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FSM Portfolios: Little Pain In November December 6, 2011
This article provides a quick overview of the recent market happenings as well as some of the key factors that have influenced our five recommended portfolios’ returns.
Author : iFAST Research Team

Untitled Document

Market Summary for november 2011
In November, global stock markets around the world gave up some of their extraordinary returns from October. Following the MSCI AC World's hefty rise of 6.35% in October, the index lost a mere -0.91% in November. Asia ex Japan led the regions in losses, losing -6.20% for the month. Heavy selling in India, Taiwan, Hong Kong and China saw the 4 bourses lose -13.12%, -8.04%, -7.30% and -6.12% respectively. Amongst the developed markets, only the S&P500 posted positive returns, performing 1.86% for the month of November. [All returns are in SGD terms]

Currency movements saw the USD and JPY gain 1.60% and 3.04% respectively against the SGD, while the EUR fell -1.10% against the SGD.

us "super-committee" is no super hero
IThe US congressional “supercommittee” (made up of six Republicans and six Democrats) which had been tasked to formulate plans to slash the US federal budget by at least USD 1.2 trillion in order to reduce the deficit has failed in its task as both sides have failed to agree on tax increases. 23 November 2011 had been set as a deadline for a credible plan to be agreed upon by the committee, and with the failure to meet this deadline, a set of public spending cuts totalling USD 1.2 trillion over the next decade will be implemented come January 2013, with defence spending cuts expected to contribute to a USD 54.7 billion reduction per year, and domestic spending cuts like Medicare payments, Justice Department funding and Border patrol contributing another USD 54.7 billion each year. Political impasse on the US debt burden has been cited as a key reason for S&P’s downgrade of the US sovereign credit rating earlier this year, and while the ongoing failure to agree on deficit-reduction measures may result in yet another credit rating downgrade (whether by S&P or another credit ratings agency) for the US, the ability of the US to print its own currency as well as the significant dependence on the USD in global trade should sustain demand for US government debt, and we do not think that risks of a debt default have increased materially.

Despite the disappointment of political bickering, US economic data has been on the uptrend. The NFIB Small Business Optimism index read 90.2 in October, narrowly but nonetheless higher than expectations of a 90 point level reading, following a level of 88.9 in September. With small businesses accounting for over 99.7% of employer firms, employing 50% of all private sector employees, paying 43% of total US private payrolls and contributing approximately 50% to nonfarm private GDP, a rebound in optimism in small business sentiment is key to the continuing economic recovery in the US. Other positive economic data include weekly initial jobless claims on a downtrend and rising retail sales where according to ShopperTrak, Black Friday sales in the US amounted to USD 11.4 billion, up 6.6% year-on-year, the largest annual increase since 2006-2007, which saw an 8.3% gain.

The latest revision to 3Q 11 GDP in the US brought down the rate of growth from 2.5% (in the advance estimate) on a quarter-on-quarter annualised basis to just 2%. Notably, changes in private inventories deducted a hefty -1.55% from the overall growth figure – the single-largest detractor from growth in 3Q 11 - suggesting that the business climate turned uncertain in 3Q 11, resulting in a preference for companies to draw down on existing inventory. Nevertheless, inventory effects may reverse in 4Q 11 which could add significantly to GDP growth, possibly resulting in the US economy posting a stronger expansion compared to the +2.3% currently expected by the consensus.

european 3Q 2011 GDP'S GROWTH SURPRISE
Eurozone advance estimates for 3Q 11 GDP growth came in at +0.2% quarter-on-quarter (in line with consensus estimates); on a year-on-year basis, this represents growth of 1.4%. The core Eurozone economies of France and Germany provided the expansionary firepower which offset contractions in Greece, Portugal and the Netherlands, helped by stronger-than-expected consumer spending and industrial production. We previously held a view that 3Q 11 would see the Eurozone contract on aggregate, and are “glad” to have been proven wrong in this respect, as the ability of the Eurozone to eke out an admittedly small expansion in the face of the ongoing debt crisis highlights the stark disconnect between financial market sentiment and economic reality.

Nevertheless, we continue to observe deteriorating leading indicators in the Eurozone, and expect that a mild recession is inevitable, something which the consensus has been increasingly willing to admit in recent months. Both the European Commission and ECB have warned of an impending recession in the Eurozone, while a recent BofA Merrill Lynch survey of fund managers in November indicated that a net 72% of European respondents in the survey expect a recession in Europe in the coming 12 months, almost double the 37% in the October poll. In light of the 3Q 11 growth figures and having had time to digest the latest round of earnings of Stoxx 600 companies, we have made upward adjustments to European equity earnings for 2011, details of which can be found in European Review: 3Q 2011 GDP Dodges the Bullet.

Economic data across the continent continues to be disappointing with consumer, economic, industrial, and services continuing to deteriorate as Europe’s debt crisis continues to sap sentiment.

Asia ex japan & global emerging markets ease monetary policy
Across much of Asia and Global Emerging Markets, central bankers have been initiating accomodative monetary policy as economic growth begins to slow as a result of the crisis in Europe. Economic data has been pointing to growth slowing with industrial production falling in Korea and Japan, exports slumping in Singapore, Taiwan and Thailand, just to mention a few. Attempting to counter slowing economic growth, central bankers from Thailand, Indonesia, Brazil have either begun or continued to cut rates in an attempt to bolster slowing growth. China’s central bank has lowered the reserve ratio requirement (RRR) for some relatively small rural lenders as a credit squeeze arising from aggressive monetary tightening this year has forced many SMEs into bankruptcy. The central bank's latest move to cut the RRR by 50 basis points on the last day of the month is but yet another example of policy makers' focus on growth.

With inflation unlikely to spike higher into 2012 given the high-base effect of 2011 as well as softening commodity prices, central bankers in Asia ex Japan as well as the Global Emerging Markets have more room for manoeuvre as many of them had been hiking rates previously in an attempt to curb inflation. Healthy national balance sheets will also offer these central bankers a wider range of policy tools as compared to their counterparts in the West.


Table 1: performance for the past 6 months
Monthly Returns Conservative Moderately Conservative Balanced Moderately Aggressive Aggressive


-2.2% -2.9% -3.3% -3.9%


3.5% 4.7% 6.0% 9.3%


-1.3% -1.1% -2.6% -2.0%
31-Aug-11 -2.7% -4.0% -4.6% -6.5% -7.7%
31-Jul-11 -0.1% -0.5% -0.9% -0.7% -1.1%
30-Jun-11 -0.5% -0.9% -1.2% -1.2% -1.6%
Source: iFAST Compilations

Table 2: Portfolio returns overview

Moderately Conservative
Moderately Aggressive
Rolling 1-year chain-linked performance -2.5% -3.4% -3.8% -3.3% -5.0%
Year-to-date -2.2% -3.9% -5.0% -8.3% -7.9%
2010 6.2% 6.6% 6.8% 4.4% 4.3%
Chain-linked performance since revamp (end Aug 2009) 9.1% 8.6% 8.4% 2.1% 3.8%

Source: iFAST Compilations (as of end Nov 2011)

last month's winners are this month's losers

The failure of the Super-Committee in the US to come to an agreement as well as continued problems in Europe saw most markets post losses, with Asia and the Emerging markets taking the brunt of losses as markets made a return to risk aversion. Riskier segments of fixed income underperformed as spreads widened due to yields on traditional safe haven securities such as US Treasuries falling as investors increased their holdings of such assets.

With markets staging a broad based retreat, all five recommended portfolios lost abit of the ground gained in October, with the Aggressive posting the largest loss of -3.9% as its all-equity allocation saw the retreat in equity markets inflict yet another monthly loss. With just a single month left to go for 2011, positive returns are still within reach following what has been a poor year for financial markets as a whole. Our long-standing call to underweight bonds vis-à-vis equities remains intact, given that yields remain low and equities continue to be cheaply priced.

Among all the funds within the five portfolios, the best performing funds for October was the UOB United Asian Bond Fund SGD which returned a paltry 1.3%. Aberdeen Global Emerging Markets, Henderson Hzn Pan Euro Eq A2 Eur and FTIF-Templeton Glb Bond A(mdis) SGD-H1 funds were amongst the biggest losers with losses of -5.8%, -3.9% and -3.9% respectively. FTIF-Templeton Glb Bond A(mdis) SGD-H1 losses can be attributed to the currency losses on its underlying holdings of Asian Sovereign bonds which saw their currencies depreciate against the USD.

For more details of the fund performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.

Table 3 shows our current funds selection as well as their respective weights for each of the five FSM recommended portfolios. You may refer to table 4, 5 and 6 under the “Appendix” section for more details on the asset allocation breakdown.

Table 3: Latest Portfolio Allocation
Categories Recommended Funds C MC B MA A
Singapore / SGD Bias UOB United SGD Fund 24.0% 18.0% 12.0% 10.0% -
Global Bonds FTIF-Templeton Glb Bond A(mdis) SGD-H1 12.0% 9.0% 6.0% 10.0% -
Asian Bonds United Asian Bond Fund SGD 20.0% 15.0% 10.0% - -
Emerging Market Debt UOB United Glb Emerging Mkts Portfolios S$ 12.0% 9.0% 6.0% - -
High Yield PRU Monthly Income Plan Cl A 12.0% 9.0% 6.0% - -
Global Equity Aberdeen Global Opportunities 10.0% 28.0% 42.0% - -
Global Emerging Market Equity Aberdeen Global Emerging Markets 10.0% 7.0% 12.0% 30.0% 38.0%
Asia Ex-Japan Equity Aberdeen Pacific Equity - 5.0% 6.0% 10.0% 12.0%
US Equity Fidelity America USD - - - 20.0% 25.0%
European Equity Henderson Hzn Pan Euro Eq A2 EUR - - - 16.0% 20.0%
Japan Equity LionGlobal Japan Growth Fund - - - 4.0% 5.0%
Source: iFAST Compilations
NOTE: C – Conservative, MC – Moderately Conservative, B – Balanced, MA – Moderately Aggressive, A - Aggressive

Start with $20,000
Investors should be able to follow the target allocation in Table 3 with S$20,000 as starting capital. The research team at iFAST will be providing the portfolio review on a monthly basis at the start of each month.

Latest Portfolio factsheets
The portfolios' factsheets are updated on a monthly basis with monthly factsheets archived up to 1 year.

previous months portfolio summary

  1. October 2011 - FSM Portfolios: Oktoberfest Returns!
  2. September 2011 - FSM Portfolios: September's Slumber
  3. August 2011 - FSM Portfolios: August's Summer Sale
  4. April 2011 - FSM Portfolios: April, the best trading month year-to-date
  5. March 2011 - FSM Portfolios: Developed markets equity dragged overall performance
  6. February 2011 - FSM Portfolios: Diversification does reduce systematic risk
  7. December 2010 - FSM Portfolios: And the winner is….. the BALANCED PORTFOLIO!
  8. November 2010 - FSM Portfolios: Performance mostly flat on weak sentiments
  9. September 2010 - FSM Portfolios: Sep was probably the best month for most equity markets in recent times
  10. August - FSM Portfolios: Equity market volatility evident in portfolio performance
  11. July 2010 - FSM Portfolios: Risk takers rewarded with bigger winnings
  12. June 2010 - FSM Portfolio: Supplementary portfolio can be a double edged sword
  13. May 2010 - FSM Portfolio: Bonds helped preserve portfolio’s capital


Table 4 – Targeted Asset Allocation
  Neutral Allocation
(Equities: Bonds)
Current Targeted Allocation
(Equities: Bonds)
Conservative 10:90 20:80
Moderately Conservative 30:70 40:60
Balanced 50:50 60:40
Moderately Aggressive 70:30 80:20
Aggressive 90:10 100:0
Source: iFAST Compilations

Table 5 – Equity Market Allocation
  Neutral Allocation Current Targeted Allocation
US 25.0% 25.0%
Europe 25.0% 20.0%
Japan 7.0% 5.0%
Asia ex Japan 14.0% 12.0%
Global Emerging Markets 29.0% 38.0%
Source: iFAST Compilations

Table 6 – Bond Market Allocation
  Neutral Allocation Current Targeted Allocation
Cash / Money Market 0.0% 0.0%
Singapore / SGD Bias 30.0% 30.0%
Global Bonds 25.0% 15.0%
Asian Bonds 25.0% 25.0%
Emerging Market Debt 10.0% 15.0%
High Yield 10.0% 15.0%
Source: iFAST Compilations

iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. If you have any queries about the above contents, please contact iFAST.