Thursday, December 18, 2008

Unit Trust (3) - Constructing a Portfolio

I attended a wedding dinner last Sunday and met my ex-classmates. One of them shouted across the table at me and asked "Hey Adrian, if I got $100k now, what shall I invest and make the most money?" Everyone was waiting for my answer, expecting me to give them some stock tips. I stare back at my friend and replied,"I don't know. Let me know if you have the answer."

I normally help my clients invest via a portfolio. I cannot tell exactly what you should buy today and sell tomorrow. I adopt an investment process and I do not speculate for high returns. Thats one reason I never able to sell to an uncle or auntie in their 50s who just want quick money.

Today, I like to share how I help my clients construct a portfolio. Sounds academic but its what I really do.

1) Going through a Fact-finding
a) Understanding client's short, mid and long term financial objectives
b) Understanding client's current assets and % that will be used for investment
c) Understanding client's abiity and need to take investment risk
d) Understanding client's time horizon and Risk profile

2) Asset Allocation
a) Grouping my clients to their risk level from Conservative to Agressive
b) Setting a target asset allocation to each group. Example, Agressive portfolio is 80%equity;20% fixed income.
c) Setting a band in their asset allocation.
Eg Agressive investor 60%equity - 90% equity
* In economic downturn when our view is bearish in the near term, we will reduce the equity portion gradually from 80% to minimum 60%. We will gradually move back to as high as 90% when economy stablises.

3) Choosing the sectors by Geography and Industry
a) Split the equity portion into Core and Satellite
* My Core Portfolio are normally 2 global and 1 asia fund
* My Satellite is normally 1 Country specific fund and 1 theme fund
b) Split the Fixed Income to Bonds and Money Market
* Normally 1 global and 1 local bond
* The money market fund is kept for tactical allocation in short term

4) Choosing the specific fund manager
a) My selection criterias are:
i) Consistency of performance over 1,3 and 5 years
ii) Fund Size and Expenses Ratio
iii) Comparing the Alpha, Beta, Standard Deviations and Sharpe Ratio with peer funds of comparable performance
iv) Understanding the experience of the fund manager and check his history, if any.
v) I normally avoid new funds with less than 2 years of track record

5) The ongoing process
* After the time consuming part of funds selection, our portfolio are somehow similar for most of our clients. The smaller the investment amount, the lesser the funds.
* We have our regular investment meetings among advisers to share our respective economic views.
* We adjust the clients' portfolio by reallocating the asset allocation within the specified band.

The investment process is to ensure my clients stay invested and avoid timing the market excessively. My role is to help manage risk, emotions and expectations of my clients and not to help them make quick money.


Anonymous said...

My answer will be use half to buy Gold and half to buy Silver. You will be so much richer this time next year.

Anonymous said...

Shouldn't you be using ETF whenever possible?
Funds expense ratio is too high and it eats away at returns.

Anonymous said...

To December 19, 2008 1:55 PM,

ETF cannot help Adrian earn anything unless he charges fee. But if he charges fee, many clients may not want to pay for those fee. you see, singaporeans are stupid people - they love paying commissions but refuse to pay a separate advisory fee although both are similar in magntitude but often the advisory fee is lower than commission.