumer advocates are lauding the move.

‘The term principal protected has never been understood by retail investors. Now they’ll understand the terms of sales better,’ said David Gerald, president of the Securities Investors Association of Singapore.

The change will make it tougher for bankers to market these investments. One banker said some product manufacturers will find it harder to sell structured products in Singapore in future because they cannot distinguish the safer products from more risky ones.

But Singapore will not lose its competitiveness as a wealth management centre, he acknowledged, since the measures as a whole will provide more transparency and confidence.

Seah Seng Choon, executive director of the Consumers Association of Singapore, lauded the full list of changes, saying that they go a long way in promoting a higher level of disclosure and safeguard investors’ interest.

MAS said that it will issue further responses to more proposals in the fourth quarter. That is because some of them need further study. — The Straits Times

Here is an interesting story that appeared in today’s issue of The Business Times in Singapore. It’s saying that owing to the global financial crisis Malaysians appear to be the most averse among Asians to higher risk investment products. They have become more conservative in their choice of financial instruments.

According to the Life Outlook Index released by AXA, 67 percent of Malaysians indicated a preference for insurance products that offer protection as well as savings. It’s a ‘dramatic shift’ from aggressive to conservative strategies, and this is reflected in a big jump from 26 percent in 2007 to 45 percent of those planning to purchase life insurance.

The response rate for dual protection-savings products ranged between 40 and 60 percent for the other seven markets AXA had surveyed, namely, China, Hongkong, India, Indonesia, the Philippines, Singapore and Thailand.

AXA Affin Life Insurance chief marketing officer Nicholas Kua said the switch from high-risk, high-return investment products to options combining life protection and long-term savings was quite consistent with the firm’s observations. “The financial crisis has made Malaysians and Asians more conservative,” he said, which was surprising because unlike Hongkong and Singapore, Malaysian investors were spared much of the pain associated with structured products and investments tied to the now defunct Lehman Brothers.

Here’s the rest of the Business Time story:

Even so, Kua said it was evident Malaysians are shaken up by the global economic gloom and more willing now to plan for their retirement. Instead of starting at an average age of 37 as was the indication in 2007, they now plan to begin at 34 — earlier than the regional average of 36.

Nearly a quarter or 23 per cent plan to increase savings for retirement while 43 per cent would maintain the current pace.

But most are still far from ready for retirement with only 38 per cent having a plan (36 per cent previously). More than a quarter or 27 per cent are “thinking seriously” but unsure how to go about saving while 7 per cent are non-planners — admittedly an improvement from 12 per cent in 2007.

According to the Employees Provident Fund — the country’s biggest pension fund and main source of savings for most workers — the average savings for a 54 year old member last year amounted to RM132,500.

Given that 70 per cent of retirees who take out their EPF savings in a lump sum exhaust it within 3-10 years, the concerns and fear are very real.

Indeed the AXA survey showed only 29 per cent of Malaysians think they can maintain their health post-retirement, most believing their funds would be insufficient.

The respondents also desired to retire at an average age of 54 — one year before the retirement age — but believe 57 to be more likely given the current economic conditions.

Kua said unlike the Indians who are “very realistic” and willing to either work longer or compromise their present living standards to save for their retirement age, the survey revealed Malaysians want to enjoy their golden years but not at the expense of their luxuries.

One area they were willing to trade-off current living standards is to provide their children a better education (57 per cent).

Although only 57 per cent still see opportunities in the future compared to 64 per cent previously, 60 per cent still plan to have kids, with half of them planning to have at least three.

The survey covered 2,400 respondents regionally, those in Malaysia having an income of RM4,000 to RM5,000.

Very few of us can be a Guy Ritchie or a Madonna or one of the several thousands of celebrities who have millions of dollars’ worth of assets to share among themselves or their lawyers whenever they get hitched or ditched.

For us, planning a wedded bliss together may require some pre-wedding financial planning as well. It’s always prudent to sit down with your spouse-to-be and talk frankly about money and expenses. What can you talk about?

1. The accounts you have. What types are they: current account, savings account, fixed deposits? How long have you had them? Start an inventory of the accounts you have and how you handle them.

2. The credit cards you have. How do you use them? What’s the balance in your credit cards? How do you repay them?

3. Bank loans. Do you have any bank loans to settle? Housing loan? Car loan? Study loan?

4. Should you have separate or joint bank accounts?

5. How will you make buying decisions? What purchase decisions should be made together and which should not? Should there be a limit to spending without joint decisions and if so, how much?

6. Who is responsible for the marketing, paying household bills, utility bills and preparing taxes? Should there be separate assessment or joint assessment?

7. Do you work benefits overlap? Do you have insurance: personal insurance, medical insurance, home insurance? How about investments: mutual funds, stock market? How about the degree of risk you are able to live with?

8. What are your money goals? Retirement planning?

Asking these questions early on and starting the conversation before you sign the marriage certificate will make it easier to revisit money talk, which may not be as fun as pillow talk but is certainly as vital to your relationship.

One of the enhancements in this new strategic initiative is the introduction of the concept of “basic savings”. The understanding of this concept will enable you to determine the minimum sum that you, as an EPF member, will be allowed to withdraw from your Account 1.

Basic savings is an amount to be put aside in your Account 1 that will grow progressively at various pre-determined age levels to enable you to accumulate a minimum savings of RM120,000 by the time you reach the age of 55.

Accordingto th EPF, a member will need to have a basic savings amount at the predetermined age levels, and the amount in excess of the basic savings can then go into investments offered by fund managers approved by the Ministry of Finance.

But there are two main conditions involved.

Firstly, you can invest not more than 20% of your credit in excess of Basic Savings in Account 1. The investment must be made in products through approved fund managers. Normally, this will mean the Unit Trust or Mutual Fund companies.

Secondly, the minimum amount of savings that you can withdraw is RM 1,000. The withdrawals can be made at intervals of three months from the date of the last transfer, subject to the availability of the Basic Savings required in Account 1.

To have a better idea of the amount of basic savings which you must have, here is a table to help you:

Hopefully, this table will be clear enough. If you have more questions, don’t hesitate to call your unit trust consultant for more news about this!

This move as approved by the Minister of Finance will help members save on service charges. The service charges by local investment funds in Malaysia currently are relatively higher when compared with other countries like Singapore, United Kingdom, Japan and the United States.

“Members can enjoy better returns from their investment in unit trusts with the lower service charges,” said Datuk Azlan Zainol, Chief Executive Officer of the EPF.

Datuk Azlan also added, “We decided to cap the service charges at three per cent in the interest of our members and the fund managers”.

Currently members pay about five to six per cent in service charges.

“A study commissioned recently by EPF revealed that one of the major factors affecting the investment returns for our members is the high service charges imposed by the fund management institutions,” said Datuk Azlan.

About 11.4 million Employees Provident Fund’s (EPF) members are expected to benefit from a comprehensive plan which will promote savings and enable members to have more funds to cover their basic retirement needs.

The ‘Beyond Savings’ initiative, which is essentially a new benefit structure provided by the amendment of EPF Act 1991 to enhance retirement savings of all members, involves new provisions for the EPF’s contribution and withdrawal benefits. The initiative will be introduced in stages from November 2007 till June 2008. Through these changes, members will also be given more choices and greater flexibility to manage their EPF savings.

The changes include the introduction of more flexible withdrawal options for members after age 55, to extend the liability to contribute to the EPF beyond 55 years up to 75 years; and the introduction of basic savings in members’ Account 1 to give members an opportunity to invest at an earlier age.

The ‘Beyond Savings’ initiative is prompted by the EPF’s desire to enhance financial security in retirement in the light of inflation, a weakening extended family system, longer life expectancy and escalating medicals costs.

“The EPF’s main concern is the adequacy of savings for members during their retirement years as the average retirement savings for EPF members currently is inadequate. With Malaysians having a longer life span as well as inflation and escalating medical costs, many members may find themselves with insufficient funds if the issue of adequacy of savings is not addressed now,” said Datuk Azlan Zainol, Chief Executive Officer of EPF

“It is against this background that the EPF has taken the lead to introduce ‘Beyond Savings’. As a progressive and member-focused organisation, the EPF is constantly reviewing its benefits and schemes to ensure that the organisation remains relevant to the needs of its members,” he said.

Datuk Azlan added that these changes to the contribution and withdrawal will ensure a healthier level of savings for EPF members. He also added that these changes are a continuation of initiatives begun in 2000 to enhance customer service and delivery for its members.

Underpinning all these changes is EPF’s commitment to a faster and more efficient service delivery. The changes will also help to realign the EPF with its objective as a national social security organisation and to be more relevant to the changing demands of its members.

About the Employees Provident Fund (EPF)

The Employees Provident Fund (EPF) is a national savings scheme, providing basic financial security for retirement. The Fund is committed to preserving and growing the savings of its members in accordance with best practices in investment and corporate governance. It will always be guided by prudence in its investment decisions.

As a customer-focused organisation, the EPF delivers efficient and reliable services for the convenience of its members and registered employers.

The EPF continues to play a catalytic role in the nation’s socio-economic growth, consistent with its position as a leading savings institution in Malaysia.

Date: 22 October 2007

ING Global Real Estate Fund (31 July 2007)
(Source: ING Funds Distributor, LLC)
* Mitsui Fudosan Co Ltd (Japan) 4.64%
* Westfield Group (Aust) 4.24%
* Mitsubishi Estate Co Ltd (Japan) 3.89%
* Sun Hung Kai Properties Ltd (HK) 3.16%
* Simon Property Group Inc (USA) 2.82%
* Boston Properties Inc (USA) 2.65%
* Unibail-Rodamco (France) 2.02%
* Sumitomo Realty & Development Co Ltd (Japan) 1.95%
* Vornado Realty Trust (USA) 1.82%
* SL Green Realty Corp (USA) 1.81%

Hwang-DBS Global Property Fund (31 July 2007)
(Source: DBS Asset Management, Singapore)
* Vornado Realty Trust (USA)
* Simon Property Group Inc (USA)
* SL Green Realty Corp (USA)
* Unibail-Rodamco (France)
* Prologis Trust (USA)
* Public Storage Inc (USA)
* Boston Properties Inc (USA)
* Westfield Group (Aust)
* Boardwalk Real Estate Investment Trust (Canada)
* Land Securities Group Plc (UK)

AmGlobal Property Equities Fund (29 Jun 2007)
(Source: AmInvestment Services Berhad, Malaysia)
* Westfield Group (Aust) 2.60%
* Mitsubishi Estate Co Ltd (Japan) 3.40%
* Mitsui Fudosan (Japan) 3.20%
* Prologis Trust (USA) 3.10%
* Sun Hung Kai Properties (Japan) 2.90%
* Simon Property Group Inc (USA) 2.80%
* Land Securities Group (UK) 2.20%
* South African Property (South Africa) 2.00%
* Sumitomo Realty & Development Co Ltd (Japan) 1.90%
* Unibail-Rodamco (France) 1.80%

The introduction of the equity ETF as a viable alternative investment instrument had been inevitable but now that it has made its debut on the Bursa Malaysia, more ETFs can be expected to be launched within the next six months to a year.

Investors can also expect various flavours of ETFs in the next phase of development, for example, ETFs that are syariah-compliant or ETFs that specialise in overseas markets.

But what is an ETF? It’s a fund that bundles together the stocks in an index. In the case of the FBM30etf, it tracks the performance of the top 30 biggest companies listed on the Bursa Malaysia’s KL Composite Index.

If reading the above makes you feel that an ETF sounds like a Unit Trust index or equity fund, you are not wrong. There are some similarities between the two. For instance:

• An ETF, like a Unit Trust, gives small investors an alternative way to gain exposure to an index.
• An ETF, like a Unit Trust, invests in stocks quoted on the index.
• An ETF investor, like a Unit Trust investor, will be diversifying his risks.

But there are differences too:

• An ETF is traded through a remisier; a Unit Trust is transacted though a unit trust consultant (individual or institutional).
• Because the ETF is quoted directly on the stock exchange, its trading price fluctuates throughout the day and is determined almost immediately; for a Unit Trust, you only get to know the actual trading price on the next business day.
• An investor pays a commission when he buys or sells an ETF; for Unit Trust, the commission is charged when the investor buys into the fund, not when he sells.

So would you go out right now and place an order for the ETF with your remisier? I wouldn’t stop you if you do, but it is wise that you pause first to consider that ETFs do not usually track indexes as well as conventional index Unit Trusts.

A unit trust price is always its net asset value (NAV), which is the weighted average current market value of all the fund’s holdings, expressed as a per-unit basis.

On the other hand, an ETF’s market or trading price is driven by demand and supply. Even if an ETF follows exactly the same percentage of shares as the index it tracks, its market price at any time can be above or below the NAV. This means that it can be sold at either a higher or lower price than the per-share value of its underlying stocks.

It’s debatable whether this difference between the NAV and market price for an ETF is significant but you, as an investor, should still be aware of this point before you put your money there to work for you.

Some analysts are saying that investors’ interest in an ETF will be subject to the valuation of the fund which in turn will depend on the basket of stocks that makes up the fund. Possibly, ETFs may only appeal to certain investors or fund managers who like a mini-Malaysia type of fund that’s made up of Malaysian stocks.

Disclaimer: This article expresses only my personal opinion. Investors are requested to perform their own due diligence studies before they plunge into investing in an ETF. Above all, investment is always a risk game.

If you don’t know what I’m referring to, let me explain. Everyone that works in the banking industry today knows that selling their products is very much part of their job. Such is the competition for business among banks that the staff knows no boundaries for the sake of closing a sale, finalising a deal or pushing a product.

There is little care whether the sale, deal or push will actually benefit the customer. As long as there is a transaction that benefits the bank’s bottom line, the bank will want to push it through because ultimately, that’s the pressure on the staff. Many old bank staff feels uncomfortable with this role – they feel that they are betraying the customers that they are so familiar with – but to new bank staff, it is second nature to them that they are bank salesmen. They know of no other alternative.

I met an elderly couple this evening. Both are in their mid-seventies. They knew that I have an active interest in financial planning – investments and estate planning – so they asked me to look at the copies of two application forms in their hands. They were illiterate and wanted an explanation of the two forms.

I was surprised. The forms turned out to be applications for some unit trust funds. One was a third-party global infrastructure fund marketed by Maybank while the other was a Euro equity fund from Public Mutual.

I was surprised because all that the elderly couple had done at the branches of these two banks was to ask the bank staff for alternatives to their maturing fixed deposits. Immediately, they were sweet-talked into transferring their money into the two funds with promises of good profits.

Is that the way that a responsible bank or even an agent would make a sale? Sales at any cost, regardless of the client’s tolerance to risk? This couple are in their mid-seventies and illiterate. Do they understand the modern concept of risk in this fast-changing world? It’s already so difficult to explain to them. A responsible financial planner will not want to ensure that their savings would be subjected to the risks of the local or global market. They don’t have time to recoup any loss should the market reverse itself.

I’m saddened that banks are allowing this to happen to their account holders. Where is their social conscience? Where is their responsibility? Where is their professionalism? They started disappearing about 10 years ago.