Unlocking the Mystery of Capital Protected Funds

Recently, there are a few capital protected funds being matured. However, most of the investors are not satisfy with the performances as promised when the fund was launched years ago. Is this the fault of investors who don’t understand it? Or, the fault of the product itself?

To make things worse, most of the investors are conservative in nature – older age group. If your mum or dad was one of them, make sure you finish this and explain to them.

Although Capital Protected Funds have been exist in Malaysia since early 20s, many investors still unclear about the structure of this type of fund. Is it safe as the name goes by? What is the return like? And, are there any terms and condition apply to it? Questions usually asked were answered below:

What are capital-protected unit trust funds?
· They are investments that promised to repay 100% of your capital, when held until maturity, which means your downside risk is protected.
· They do not guarantee returns to investors, but only promise to protect the capital invested.

So, what is the return likes?
· They allow investors to participate in the potential upside from the investments, by investing in risky assets like stocks, options or derivatives. Example, equities, bonds, commodities, indices and currencies.
· Normally, capital-protected funds are targeting 7%-10% annual return.
· Of course, they could give you zero return too. It all depends on the performance of underlying investment.

How is my capital being protected?
· It is protected by placing a large portion of capital in Zero Coupon Negotiable Instruments of Deposits (ZNIDs), which are money market instruments. ZNIDs carry a fixed interest rate, and aim to get back your 100% capital at maturity. (See Figure)
· These ZNIDs are issued and protected by Malaysian banks, with high-grade ratings.
· To make it even safer, fund manager would diversify the risks by sourcing ZNIDs issued by more than one bank.

Can I redeem before maturity? Any penalty?
· Yes, you can. But, you may not receive 100% of your initial capital. The value is based on the net asset value (NAV) at the time you redeem.
· Usually, a penalty fee of 0.5%-2% is imposed if you redeem before maturity.

Are you understood now? Be mindful if you come across capital-protected funds next time. Happy Investing.

2010 Economic Forecast

After some spectacular performances displayed by global equity markets, how is 2010 heading? In fact, 2009 is a year, in which, share market around the world performed the best in recent years. Indonesia is leading all the way with an awesome 87% gains, follow by China, India, Brazil, Hong Kong, Singapore, and Taiwan…

Meanwhile, Malaysia too joining the bandwagon by rising 45%, which was the index’s biggest annual gain since 1993. All of this was started since March 2009 when risks appetite increased and low interest rate environment surfaced.

Is this Sustainable?
However, all of this was fueled by excessive liquidity, couple with low interest rate, with oversold position of global markets only. The next engine would be earnings growth from companies, where this is the real food for the “Bull”. Because low interest environment forced people to invest, and a lot of people borrow USD to invest globally, which gave them handsome profit.

So, what’s the prediction of 2010?
As long as US do not hike interest rate, the current rally would persist going forward. If not, higher US interest rate will encourage people to divest all their investments globally in order to pay back the USD loans (See diagram). Anyway, US would only hike interest rate if their economy was on a stronger footing, where unemployment rate drop, retails sales up, and manufacturing sector recovering. All of this may happened in 2nd half of 2010. So, you still could enjoy your investments for few months more.

Advise:
US must work hand-in-hand with major governments to manage the reversing of interest rate environment, in order to minimize the impact of sudden currency surge of a particular country. One of it was to hike interest rate simultaneously with major countries globally. And, I believed that Obama's administration already knows it (hopefully).

The Collapsing Dubai

Once, Dubai World has a motto saying: “The sun never sets on Dubai World”. The state-backed group was the mastermind of world’s famous 7-star hotel, incredible man-made Palm Island, and world’s tallest building – The Burj.

By utilizing the oil wealth, Dubai had diversified into property and tourism since 2001. Property prices had gone up several folds – in this desert. Foreign workers are several times more than their own population. It was doing very well until overspending sets fire on its huge debts.

With up to $80 billions of debts due end of 2009, Dubai is scratching its heads very hard now. This was all started a year ago when the global economic downturn ended the sizzling hot property boom. Dubai was empty pockets after their oil money was drained by collapsing real estate prices and over-ambitious development plans, which sparked panic selling across the world on fears of, prolong global recession.

HSBC and Standard Charted Bank were believes to be the biggest financier to Dubai World, with the rest of the debt financed by regional banks. Yet, can Dubai pay back now? Impossible – with its tiny population and workforce!

Solution?
Luckily, its oil-rich neighbour – Abu Dhabi – is more than enough to fund a bailout and has incentive to do so. In exchange, Abu Dhabi would gain control of Dubai, whether economy or political. Not surprisingly, Abu Dhabi sovereign funds are searching for investments around the world, cited Citigroup as example, eagerly flush its muscle in Dubai. Of course, Abu Dhabi existing economy involvements in Dubai created a too-big-to-fail scenario here.

For us, please rest assured that developments there would not impact our recovery path, except confidence. The dipping of stock markets worldwide this few days was mainly driven by emotional. In fact, this is a very good excuse for investors to exit the markets, which deem profit-taking.

How to tell when the economy is getting better?

Recently, I have more time to walk around and seek for others' opinions regarding their view on "whether recession was end?".

After fooling around, I'm proud to make a conclusion: "50% YES, 50% NO"
(Real conclusion: NO conclusion at all).
Haiz...

Then, I'm frustrated and came out with my own conclusion. However, my conclusion depends on the following 5 indicators:

1. An improvement in the Unemployment Rate
   - 1st Sign – Corporate silence, which means no more job-cut announcement
   - 2nd Sign – Companies might start hiring again (slowly)




2. More stable home prices
   - Housing prices had fallen for 2 years now, 20% worldwide
   - Once prices stabilize, buyers will stop worrying and bargain-hunting activities will pick-up slowly again




3. Consumer confidence rebound
   - When corporate silence, housing and stock market will turn around
   - People feel more secure about their jobs and income, and will start to spend/consume again
   .
4. A less volatile stock market
   - When corporate news came out, stock market did not react crazily
   - Less sensitivity in stock market means all the news had actually factored-in the pricing of companies




5. Economic growth turns positive
   - In order for a sustainable recovery, a country’s economy must be positive (+ve GDP growth)
   - Of course, it all starts with an improved companies’ earnings

Agree or Not? This is my answer to the above question.

Budget 2010: Credit Card

Credit Card - Life of Banks

The most talk-about topic of the boring 2010 Budget is the Credit Card's Service Tax. Rm50 for principal and Rm25 for every Supplemental card. I believe almost every qualified person on the street owned at least one card. And, many of us own more than what our purse can accommodate.

If this new policy is to be inforced starting next year, what's the impact?

1. Banks: CC is a new income source for banks. If we took the interest off the picture, I think it's fair enough that CC makes consumers more convenient, and banks charge merchants for using their credit service. For those banks which are promoting their CC heavily sure would suffer a massive blow. NO new card application + Card cancellation = Problems
2. Cardholders: For sure, actions will be taken to cancel as many cards as possible. Unused cards sure not a problem, but how about those with installments? Congrats, you are forced to continue and pay Rm50 extra. How about those who still have CC debts and can't afford to settle it fully? Congrats again, you are forced to have more debts every year.
3. CC sales person: For every new cards cancellation within 6 months, commissions will be crawled back by issuing banks. Busy calculating now?

Government said this is a Rakyat-Friendly Budget, and I'm not surprise, since this service tax is successfully link with almost all of the Rakyat (But, it's not Friendly either). The objective given by government is to discourage citizen to ride the CC debts, which can leads to bankruptcy. However, these kind of policy would worsen the situation only by adding Rm50 more debts for each card.

So, should this be implemented? And, how should it be implemented?

YES, to induce a better CC culture, we should implement it. However, we should be fair to those who are using credit cards correctly. Example, Rm50 should only charged on the 3rd cards onwards instead. I think 2 cards per person is reasonable. Or, we can raised the card's application requirements and stringent the approval process. In other words, lending money to affordable cardholders only.

Are there any more Upside?

Right after the worst bear-run of the century, 2009 seems to be one of the best year in history of Stock Market. Although unexpected, the bull rally almost unstoppable yet.

Will it last? Or, when would it last?

W, V or L shape recovery is a hot topic among investment community. Anyway, all of this is depending on the basic fundamentals of the economies.

1. the current bull-run is started just because of the low-base effect in terms of pricing. When stock prices are so low after 2008, many people became Warren Buffet - with no fundamental checks. They bought because of the stock prices only. And, they make some profit though. Not a bad investment, if they are lucky as far as I concerned.
2. after the first phase of recovery, the second phase is earning potential. This is the phase where we must go back to the fundamentals of a company. Earnings growth is what will drive the share prices higher after the first phase.

This is why share market traded range-bound now (Oct 09). What would excite the Bull to run again is earning growth. Public Bank and glove companies are the main drivers of KLCI last week with positive earning growths. However, any setbacks will pull us down as what we saw in US, where Bank of America and General Electrics reporting disappointed results.

Conclusion: Do not look at the price from now onwards. Instead, look at the earning power of your favourite counters. Yes, there is further upside with earning as its ingredients.

Do share your stock recommendations, which you think have good potential here.

Banks Offering Higher FD?

Hurray!!! Even though economic crisis is still following us closely, banks are willing to offers higher Fixed Deposit (FD) rate. Sounds good?

However, let us look at this "exciting" offers first before making any decisions. Normally, banks are offering enhanced returns for those who also buy unit trusts or insurance products. They bundle these products, in order to give consumers special FD rates. But, is that your cup of tea?

YES, if you:

• need to buy an insurance and have extra money to put into FD
• need to invest into unit trust and have extra money to put into FD

NO, if you:

• want to buy insurance only
• want to invest into unit trust only
• do not want to lock-in your cash in FD

Do take note on the terms set by banks, such as the ratio of FD:UT / FD:Insurance.

For instance, the insurance products bundled are higher in premiums.

While for Unit Trust, ratio is directly affecting your return.

For example, RM100k are divided into 4:1 ;

RM80k FD and RM20k UT

Enhanced FD 3% and UT 10% (I'm very kind though)

Total profit is RM4,400 (80k x 3% + 20k x 10%)

However, the real return is 4.4% only (RM4.4k/RM100k)

If you includes the UT fees and the risks that you are taking, does it worth?

Also, some banks are giving special 1-month FD rate only instead of 1-year.

Do consult with your financial adviser for more. Your feedback is welcome.