Are your investments ‘diversified’? Are you sure?

Economy October 03, 2017 01:00

By SPECIAL TO THE NATION

SOME 380 per cent would be an exquisite number if it were one’s own portfolio return, but in fact it is how much Foreign Investment Funds (FIFs) in Thailand have grown since 2007. As investing becomes more popular and much easier than previous, and the investment world becomes more globally connected, Thai investors have started to seek opportunities elsewhere.



However, do we Thai investors really realise what our investment fund’s underlying assets are? Are there any untold (intentionally or unintentionally) risks associated with our FIFs?

“Diversification” is usually pronounced the single simplest and most effective thing that every investor could do to achieve the highest risk-adjusted return. Nowadays, Thai investors’ portfolios look more diversified with help from asset management companies that offer various choices of foreign investment funds. There are options to invest in different asset classes such as equities, fixed income and commodities, along with choices of different investing styles such as growth or value, and different geographical focuses such as US, Europe, Asia and “emerging” markets.

Generally, it is costly for Thai investors go it alone in investing in foreign securities, since some investment vehicles might require hefty minimum initial investments of around US$1 million (Bt33 million). More recently, local investors – whether institutional or individual – could invest globally through funds in Thailand with a minimum capital requirement as low as Bt1,000. And with Bank of Thailand regulations opening up to allow more fund outflow, Foreign Investment Funds (FIF) have gained in local popularity, such that total net asset value (NAV) of FIFs in Thailand jumped tremendously from a mere Bt0.23 trillion in 2007 to Bt1.13 trillion at the end of August 2017.

With about 84 per cent of the total net asset values of FIFs classified as “global” investment funds, you might think that Thai investors’ portfolios are well-diversified by investing “worldwide” through these funds. Certainly, a quick scan through the prospectus documents of these funds leaves the impression that these “global” funds invest around the world. But deeper scrutiny, reveals a hidden “concentration” risk that could be lurking, a potential danger for unaware investors.

We found in an analysis of the holdings of so-called “global” funds within the top 10 NAV, that most were quite concentrated in terms of the country of investment destination. Surprisingly, most of these funds invest almost 70 per cent in the US. I wonder how many investors realise that their portfolios, which they believe to be well diversified, are in fact largely exposed to specific-country risk?

For instance, after Trump’s election-victory speeches last year, his pro-growth agendas rattled the financial market by triggering a US treasuries sell-off and a US small-mid cap stocks rally which significantly fluctuated funds’ NAV.

Looking forward, there is another critically important risk to be considered, especially for securities in the US that now dominate Thailand’s “global” FIFs. It is the Fed’s “tightening monetary policy”, specifically the Fed’s rate hike and its balance-sheet run-off. Twin effects from the Fed’s rate normalisation and balance-sheet reduction would heavily affect the NAV of funds investing in the US fixed income.

On top of that, investors would likely face a currency risk if the funds were not fully hedged. True, unhedged FIFs could yield nice returns on local currencies. However, when converted to Thai baht, the returns could be less rosy given that the baht seems to be appreciating over the long term.

What every investor should do prior to buying any FIFs is to clearly understand what the underlying assets are in order to have a clear picture of risk exposures. Then everyone could obtain the highest risk-adjusted returns from well-diversified investments.

This article is co-authored by DUANGRAT PRAJAKSILPTHAI and POON PANICHPIBOOL.They can be reached at tmbanalytics@tmbbank.com

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.