Friday, 4 October 2013

Are Unit Trust Fund Managers Prepared for Budget 2014??

Despite the recent temporary US Government shutdown affecting the US stock market, the expected spillover effect on our local Bursa did not materialize entirely. The second factor which is the impending announcement of Budget 2014 looked set to take center stage instead. Majority consensus are expecting that the budget, once announced would have an adverse impact towards the stock market. 

With the majority of my investment portfolio allocated to equity based unit trust, I thought it might be a good idea to find out how fund managers are preparing their strategy to maximize the opportunities created from this scenario. 

The simplest verification is to check the movement of a fund's asset allocation. In this post I've decided to select a few of the top performing equity based unit trust funds for the purpose of this verification. However I decided not to provide the name of the funds in order to prevent any accusation of being bias. 

Case Study 1 : Top Performing Equity Fund "A"

Asset Allocation Movement from 30th June 2013 til 31st August 2013:

As of 31st August 2013, the cash allocation (liquidity) for Fund "A" is at 34.10% of the Total Fund Value. In comparison to the month of July and June, this is a clear indicator that the fund manager is anticipating an opportunity to purchase stocks at bargain prices. Despite not having the data for September 2013, I expect the liquidity for this fund to remain the same or perhaps higher. 

Generally, the increase of cash/liquidity is due to the following possibilities:
  1. Fund manager decides to take profit by selling certain stocks. 
  2. Fund manager decides to cut loss by selling certain stocks.
  3. Fund manager is expecting/predicting that the market outlook to be negative, hence he/she starts to liquidate their stock holdings to generate cash for opportunity/bargain buying. 
In this case, I believe the rise in liquidity for Fund "A" is highly due to Possibility Number 3

Never the less in order to reaffirm that the rise in liquidity is due to the upcoming Budget 2014 announcement, we shall take a look at the asset allocation of another top performing equity fund from a different company.

Case Study 2 : Verification via Top Performing Fund "B"
a) Asset Allocation Movement as of 31st May 2013

May 2013 - Cash Allocation : 9.9%

b) Asset Allocation Movement as of 31st July 2013

July 2013 - Cash Allocation : 33.1%

c) Asset Allocation Movement as of 31st August 2013

August 2013 - Cash Allocation : 41.0%

Fund "B" indicates that the cash allocation of their fund has risen from 9.9% in May 2013 to 41.0% in August 2013. The large allocation of cash/liquidity indicate that fund manager for Fund "B" is expecting a drop in the stock market which would create numerous opportunities to investing into stocks at low prices. 

In fact, Fund "B" has the highest cash allocation among its rival funds in this category. With only 59% invested into stocks, in an advent that the stock market drops by 10%, Fund "B" will only suffer losses of approximately 5.9% of the total value of this fund.

By having a large cash/liquidity on standby, Fund "B" becomes an attractive investment option for investors as it creates an opportunity to generate higher returns through future gains made from purchasing stocks at low prices.

Based on the above, I strongly believe that there is an opportunity for investing into equity based unit trust fund after Budget 2014. While there is no guarantee that the Budget 2014 will create a negative impact on the stock market, the increase in cash allocation of top performing funds are pointing to that outcome. 

That aside, some readers might also ask why invest into unit trust when we know that the opportunity is there to profit directly from investing in stocks? In all honesty, the choice of investing depends on each individual, you can read mine HERE.

The bottom line for an investor when it comes to selecting an investment vehicle is to be comfortable with the risk that comes with it. There's no reason for one with low risk tolerance to join the bandwagon of high risk stock investing just because there's a promise of higher returns. If you look closely there are other available investment options that you can enjoy slightly lower returns in exchange for a peaceful sleep at night. 

Cheers and Happy Investing!

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