An Analysis On Strategic Asset Allocation And Determining The Optimum Portfolio of Four Asset Class: a case Study On cimb wealth Advisors (cwa) Conventional Fund




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An Analysis On Strategic Asset Allocation And Determining The Optimum Portfolio of Four Asset Class: A Case Study On CIMB Wealth Advisors (CWA) Conventional Fund



CHAPTER ONE

INTRODUCTION



  1. Overview



The contents of this chapter discussed on the background of the study, background of the company and some issues related to the study. Under issue of the study, asset allocation will be discussed because it is proxy of this study.



    1. Background of the Study



A unit trust is a professionally managed investment fund which pools your money with that of many other investors with similar investment objectives. The aggregate sum is then used by the fund to build a diversified investment portfolio which comprises stocks, bonds and other assets in accordance with the investment objective of the fund. 

The price of a unit reflects its total Net Asset Value, commonly referred to as NAV (the fund’s assets less its liabilities, divided by the number of units in issue). Unlike stocks, whose prices are subject to change at each trade, the fund’s NAV is calculated only at the close of each day’s trading. Hence the fund’s unit price is quoted in major newspapers on the following Business Day. 

To protect your rights and interests as investors, an independent Trustee is appointed to ensure compliance of the Manager with the requirements of the Trust Deed, Securities Commission Guidelines on Unit Trust Funds and Securities Commission (Unit Trust Scheme) Regulations 1996. The manager is also required to appoint an approved Company Auditor (within the meaning of the Companies Act 1965) for the purpose of conducting annual audits of the Fund’s accounts which must be included in the fund’s annual report.

There are many benefits in investing in Unit Trust. One of the benefits is diversification. Diversification can spread of risks over a wide variety of securities in different sectors. Normally to do this, you must have a substantial amount of money to buy a diversity of stocks. However, unit trust funds facilitate this by providing small savers with an opportunity to pool their savings to invest in a diversified portfolio of stocks or you could think of it as "not putting all your eggs in one basket".

Next is professional fund management. Under this benefit, it is our ability to employ a team of well-trained, in-house investment professionals who conduct full-time regular investment research and analysis in managing the assets of the Fund. With such investment expertise, research facilities and information network, sound investment decisions may be made. Furthermore, we can see the benefit in investing in unit trust in term of liquidity where we can redeem all part of our units on any business day and the manager will purchase them for us.

To be added, investing in Unit Trust is hassle free. We need not to trouble ourselves with complicated decision making and arduous paperwork involved in investment in the securities market. Lastly, we can see the benefit in term of affordability. You only need a small amount of money to participate in a professionally managed portfolio of investment and enjoy the same benefits accorded to others when investing in high priced securities. At the same time, you can also reap better returns from a portfolio of investment as opposed to the limited number of securities which one can invest individually. 

Unless a person has a very large amount of cash for direct investments in individual stocks, he may not be able to achieve a sufficient level of diversification. Losses in one or more of his stocks may substantially reduce the value of his portfolio. Unit trusts, on the other hand, have a diversified portfolio and losses in some of the stocks held are offset by gains in others. Nevertheless, a person with an undiversified portfolio may reap great returns if one or more of his stocks increase in value. Unit trust prices rise more gradually when some of its stocks' prices increases as the unit prices are based on the total value of the portfolio.

Fixed deposits are generally safe and the returns are guaranteed. Nevertheless the returns are generally lower and may be eroded by inflation. Unit trusts generally aim to achieve returns that are higher than fixed deposits but such investment carries the risk that losses may be incurred.

The Securities Commission is the main regulatory body governing the establishment and operations of unit trusts in Malaysia under the Securities Commission (Unit Trust Scheme) Regulations 1996. This requires that the Manager and Trustee execute a Trust Deed, registered with the Securities Commission. You may purchase a copy of the Trust Deed which is registered with the Securities Commission for inspection at the Manager’s office.

Malaysia introduced the unit trust concept relatively early compared to its Asian neighbours, when, in 1959, a unit trust was first established by a company called Malayan Unit Trust Ltd. The unit trust industry in Malaysia has therefore a history of more than four (4) decades. The development of this industry can be presented in chronological order as follows:


The Formative Years: 1959 -1979


The first two decades in the history of the unit trust industry were characterized by slow growth in the sales of units and a lack of public interest in the new investment product. Only five unit trust management companies were established, with a total of 18 funds introduced over that period. The industry was regulated by several parties including the Registrar of Companies, The Public Trustee of Malaysia, Bank Negara Malaysia and the Ministry of Domestic Trade and Consumer Affairs. The 1970s also witnessed the emergence of state government sponsored unit trusts, in response to the Federal Government's call to mobilize domestic household savings.


The Period from 1980 to 1990


This period marks the entry of government participation in the Unit Trust Industry and the formation of a Committee to regulate the unit trust industry, called the Informal Committee for Unit Trust Funds, comprising representatives from the Registrar of Companies (ROC), the Public Trustee of Malaysia, Bank Negara Malaysia (BNM) and the Capital Issues Committee (CIC).


The 1980s marked a significant development in the history of the industry when the Skim Amanah Saham Nasional (ASN) was launched by Permodalan Nasional Berhad (PNB) in 1981. Despite only 11 funds being launched during this period, the total units subscribed by the public swelled to an unprecedented level because of the overwhelming response to ASN. The 1980s also witnessed the emergence of more unit trust management companies, which were subsidiaries of financial institutions. Their participation facilitated the marketing and distribution of unit trusts through bank's branch network which widened investor reach.


The Period from 1991 to 1999


This period witnessed the fastest growth of the unit trust industry in terms of the number of new management companies established, and funds under management. The centralisation of industry regulation, with the establishment of the Securities Commission on 1 March 1993, coupled with the implementation of the Securities Commission (Unit Trust Scheme) Regulations in 1996 and extensive marketing strategies adopted by the ASN and ASB (Amanah Saham Bumiputera), played key roles in making unit trusts household products in Malaysia. Consequently, the total asset value of funds under management grew more than threefold from RM15.72 billion at the end of 1992 to RM59.95 billion at the end of 1996.


The period also saw greater product innovation and deregulation of the industry.Although the pace of growth of local unit trust funds has moderated since the financial crisis of 1997-1998, it has nevertheless maintained its upward trend.


The Period from 2000 to current


The unit trust industry has a very promising start to the 21st century. The industry recorded double digit growth for first 7 years, growing from RM43 billion in Net Asset Value (NAV) in Year 2000 to RM169 billion as at 31 December 2007. However, this strong growth has been punctuated by some extraordinary financial crisis in 2008, starting from the fallout of the subprime loans in the USA, bursting of the property bubble, the global credit crunch, the banking crisis and the rapidly falling share prices worldwide.


As at 31 December 2008, the unit trust industry saw its NAV dropping to RM134 billion. While the industry NAV has dropped by 20% over the last 10 months, the industry Net Asset Value to Bursa Malaysia Market Capitalization has increased from 15% to more than 20%. In relative terms, the unit trust industry drop is less severe than the fall in share prices in Bursa Malaysia due to the diverse nature of its assets.

(Federation of Investment Managers Malaysia (FiMM) (2003-2008))


      1. The Funds


The funds used are firstly, CIMB Principal Equity Aggressive 3 (CPEA 3) as the Local Equity where they has invested in CIMB Group Holdings Bhd, Malayan Banking Bhd, AMMB Holdings Bhd, Axiata Group Bhd, Public Bank Bhd, IOI Corporation Bhd, Genting Bhd, Maxis Communications Bhd, Sapura Crest Petroleum Bhd and Latexx Partners Bhd.


Secondly, CIMB Principal Emerging Asia (CPEA) as the Regional Equity where they has invested in Tracker Fund of Hong Kong TraH (Hong Kong), Samsung Electronics Co Ltd (Korea), Hang Seng Investment Index Fun (Hong Kong), Hyundai Motor Company (Korea), Lenovo Group Limited (Hong Kong), Samsung Fire & Marine Insurance (Korea), LG. Display Co Ltd (Korea), State Bank Of India (India), Nine Dragons Paper Holdings Li (Hong Kong), Parkway Holdings Limited (Singapore).


Thirdly, CIMB Principal Global Growth (CPGG) as the Global Equity where they has invested in Microsoft Corp (United States), Samsung Electronics(South Korea), Sanofi Synthelabo (France), Pfizer Inc Com (United States), Nestle S A Shs (Switzerland), Amgen Inc Com (United States), Siemens A G Ord (Germany), Telefonica Sa Eur1 (Spain), Novartis Ag-Reg Shs (Switzerland), Oracle Corp Com (United States).


Lastly, CIMB Principal Bond(CPB) as the fixed income where they has invested in Hyundai Capital Services, Bank Muamalat Malaysia, Malaysian Government, Special Power Vehicle, Teknologi Tenaga Perlis, Selia Selenggara Selatan, Syarikat Pengeluar Air Sungai, Ranhill Powertron Sdn Bhd, Malakoff Corp Berhad, Tanjung Bin Power Sdn Bhd.


1.2 Overview of Asset Allocation


Asset allocation is a diversification technique that aims to create an optimal portfolio of investments across asset classes for a given level of risk. The theory behind this is that every asset class has different correlation to its counterparts. There is no perfect portfolio as risks and returns cannot be known with certainty.  However, diversification does reduce the volatility of a portfolio and allows for more consistent performance under a wide range of economic conditions. 


There are two factors that you should take into consideration which are:


  1. Time Horizon


It is the expected number of months or year’s investor will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier or more volatile portfolio. In contrary, an investor saving up for a teenager’s college education would likely take lower risk because of the shorter time horizon.



  1. Risk Tolerance


It is your ability and willingness to lose some or all of your investment in exchange for a greater potential returns. An aggressive investor is more likely to take higher risk for a higher return. A conservative investor tends to favor investment that will preserve their investment capital.


Asset allocation mutual funds come in several varieties. Some people combine active and passive approaches in their total portfolio. This allows them to use passive management for highly efficient asset classes (where benchmark would be difficult to beat) and to exploit less-efficient asset classes by using active managers.(Bekkers, N. et all 2009)


Blake, et all (1999), Brinson, et all (1986); Brinson, et all (1991) and Ibbotson and Kaplan (2000) suggest that the main determinant of investment performance of mutual fund is the asset allocation, rather than stock selection. So that, asset allocation should be aims to maximize the return for any given level of risk, or reduce the risk for any given level of return, by allocating capital to different types of asset in suitable proportions.


1.3 Background of CIMB Wealth Advisors Berhad (CWA)


CIMB Wealth Advisors is a subsidiary of CIMB Group, housed under Group Asset Management. CIMB Wealth Advisors was incorporated in 1990 and at that time it was known as SBB Mutual Berhad. SBB Mutual Berhad has rebranded as CIMB Wealth Advisors Berhad on 9 November 2006 as announced by CIMB Group. Next, on January 2010, CIMB Group has annouced that CIMB Wealth Advisors Berhad has rebranded as CWA Berhad. CWA is under CIMB Principal Asset Management.


As at December 2009, the Group’s assets under management was at RM25.2 billion. The Group’s asset management activities are operated from CIMB-Principal Asset Management Berhad, CIMB-Principal Islamic Asset Management Sdn Bhd, CIMB-Mapletree Management Sdn Bhd, CIMB Standard Strategic Asset Advisors Sdn Bhd and CIMB Private Equity and Venture Capital.


While as at the end of 2008, the Group's assets under management stood at RM19.2 billion. This shows the expansion of asset under management for CIMB Principal Asset Management. (CIMB Principal Asset Management (2010))


CIMB Wealth Advisors was incorporated in 1990 and has since then grown into one of the largest retail distribution arms in the financial services industry with a dynamic sales force of about 4600 FiMM (formerly known as FMUTM) registered consultants and financial planners.

CIMB Wealth Advisors offers investment and financial planning advisory services through the distribution of best of breed mutual funds and other innovative products across asset classes from reputable fund houses. CWA create value for customers through our work value of “forward thinking”. CWA do this by being able to anticipate customer investment needs with the best selection of innovative products and professional advice. CWA philosophy is to create value for our customers; to enable our people to be true professional advisors; and to have integrity to speak and act honestly and sincerely to allow our customers to entrust their business to us.

As mentioned above, CIMB Wealth Advisors is a subsidiary of CIMB Group, housed under Group Asset Management. The synergy from the integration of the companies under the Group Asset Management brings together a powerful range of strengths that enable the development of innovative products distributed through multiple channels.

Building on CIMB Group’s solid foundation, CIMB Wealth Advisors has scaled new heights with its unit trust funds, investment services and a broader range of other financial services and instruments. Embraced in a bigger entity, CWA have gained greater economies of scale and market concentration besides having increased CWA competitive advantage in the financial services industry.

To meet investor's growing demand for a one-stop financial services solution provider, CIMB Wealth Advisors has expanded its products beyond Unit Trust alone.  CWA also offer a wide range of differentiated and innovative insurance protection solution underwritten by our strategic partner, AIA Bhd. and its subsidiary, AIA Takaful International Bhd.  CWA, at CIMB Wealth Advisors are poised at the forefront of the financial services industry, readily equipped with dynamic solutions to meet your financial needs.


CWA Group of fund is divided into 4 classes, that is:-

  1. EQUITY

Local

  • CIMB Islamic DALI Equity Growth Fund (formerly known as SBB Dana Al-Ihsan)

  • CIMB Islamic DALI Equity Theme Fund

  • CIMB Islamic Equity Aggressive Fund (formerly known as Lifetime Dana Mubarak)

  • CIMB Small Cap Fund (formerly SBB Dana Al-Azam)

  • CIMB-Principal Equity Aggressive Fund 1 (formerly known as SBB Strategic Equity Fund)

  • CIMB-Principal Equity Aggressive Fund 3 (formerly known as Future Goals Fund)

  • CIMB-Principal Equity Fund (formerly known as SBB Premium Capital Fund)

  • CIMB-Principal Equity Fund 2 (formerly known as SBB High Growth Fund)

  • CIMB-Principal Equity Income Fund (formerly known as SBB Equity lncome Fund)

  • CIMB-Principal KLCI-Linked Fund (formerly known as SBB Index-Linked Fund)

  • CIMB-Principal Small Cap Fund (formerly known as Hidden Teasure Fund)


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