Portfolio Management

1. Practical Investment Issues

Taking a closer look at our selected funds, the Janus Henderson Global Technology Fund (HENGBTI) invests in a globally diversified portfolio of technology-related companies, while the United Asian High Yield Bond Fund SGD Acc. (UAHYBSA) invests primarily in diversified high yield fixed income and debt securities, including money market instruments, issued by Asian corporations, financial institutions, government and government agencies. Thus, our portfolio consists of a broad range of financial instruments, including equities, bonds, and money-market instruments.

Within each fund, rigorous fundamental analyses are consistently performed, while credit analyses and credit diversification are carried out on the fixed-income instruments, so to add value to the fund and to reduce unsystematic risks. For detailed calculations of this section, refer to Excel spreadsheet tab “5. Practical issues”.

5.1. Historical fund performance and Management team

Both funds are managed by experienced teams and they are able to outperform the market index (MSCI World) in general as reflected in the past record. However, past performance of the Fund or the Manager are not necessarily indicative of the future or likely performance of the Fund or the Manager.

5.2. Actual Returns after Sales Charges

Both selected funds in our portfolio are open-end standalone unit trusts. Thus, the funds stand ready to redeem or issue shares at the NAV with sales charges applicable to both purchases and redemptions. To better understand the funds’ actual returns which were subject to sales charges, front-end load and expense ratio were obtained from their prospectus to compute the actual return.

After deducting front-end load and relevant expenses, the realizable annual return of the constructed portfolio was 3.9%, as compared to the 9.3% before sales charges. Sharpe ratio has decreased severely from 2.07 to 0.54 (-74%). This suggested that one should always take the sales charges into consideration when making an investment decision on funds.

UAHYBSA charged both a lower front-end load and expense ratio than HENGBTI. Considering that HENGBTI was able to generate a significant higher return than UAHYBSA, HENGBTI was charging higher fees for its active management. Despite that the actual return of UAHYBSA was significantly lower than HENGBTI, the portfolio chosen by our group assigned majority of the portfolio weight to UAHYBSA, because it helped the portfolio to achieve a larger Sharpe ratio due to its low volatility.

5.3. Fund Risks

We proceeded to calculate the funds’ individual systematic and idiosyncratic risks. Beta was first calculated by regression against benchmark. Subsequently we computed their systematic risk and idiosyncratic risks. Systematic risk is inherent to the entire market, thus non-diversifiable but only be mitigated by hedging. Idiosyncratic risk is also called company-specific risk, which is diversifiable.

Upon further examination, we discovered that UAHYBSA primarily comprised securities that were non-investment grade or unrated. Non-investment grade would include those securities with a long-term credit rating of below “BBB-” by Standard and Poor’s, “Baa3” by Moody’s Investors Service, “BBB-” by Fitch Inc, or their equivalent. This implies that these securities may not have adequate capacity to meet its financial commitments and adverse economic conditions or changing circumstances are more likely to weaken the its capacity to meet its financial commitments. For instance, the trade war between China and US could have a significant impact on the performance.

In addition, default risk is further amplified as Asian markets are subjected to greater volatility than developed markets. Hence the actual underlying risk might be higher than the risk captured in the calculated volatility. A rough estimate of its beta for the past 3 years was -0.07, suggesting that the returns of UAHYBSA was moving in the opposite direction as the market. As the magnitude of its beta was very small, the returns volatility was almost independent of the market movement. The major source of risk was fund-specific risks, possibly due to the large proportion of non-investment grade bonds.

While on the other hand, beta for HENGBTI was estimated to be 0.92, suggesting that the fund moved in the same direction as the market index, but with slightly less fluctuations. The magnitude of beta suggests that HENGBTI was exposed to higher market risk as compared to UAHYBSA, as more than 85% of the fund’s capital were invested in technology companies in the United States and China, whose market conditions would have a materially significant impact on the overall market. Meanwhile, one should also consider the significant amount of specific risks related to the technology industry. The technology-related industries are exposed to greater risk and market fluctuation than investment in a broader range of portfolio securities covering different economic sectors. Technology, technology-related, and telecommunications industries are also subject to greater government regulation than many other industries. Thus, changes in government policies may have adverse effect on the industries this fund concentrated in. Scientific and technological advances are also less predictable.