Cash is not king when it comes to investment

All the cash - $528 billion at the end of January - is earning next to nothing sitting in the banks, reports TEH HOOI LING
 06 Mar 2013 09:58

Mr Tan: Dilemma facing many investors - investments at a standstill but goals remain the same

Time to take stock

WITH their judgments clouded by a flawed assessment of risk and return, retail investors who opt for the safety of cash will experience an erosion of their purchasing power and deprive themselves of a chance to participate in a potential increase in wealth, said William Tan, Franklin Templeton's director of retail fund distribution for South-east Asia.

There was $519 billion in cash sitting in Singapore banks as at end-December last year. This rose to $528 billion at the end of January 2013. "If you stack that amount in $100 bills, the height will be two-and-a-half times that of the Singapore Flyer," he said.

All this cash is earning next to nothing in the banks. "This is the dilemma facing many investors - their investments are at a standstill but their investment goals remain the same," noted Mr Tan at a media conference this week entitled "Time to take stock".

According to data compiled by Morningstar, investors have been taking funds out of Asian equity mutual funds in each of the past five years. In total, some US$113 billion (S$141 billion) has been withdrawn from the funds.

At the same time, funds have been flowing into bonds. Globally, between 2006 and Feb 12, 2013, US$823 billion has poured into bonds, while US$562 billion has been drained from the equities market, data from BofA Merrill Lynch Global Investment Strategy and EPFR Global showed.

Such behaviour can be explained by human being's psychological biases. One, people in general are strongly influenced by what is personally most relevant, recent or dramatic. As the stock markets and the global economy have gone through some upheavals in the past few years, "investors continue to remember the bad stuff and are continuing to avoid equities", said Mr Tan. Two, people are more averse to losses than to risks. "If investors wait for data that the economy has improved, they would probably have missed the first nine months of the run-up," he said. And finally, investors are herd-like; they feel safe if they just follow what everyone else is doing.

Many investors have been flocking to bonds and deserting equities. This must be the safe thing to do, so goes the flawed reasoning. According to Mr Tan, of the money Franklin Templeton attracted over the past six months, only 20 to 25 per cent opted for equities, with the rest going into bonds. Still, that's an improvement from the 5 to 10 per cent which were allocated to equities in the previous 18 months. Overall, fund flows has increased by some 20 to 30 per cent in the past six months.

As investors' fears of losses linger, they have missed a few mega trends that are happening right before their eyes.

One is the massive urbanisation of the world's population, especially those in the emerging markets. With urbanisation comes new demand and replacement demand. Infrastructure and housing need to be built. The middle-income group will grow. Mr Tan highlighted China and Indonesia as two countries with huge consumer potential.

Despite the run-up in the market in the last six months and the increased fund flows into equities, Mr Tan reckons that valuations for equities are still not excessive. "Investors are starting to realise that the fundamentals of some of the companies are good, they have solid cash positions etc. But in terms of funds flow, and the push towards higher valuation, we are not there yet. We are just at the start of it. It is still a good time to enter the market," he said.

But risks still abound. "You have to take risk if you want potential return. You just have to manage the risk," he said.

Risks and market volatility is one reason why allocation to bonds continues to be necessary. "Fixed-income instruments dampen the volatility of one's portfolio. Volatility will continue to be in the market," said Mr Tan.

He concluded that Franklin Templeton takes the 3R approach to managing risks - recognise the risks, take rational risks and take risks that one will be rewarded for.