Strengthening the bedrock

Chairman of OCBC Wealth Panel Marc Van de Walle gives his insights on unit trusts, or funds, as the core of portfolio diversification

Diversification is essential to any investment portfolio. Put simply, a prudent investor should own many different instruments of various asset classes, such as equities, bonds and perhaps real estate so that the sudden decline of a single holding will not result in an unbearable loss.

An instrument that helps an investor diversify his or her portfolios easily is the unit trust, which pools a group of investors’ money and buys stocks and bonds that they may not able to buy individually.

With an outlay of as little as $1,000, an investor gains immediate access to a diversified portfolio of assets.

For investors keen to invest in bonds, diversification is especially important for two reasons, says Mr Marc Van de Walle, Head, Group Wealth Management, OCBC Bank Chairman, OCBC Wealth Panel.

“First, the returns from bonds are capped on the upside by the yield of the bond, unlike equities where returns are uncapped,” he explains.

“Second, an investor may risk losing a substantial portion of his portfolio should he have concentrated exposure in a few bonds.

“For instance, if the customer holds a portfolio of five unique bonds and a single issuer unfortunately defaults, he risks losing 20 per cent of his holdings.

“With this combination on capped upside and large downside, an investor cannot expect much reward from a concentrated portfolio in bonds.”

Constructing a well-diversified bond portfolio requires large amounts of money because the minimum investment for a single bond is often more than $200,000. Here is where unit trusts can play a significant role.

A different product shelf

Some bond funds on OCBC’s product shelf, such as Templeton Global Bond Fund, Fidelity Asia High Yield Fund and Allianz U.S. High Yield Fund, each invests in over 200 different securities.

Unit trusts can offer other forms of diversification as well. For instance, multi-asset funds can offer the individual retail investor access to a whole range of asset classes that are usually only available to larger institutional investors, says Mr Van de Walle.

These include bank loans, preferred stocks, real estate vehicles and listed master limited partnerships.

Meanwhile, funds can have strategies tailored to the specific needs of investors, such as income-producing funds.

Diversification can be easily achieved within or across asset classes, geographies and sectors through unit trusts, he says.

Multi-asset approach

OCBC has been advising customers to adopt a multi-asset approach to help mitigate potential downside risks. This strategy shows its merits in periods of market volatility, such as the one experienced in the third quarter.

To avoid chasing the market on a high and cutting positions when prices are falling, investors must stay in the market for the long haul, Mr Van de Walle says.

OCBC customers are able to do that by investing in multi-asset funds that allow the fund manager to allocate among the different asset classes in line with market conditions, providing diversification while earning income along the way.

“Investing in such funds eliminate the need for any reallocation between funds, hence reducing costs while staying invested through the course of higher volatility,” he explains.

OCBC’s preferred multi-asset strategy fund Blackrock Global Multi-Asset Income fund (USD) dipped 3.61 per cent over 3Q2015, outperforming a pure equity approach that saw a deeper decline. Global equity index the MSCI World Index dropped by 8.31 per cent over the same period.

In addition, OCBC has also seen customers benefiting from investing in European equities through actively managed funds.

The currency-hedged class allows investors to reduce unnecessary risk from a weak Euro while benefiting from European companies that gain from a weaker Euro.

The unit trust is therefore a relatively hassle-free solution that allows a customer to benefit from instant diversification and potentially reap higher returns, Mr Van de Walle says.

“Think of it as outsourcing your investment needs to a professional with the capacity to manage your investments expertly,” he says, adding that the additional costs are a small price to pay for peace of mind.

Personalising a portfolio

At OCBC, customers and Premier Relationship Managers have access of rich sources of information which are supplied by the bank’s Wealth Panel.

The Panel provides financial insights and analysis of key economic trends that enable the Premier Relationship Manager to personalise each customer’s portfolio and review it regularly.

In my view
What is the best fund that you have ever bought?

“I first started investing in unit trusts in the early 1990s, right out of university. I understood the benefits of diversification, but did not have enough savings to diversify enough in my own portfolio. Also, I wanted to gain access to emerging markets, which was impossible without funds.

I would say there is no such thing as a “best fund” because each fund achieves a purpose in a global portfolio and funds will perform differently in different market conditions. But I personally like the Blackrock Global Asset allocation fund, a unit trust which I have been holding for 10 years now. It has delivered steady returns over market cycles, with low volatility. It is an anchor in my investment portfolio.”

Mr Marc Van De Wale
Head, Group Wealth Management, OCBC Bank Chairman