Retirement: Lower returns for PRS funds in 2018

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 17, 2019 - June 23, 2019.
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It was a rather rocky year for funds under the Private Retirement Scheme (PRS) last year due to domestic and international economic challenges. The overall lower performance in 2018 was caused by macro-events, such as trade wars, rising rates in the US and uncertainties after last year’s Malaysian general election (GE14).

Funds across various categories delivered lower average returns over a one-year period ending April 30, 2019, compared with the previous corresponding period.  According to data provided by independent investment research firm Morningstar, core funds (categorised as aggressive, moderate and cautious) produced single-digit returns over one-year ending April 30 this year. About one third of funds saw negative returns.

The core funds in the conventional growth category saw returns of -6.85% to 1.87% while those in the shariah growth category registered returns of -1.84% to 4.15%.

Core funds in the conventional and shariah moderate categories provided returns of -6.49% to 5.16% and -3.80% to 3.70% respectively while those in the conservative categories registered returns of -0.37% to 4.34% and 1.79% to 3.10% respectively.

The conventional non-core funds performed significantly better than their core counterparts with returns of -3.30% to 16.16% while returns for the shariah non-core funds ranged from -8.83% to 7.28%.

Meanwhile, CIMB Islamic PRS Growth X emerged as the top performer in the aggressive category, with a return of 4.15% for the one-year period ending April 30, 2019. The fund’s regional allocation is invested in Malaysia, Hong Kong, Singapore, Cayman Islands, China, Australia, South Korea and Indonesia.

The top three holders of the fund are China’s Alibaba Group Holding Ltd (4.54%), followed by Malaysia’s Jimah Energy Ventures (3.7%) and Bandar Serai Development Sdn Bhd (3.55%).

In speaking about the fund, Principal Asset Management Bhd’s CEO Munirah Khairuddin says the fund house took a defensive stand last year after taking into account the “noise” in the marketplace, especially the US-China trade war tensions, which had a knock-on effect in all equity markets.

“When market volatility is high, we need to make sure that the volatility of the portfolio does not go too high and the way we do that is to invest in defensive stocks, good dividend yielders and companies with a clear direction on what they want to do.”

She adds that the fund house typically applies a fundamental approach to investments and avoids taking too much risk. “First, we need to identify the objective and with that, we will then define how we manage the fund. Once we define how we manage the fund, we decide on the tolerable amount of risk we want to take,” she explains.

“We screen through our stocks and make sure they are financially solid into the medium and long-term periods because we are not short-term punters. Therefore, sometimes you will see our funds lagging behind our competitors because we do not take unnecessary risk.”

Munirah notes that seven out of their 10 PRS funds are No 1 in the industry according to Lipper’s investment data. In volatile market conditions, the fund house continues its focus on more dividend-yielding counters.

“We need to deliver consistent risk-adjusted returns. We focus on equity stocks with good dividends so, at least, investors get some income even if the stocks are volatile.”

Topping the conservative fund category was Affin Hwang PRS Conservative fund with a return of 4.34% in this period. The fund, which mainly invests in fixed income instruments, has top holdings in the Affin Hwang Enhanced Deposit Fund (10.5%), Southern Power Generation Sdn Bhd (8.3%) and YTL Power International Bhd (7.8%) as at end-April.

Across the board, Affin Hwang Asset Management chief marketing and distribution officer Chan Ai Mei says the total assets under management (AUM) of their PRS segment grew 26.7% year-on-year to RM279.3 million as at April 30, 2019. This keeps them on track to reach their target of RM300 million.

Chan explains that the Affin Hwang PRS Conservative fund — like all their PRS funds — comprises a portfolio of funds sufficiently diversified across asset classes and geographical reach to mitigate any concentration risk. The fund is managed from a ringgit perspective, she adds, as the fund house is aware that contributors to PRS are typically ringgit investors, and thus aims to mitigate any foreign currency risk through hedging.

“Anchoring the strategy is our absolute return philosophy to deliver positive returns across market cycles to investors irrespective of benchmark performance.

“This is done through the selection of quality securities based on a strong awareness of the changing macro-conditions. Thus, we aim to build a portfolio that is sustainable for the long-term with the underlying built on quality investments with strong fundamentals,” Chan says.

She adds that 2018 was a challenging year for emerging markets (EM), which underwent a tantrum-like sell-off on the back of fractious geopolitical developments. “Global fund managers were also ploughing-back money into the US on signs of quicker growth, rising interest rates and a stronger greenback that undermined the attraction of riskier EM assets. Tit-for-tat tariffs between the US and China also weighed down on sentiment, where we have recently seen tensions between the two countries re-escalate and relations deteriorate.”

Like Principal Asset Management Chan says Affin Hwang too adopted a defensive strategy by raising cash levels to cushion portfolios as capital protection took precedence. “We stayed prudent in our allocation and avoided sectors or stocks that would be directly impacted by the tariffs imposed.”

“Throughout 2018, the underlying funds adopted a barbell approach with one basket composed of defensive dividend-yielding stocks and another basket made of stocks that exhibited strong secular growth prospects.”

In 1Q2019, Chan says the fund house made some tactical allocations into the China A-share market to benefit from fund flows. She also says EM rebounded strongly in the early part of the year when trade tensions momentarily diffused and easing measures announced by China helped prop up the market.

“We expect markets to stay volatile as geopolitical risk and fault lines pressure markets and trade tensions ramp-up. The underlying funds are now tilted towards a more defensive approach with a preference for quality and liquidity. We may decide to raise some cash levels to cushion the portfolios,” she says.

She also adds that there are specific guidelines by regulators on PRS funds regarding its equity exposure, proof of stability and historical performance to ensure its suitability as a retirement savings fund. “The maximum equity allocation for the most aggressive fund [growth] is up to 70% of the NAV (net asset value) of the fund, compared to a standard equity fund which can invest almost 100% of its assets in equities,” she says.

“As such, the risk of the PRS funds has been toned down to ensure that PRS providers do not take excessive risks with the funds to ensure capital preservation.”

From a returns perspective, the AmPRS-Asia Pacific REITS I fund came out on top with a return of 16.16% over the one-year cumulative return ending April 30. According to its latest fund fact sheet, 95.93% of the fund feeds into the AmAsia Pacific REITs fund. As at end April, 70% to 98% of the fund’s net asset value was invested in REITs listed in the Asia-Pacific region.

The top five holdings of the target fund during this period are The Link Real Estate Investment Trust (4.42%), Tesco Lotus Retail Growth Freehold and Leasehold Property Fund (3.27%), Frasers Logistics and Industrial Trust (3.23%) Sunlight Real Estate Investment Trust (3.13%) and Prosperity Real Estate Investment Trust (3.12%).

A majority of the fund (21.19%) was invested in Singapore, followed by Australia (14.3%), Japan (12.9%), Hong Kong, (10.66%) and Malaysia (10.13%).


Conservative and moderate funds outperform aggressive peers

According to Morningstar, the conservative and moderate PRS funds outpaced the aggressive counterparts on average over the corresponding period. This, asset management firms say, is because the equity market was largely disrupted by macroeconomic events.

Kenanga Investors Bhd CEO and executive director Ismitz Matthew De Alwis says their moderate and conservative funds performed relatively better as compared with their growth fund, which could have been due to the bearish market conditions since last year.

“Thus, more aggressive PRS funds with higher exposure to the equity market will underperform. Moderate and conservative funds have a higher weighting to fixed income and cash.”

With that being said, he adds that the firm started this year with a view that markets should rebound as valuations turn attractive.

“Although this has played out up to the end of April, the short-term outlook has become more cloudy given the escalation of recent trade tensions. We are confident that once the trade wars subside, the equity market will rebound. If so, aggressive funds should outperform its counterparts and we will be back on track to meet our objectives.”

Affin Hwang’s Chan says the conservative and moderate PRS funds will tilt higher towards fixed income as opposed to equities. “The drawdown in bond prices would be less severe compared with equities during heightened periods of volatility. As such, these funds were able to stave off losses from the broad-based sell-offs in markets, and thus perform better than the growth fund.”

“If the bond market remains supported by accommodative monetary policies from global central banks, the conservative and moderate funds may outperform the growth fund in the near term,” she adds.


The future of PRS

It has been seven years since the launch of PRS on July 18, 2012, and since then, the industry has been growing.

Going forward, Affin Hwang’s Chan expects the industry to continue its steady growth, with the tax relief of RM3,000 playing a role in encouraging inflows. However, she notes that for the industry to be self-sustaining, PRS providers must be able to deliver long-term consistent returns at levels above or on par with what the Employees Provident Fund (EPF) provides.

“Otherwise, investors cannot see the proposition to making contributions to a PRS fund that happens to also have a lock-in period, if the returns generated cannot keep up with the cost of inflation or worse still being eroded,” she says.

Chan adds that new product innovations could spark growth for the industry by tapping into new strategies and asset classes to generate stronger returns. “Under the PRS guidelines, there are already existing provisions that allow PRS funds to invest in real estate and unlisted securities, with a limit of 10% to 15%,” she says.

“So in the future, we could see PRS funds evolving beyond just a plain retirement vanilla fund to meet more specific needs like addressing inflation and higher medical cost as well as a replacement income strategy.”

PRS funds are in the best position to do this, says Chan, as “the money is stickier and there is no sudden churn in outflows”.

“Asset managers actually have the flexibility to invest in alternative asset classes like private equity, real estate and infrastructure, which typically has longer-term investment horizon to generate potentially higher returns.”

Principal Asset Management’s Munirah is excited about the future of PRS as the fund house has a few strategies that they are planning to roll out. Kenanga’s De Alwis is optimistic too as its potential continues to grow on the back of escalating pickup rates in the last few years since its inception.

“There is much more we can do in terms of education and we intend to increase the momentum this year with more on-ground activities and digital initiatives. We will also be working with regulators to increase the public’s awareness on PRS,” De Alwis says.

Chan advises investors to go back to the basics as the market will stay volatile, as the past year has shown that timing market conditions is not going to work all the time. She says many investors were burnt in the past year trying to time the market, but ended up missing out on the next run when the market reached new-highs and they sold below the peak.

“This was evident in 1Q2019 when investors were under-positioned [in the market] as they cashed-out from their portfolios last year. Thus, they missed out on gains in the market when rate expectations were lowered after the US Federal Reserve took a more patient approach and the US dollar strength started to wane.

“This proved to be constructive for EM assets, which subsequently led to gains within regional benchmark gauges,” she says.

Chan adds that investors should strive to achieve diversification in their portfolios across asset-classes, sectors and geographical exposure instead. A disciplined approach to their investments would yield a better probability of success instead of attempting to chase market-highs or lows.

“Rather than timing the market, investors should spend time in the market instead to compound returns in their investments. Focus efforts on building a resilient portfolio capable of weathering across different market cycles.”

De Alwis advises that in times of market instability, investors should hold onto their long-term investments. “Rather than following the herd mentality to let go or chase after stocks at the drop of a pin, investors need to invest in stocks with fundamentally sound undervalued counters whose price depreciation may only be temporary in order to reap long-term profits.”


AUM sees a slowdown in growth, but industry sees record-breaking number of members in 2018

Funds under the Private Retirement Scheme (PRS) continued to see growth last year, with total assets under management (AUM) rising 23% to RM2.7 billion. However, such funds’ AUM also saw its slowest growth rate since the introduction of an optional retirement instrument in the country in mid-2012. For the first two years, these funds’ AUM saw exponential growth. However, growth slowed drastically beginning 2015 and 2016 before rising slightly in 2017, only to fall again last year.

Meanwhile, the total number of PRS members grew 38% to 416,913 last year, up from 301,279 in 2017, according to Private Pension Administrator's (PPA) press release in January. Affin Hwang Asset Management’s chief marketing and distribution officer Chan Ai Mei says that based on statistics by PPA, more people saved in PRS last year compared with the previous years since the inception of the voluntary retirement saving schemes.

She adds that the fund house did see additional flows as a result of contributors looking to utilise the PRS Youth Incentive before it ended in 2018. In terms of corporate adoption of PRS, she says it is still wanting in the industry. Many employers view such schemes as an administrative toll on them to manage another retirement scheme for their employees.

“On the flip side, we are seeing better adoption by SMEs to provide PRS schemes for their employees,” Chan says. “With smaller enterprises, the schemes are easier to administrate and also the lacking presence of decision-makers make it easier for small businesses to determine the exact vesting schemes and structures they intend to have in place.”

Principal Asset Management Bhd’s CEO Munirah Khairuddin notes that more companies have joined the fund house as clients last year, adding that employers sign on to the PRS corporate plan and offer that to their employees. “So, on top of their mandatory pension, they also contribute to our PRS funds as a supplement to their mandatory pension on a regular monthly basis,” she says.

“What we’re trying to inculcate is the habit of saving a little every month and then increase the amount every year. That will have a compounding effect and you won’t even realise it, like our Employee Provident Fund.”

The redemption rate is very low, indicating that people stay invested once they are in. “Now, we are starting to see some of our AUM snowballing because of that compounding effect, even if we don’t put in much effort in it. That is exactly what PRS investments are intended for,” Munirah adds.