Forming A Portfolio

After having a good understanding of what ETFs and unit trusts are and how they work (as covered in the Beginner section of ETFs & Funds School), the next step would be for an investor to apply that knowledge when forming his investment portfolio!
From a top-down perspective, there are 4 steps an investor should follow when forming an investment portfolio:
Step 1: Determine Asset Allocation
Step 2: Determine Intra-Asset Class Allocation
Step 3: Incorporate ‘Niche’ Requirements
Step 4: Choose Funds To Fit The Allocation

Step 1: Determine Asset Allocation

Broadly speaking, an investor’s asset allocation between the traditional equities and fixed income asset classes can be determined by identifying his risk tolerance (see diagram below).

*Maximum loss stated is not definitive and should be treated only as a rough guideline.

While there is no fixed definition for a conservative, moderately conservative, balanced, moderately aggressive and aggressive risk tolerance level, generally a risk tolerance of a maximum loss of no more than 10% over a 1 year period describes an investor with a conservative to moderately conservative risk profile. On the other hand, a risk tolerance that is typically above a 25% maximum loss over a 1 year period would be a description for an investor which is moderately aggressive to aggressive. That leaves behind investors who generally possess a risk tolerance of between a 10-25% maximum loss over a 1 year period—these investors may prefer a more balanced allocation between fixed income and equities!
As previously mentioned in Your Investor Profile, an investor’s risk tolerance would depend on both his willingness and ability to take on risk in his investments, which would differ based on the investor’s unique investment personality and financial circumstances. If you are unsure of your risk tolerance, fret not! Fundsupermart’s team of friendly investment advisors would be more than willing to assist you in determining your risk profile and your preferred asset allocation!

Step 2: Determine Intra-Asset Class Allocation

Upon determining your preferred allocation of fixed income and equities, the next step would be to determine your intra-asset class allocation (the allocation of various categories of equities and fixed income within each of these respective asset classes)! At Fundsupermart, we believe a good starting point would be for one to decide on his intra-asset class allocation based on the following broad categories:

Equities:

We typically advocate equities to be weighted according to economic representation rather than by stock market capitalisation. This is as market capitalisation is partially dependent on stock prices which at times could be driven by investor sentiment rather than entirely determined by the intrinsic value of companies. Thus, a portfolio weighted according to market capitalisation may not necessarily be a portfolio that is weighted according to value. The five markets chosen (US, Japan, Europe, Asia ex Japan, Emerging Markets) are markets which we believe will result in a well-diversified portfolio allocation. The markets also have a low correlation to each other which will lower overall portfolio volatility.

Fixed Income:

Given that the fixed income market is vast and much more varied as compared to the equity market, it difficult to come up with a single ‘best’ method in deciding on the intra-asset allocation of one’s fixed income portfolio. For instance, the fixed income market may be categorised by issuer (sovereign and corporate), credit quality (investment grade and non-investment grade), currency (local and hard currency) or duration (short term notes, short term bonds, mid-term bonds and long term bonds). Regardless of the intra-asset allocation method chosen, we suggest a mix of lower risk and higher risk bond segments rather than solely investing in either bond segment. This would give the fixed income portion of the portfolio a good balance of risk and return in accordance to the investor’s investor profile. Other factors to consider when deciding on one’s allocation within his fixed income portfolio include product availability as well as the expected returns (yield-to-maturity figures) for each segment to see if the allocation suitable.

Step 3: Incorporate ‘Niche’ Requirements

While we recommend investing according to one’s decided allocations of asset classes and investment categories within asset classes, we think that a small portion of an investment portfolio may be allocated to the investor’s ‘best bets’ which are likely to be more narrowly-focused and potentially carry higher risks, for instance single country funds and sector-based funds.
To facilitate the above, investors may consider allocating 10-20% of their investment portfolio to their ‘best’ or ‘niche’ bets (supplementary portion of their portfolio) and 80-90% weight to investments that are weighted according to asset class and investment categories within the asset classes (core portion of their portfolio).

Step 4: Choose Funds To Fit The Allocation

Upon deciding on one’s asset and intra-asset allocation as well as the allocation of the various investments in the supplementary portion of his portfolio, the final step in creating one’s portfolio would be to select the funds to fit the respective allocations. Below are some of the guidelines which investors may consider when selecting funds to fit their allocation!

Past Performance

While past performance is not necessarily indicative of future performance, it remains no doubt, as one of the most objective factors in assessing a fund manager’s credentials, particularly in the realm of actively managed funds (less so for ETFs which largely track a particular index). When looking into a fund’s past performance, both the magnitude and consistency of returns across cumulative performance periods as well as multiple calendar years should be considered.

Qualitative And Other Factors

In conjunction with past performance, we recommend considering other factors such as the expense ratio and qualitative factors such as the investment objective and strategy of the fund to help capture some intangibles that might not be forthcoming in just running a quantitative screen. A lower expense ratio typically reflects lower cost to the investor, allowing more of his monies to be compounded, while a look into the investment objective and strategy of a fund would reveal the alignment of the fund’s investment philosophy and strategy to an investor’s unique needs and preferences. For instance, certain funds are more focused on generating regular income for investors and thus invest largely in high dividend paying equities. These funds would likely appeal more to investors who seek income rather than growth or capital appreciation.

CPF-Registered Funds

Apart from assessing a fund’s past performance and its qualitative factors, investors may like to consider factors such as whether the funds are CPF-Registered, which would imply that CPF monies may be used to invested in the said funds.

A Wide Range Of Resources Available To Facilitate Investing Decisions!

To assist investors in making informed investment decisions, a good depth of information on the various funds on the platform are made readily available. For instance, on any specific fund’s information page, description on a fund’s investment objective, basic information such as Fundsupermart’s risk rating of the fund, its dividend amount (if it the fund distributes dividends), and fund charges, to name a few, are stated in an easily-digestible format! Several fund documents such as a fund’s product highlights sheet, prospectus, annual report, and its latest factsheet are also easily downloadable from the fund’s information page as well. Aside from the good depth of information on each of the funds, investors may utilize the various tools and calculators on the platform to further assist them in the screening of the funds! For instance, the fund selector would be useful in narrowing the vast array of funds available through various filters, while the chart centre would allow an investor to compare the returns of various funds and indices as graphs plotted on a single chart over different time periods. Articles, including those written by the Research team at Fundsupermart, are constantly posted on the platform to provide investors with insights on market updates, the latest investment trends and possible investment opportunities, Fundsupermart’s views on recent market events…and the list goes on! Furthermore, Fundsupermart’s investment views and recommendations are also reflected in our Recommended Funds list and Star Ratings. In addition to the good depth of fund information available, user-friendly tools and calculators, as well as investment-related articles, the Fundsupermart’s friendly investment advisors stand readily available.