Cash the culprit in Malaysia as investment returns fall 2.8% short of cost growth of financial goals

Press Release | June 03, 2015
Investors losing ground each year as savings grow more slowly than costs due to inefficient asset allocation – excessive cash holdings emerge as the key culprit.


Kuala Lumpur – For every step forward the average investor in Asia takes towards meeting their main financial goals, many fall half a step back owing to the rising costs of those goals, according to a new report by Manulife Asset Management. Malaysia is no exception, with local investors facing a potential investment returns shortfall of 2.8% a year versus the annual growth in the cost of their goals. That looks manageable as a percentage, but it represents a large sum when compounded over 10 or 20 years.

The report, entitled One step forward, half a step back: Meeting financial goals in Asia, is the sixth in Manulife Asset Management’s Aging Asia series. It analyses the five most cited financial goals on a pan-Asia basis – retirement, paying for children’s higher education, meeting current living expenses, purchasing a primary residence and saving for a rainy day (which includes unexpected healthcare costs) – and the saving and investment strategies that investors are employing to meet these goals. 

Michael Dommermuth, Executive Vice President, Head of Wealth & Asset Management, Manulife Asset Management, explained: “In Malaysia, we highlighted the goals of saving for a rainy day and retirement. We found that Malaysia has a hybrid public and private healthcare system and that participation in the rapidly growing private system in particular had driven out-of-pocket healthcare spending to rise a daunting 11.9% a year over the past five years. Meanwhile, retirement was a lower ranked goal for individual investors but the government recognises its importance and has taken steps to increase retirement preparedness via policy measures such as raising the official retirement age and introducing the Private Retirement Scheme (PRS).”

Malaysia’s potential returns shortfall of 2.8% a year arises because the cost of the five goals has risen an average of 7.9% a year over the past five years while self-reported investment portfolios delivered average returns of 5.1% a year in the same period, the highest potential returns among the markets analysed.

Mr Wong Boon Choy, Chief Executive Officer and Executive Director of Manulife Asset Management Services Berhad, explained: “While MYR10,000 invested today has the potential to grow to almost MYR16,500 over 10 years, MYR10,000 in the cost of a basket of the five most cited financial goals would  have been on track to grow to almost MYR21,500 in the same period – representing a potential shortfall of about MYR5,000. While the shortfall may seem manageable over a period of ten years, it stands to almost quadruple to more than MYR18,500 over the following 10 years and then almost triple again to about MYR53,500 in the third decade. Investors should seriously consider what this means, particularly as retirement was reported as one of their top financial goals.”

The research reveals this shortfall is primarily the result of the high level of cash investors hold in their portfolios. According to the survey, the average Malaysian holds 44% of their assets in local currency.

Dommermuth said, “Malaysians are hardly alone, with survey respondents across Asia reporting that 37% of their assets are allocated to local currency and another 5% to foreign currency. Our research reveals that this level of cash holdings is the key factor compromising investors’ abilities to generate returns that match or exceed the growth in the cost of their five leading financial goals. Indeed, we found that local currency delivered average returns of just 3.0% a year in Malaysia over the past five years.”

According to Jason Chong, Chief Investment Officer of Manulife Asset Management Services Berhad, reallocating a portion of this cash to more efficient assets such as local-market equities or fixed income could dramatically reduce the potential shortfalls facing Malaysian investors: “We found that shifting 50% of local-currency holdings to local equities could virtually erase the potential returns shortfall for Malaysians, lowering it from 2.8% a year to less than 1%. Shifting the same percentage to local fixed income could reduce the potential shortfall to 1.9% a year while also maintaining generally conservative risk exposure.”

Mr Wong added, “We see the opportunity for Malaysians to cut their potential returns shortfall further – and potentially generate a surplus – by diversifying their investments across multiple geographies to access a wider array of opportunities for returns. Such asset allocation decisions have always been important, but these days investors need to be more tactical than in the past. For example, investors could consider a professionally managed dynamic asset allocation solution that can be accessed via a unit trust fund or investment-linked insurance platform.” 

Manulife Asset Management’s Aging Asia series of reports and related resources can be accessed at: www.manulifeam.com/agingasia.

 

Unless otherwise noted, data in this press release is sourced from Manulife Asset Management based on investment returns and cost growth data outlined in One step forward, half a step back: Meeting financial goals in Asia which can be accessed at: www.manulifeam.com/agingasia.

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