With mounting cost pressures, continued inflation and encroaching global instability, investing is becoming increasingly more important.

The concept is simple – put your money into the market to make it work for you and reap returns over time. But, for every investor that found success, it seems like there could be three others who got burnt instead.

Clearly, there is a lot more to investing than simply buying up whichever stock that happens to be trending at the moment. So, how does one construct a proper investment portfolio? What should investors look out for when evaluating an investment fund? And is there an easy way for laymen to invest?

To find out more, we had a chat with Alan Koay, Head of ILP Solutions at Etiqa, and here’s what we learned. 

Hi Alan! It seems a common mistake made by many investors is chasing trendy stocks based on surface factors such as price. What would you say is a better approach?

Alan: Instead of going for individual stocks or funds that’s trending, investors should consider factors such as risk appetite, investment objectives and costs. Also, while diversification is a familiar concept, knowing how to diversify your portfolio in a holistic manner that aligns with your personal goals and time horizon is key.

To that end, we use portfolio funds to illustrate how it can help our investors better address their needs.

Portfolio funds are composed of a variety of individual funds with exposure in different securities and asset classes, including equities, bonds, and cash instruments.

For example, using Etiqa’s own portfolio funds, there are four different portfolio funds to choose from, named Conservative, Moderate, Growth and Aggressive, with corresponding risk profiles. 

What are the considerations when constructing these portfolio funds?

Alan: We always start with defining the point of each fund we create. For our portfolio funds, the three overarching objectives are

• To offer competitively priced portfolios
• Be able to meet different investment objectives
• Can match a range of risk profiles

The team then screens for building blocks that meet these defined objectives.

Some of our considerations include performance, ratings, volalities and more importantly, how the securities chosen for each portfolio fund correlate with one another and our investment thesis. 

But why would someone choose to invest in a portfolio fund instead of individual ETFs and/or unit trusts?

Alan: Cost, simplicity and diversification benefits are typically the common advantages of investing through a professionally managed portfolio fund as compared to individual ETFs and/or unit trust funds.

To put it simply, a portfolio fund is not simply buying or combining funds without rhyme or reason. Instead, there’s a lot of science that goes into building a portfolio as picking a fund is not an exercise that can be done in isolation, especially when creating a portfolio. Rather, a portfolio is built with optimisation in mind to deliver risk-adjusted returns based on set parameters.

To illustrate, take a look at the following tables, which compares the performance of five different individual funds and four portfolio funds over a three, five and ten-year period.

Table A: 10-year Return for Individual Fund

Table B: 10-year Return for Portfolio Fund

Note: Past performance is not necessarily indicative of its future performance 

There are two things to note here.

Firstly, if we were to look at the individual funds in Table A, only one – LionGlobal Global Stock Index Fund – provided a positive return over the various periods. The other four had mostly negative returns.

This means that in this scenario, the chances of picking a successful fund by yourself is 20%. In reality, given the vast number of funds available, the chance of success could be even smaller.

Secondly, Table B shows how, despite being the same set of underlying funds, portfolio funds were able to generate relatively meaningful returns over the same period. 

This highlights the importance of allocating different funds in the right proportions so as to realise optimal returns. Simply allocating each of the 5 funds equally into a portfolio would still produce a less desirable result.

Additionally, note that that the tables above illustrate the importance of allocation, and are not necessarily a reflection of Etiqa’s investment processes. Moreover, the examples above exclude any rebalancing or tactical allocation changes, which are changes made by the investment team, where appropriate, according to the prevailing market environment.

All in all, performance of the funds or returns is only one of the many considerations amongst the others. If we only look at historical returns, we might end up losing out on creating better possibilities.  

Can an investor not create their own portfolio, perhaps by replicating the composition of your portfolio funds?

Alan: Sure they can, but creating a portfolio is just the first step. It is necessary to constantly evaluate the performance of the portfolio to ensure adherence to stated investment objectives.

This involves rebalancing and reallocating the funds and assets in the portfolio so as to keep it aligned with your goals and needs.

Another important factor is knowing how to adequately manage risk. For instance, everyone wants to have high returns, but the higher the returns, the higher the risk you have to be willing to put up with.

Take a look at the following chart, which illustrates the monthly returns between two funds: Fund A (a short duration bond fund) and Fund B (a global equity fund).

As you’d expect, the peaks and troughs of Fund A are significantly less than Fund B which, for the period, typically exceed 5%-pts on a monthly basis.

While this means Fund B has higher potential for higher returns, achieving such returns also comes with higher risk. 

How does Etiqa manage volatility and risk on behalf of investors? Are changes made to the portfolios once created?

Alan: We practise on-going monitoring and reviewing to ensure the funds and/or portfolios are performing as expected, and that our investment thesis remains valid. In this way, we continually look to enhance or re-optimise our solutions through better diversification, changing outlooks and/or deploying different strategies.

This process includes making changes to the portfolios when necessary. Underlying funds may be removed and/or replaced if there are fundamental changes to our investment thesis, or if the funds are not performing to expectations – whether due to internal or external factors.

In considering which funds to add or remove, we take into account various factors, including their behaviours and attributes in different market environments and in how they relate to our investment thesis. Importantly, returns is only one of the many factors our fund managers include in their review process.

Consider Facebook/Meta, which shortly after a record-breaking IPO in May 2012, quickly saw a 47% drop in share price by August 2012. However, the stock rallied by December, and went on to be one of the top shares today. If fund managers were to just look at the sharp decline in share price over the first 3 months and remove Facebook/Meta from consideration, they would have missed out on the long-term gains that came later.

Great! Before we go, is there anything else you’d like to let our readers know about Etiqa’s portfolio funds?

Alan: Yes. As an institution, Etiqa is able to access a greater selection of different funds types than what a retail investor can get on their own. Therefore, there are perks to investing with us.

However, these funds also typically have higher minimum investment amount, from SGD250,000 to SGD1 mil or more per investment and may carry higher level of risks and thus, require careful considerations.

Click here to find out more about Invest smart flex, Etiqa’s ILP that allows you to choose from professionally managed portfolio funds as well as a list of specifically selected funds or speak to us and get S$20 cash for your time!