Just yesterday, I received some queries from client regarding the selection of 2 funds to be included in a rebalancing portfolio.
The 2 questions were:
1. What's the reason for selecting Legg Mason Glb Bond Trust?
According to Morning Star rating, it has only a 2 star rating so it does not seem promising and it has not been returning any positive returns as yet.
2. Aberdeen Emerging Markets
The fund invests 17% into Brazil. I have read that the Brazilian economy/market is rather unstable and therefore it may affect the performance of the fund as it has the highest country allocation. It also has a high risk rating of 9. Is this in accordance to our moderately aggressive portfolio?
My response is as follows:
Dear client,
1. The reason for selection of funds is not just past performance. Indeed, we are looking for investments that may be down at this point i.e. cheap, overlooked, undervalued, and yet have growth potential. We are also looking for a component of the portfolio that has low correlation to the volatile but higher growth equity portion of the portfolio. This component would usually have slower growth but lower volatility (which is considered safer).
The Legg Mason fund, at 10% of the total portfolio and giving 3.47% per annum compounding returns over the last 10 years (bid-bid), is part of this safer fixed-income component of the portfolio and it gives exposure to global bonds. It is one of the recommended funds of researchers at iFast, the investment administrator, as well as approved for CPF Special Account investments. In our view it is the best fund in its class for the purpose - and that having a portfolio that is hedged through adequate diversification, and one that can be effectively rebalanced periodically.
2. We advise our clients to look at the bigger picture of their portfolio. Not only are all funds themselves internally diversified across both companies and countries, the portfolio itself has a variety of funds. Our aim is to give exposure to the most attractive markets cost-effectively.
The risk rating you mentioned is a measure closely linked to volatility i.e. near-term price movements. It is of less concern to long-term investors who know that good investments reap good profits with time. As Warren Buffett says, "In the short run, the market is a voting machine. In the long run, it's a weighing machine".
Brazil is one such high growth emerging market that it would be unwise to not look at. Because Aberdeen Global Emerging Markets is allocated 30% of the total portfolio, Brazil would have only about 5%. This is a fund that has also beaten its own benchmark handsomely, with 11% bid-bid annualized compounding growth over the last 5 years.
