More About Equity: How Trust You Are In Equity Fund?

The common argument is that if investors were to hold them for the long-term, equities would perform better than fixed-income instruments. But in recent times, investors have had their faith questioned as volatility reigned supreme. For the last 10 years, the Kuala Lumpur Composite Index has gone through troughs and peaks, and is now at the levels seen during the peak of 1999. So, does the conventional wisdom generally work?

Any measurement of returns would depend on the time period of reference, say our interviewees. In general, stocks will perform better in the long run provided the long-term micro-economic cycle is favourable, says Yoon Mun Thim, chief investment officer of Prudential Fund Management Bhd. "Even then, economic activities would to be cyclical, and there would be periods of volatility punctuated by occasional corrections. If you had invested in equities during the Asian Financial crisis of 1997/1998, and kept them until 2007, from trough to peak, you would have made a gain of almost five times in your investment," says Yoon.

The equities market in unlike the bond market in that there are many opportunities to make a larger return but closer monitoring is required, says Chris Eng, associate director of OSK Research Sdn Bhd. This is because the less volatile bond moves in a narrow range while equity is highly volatile and moves in a wide range.

Historically, says Choo Seww Kee, chief investment officer of TA Investment Management Bhd, investors who have put money in the equity market near a short-term peak would likely suffer losses when the market decline but if they are patient enough and hold for the long-run, they were able to recover their value and have even done well compared to other safer investments. This is partially due to the cyclical nature of the investment market.

But, in recent years, equity markets have displayed greater market volatility. Greater volatility is partly due to the increased short selling and hedge fund activities in the market, says Choo. Moreover, the stock markets of developing countries like ours are more volatile due to the evolving capital markets, adds Yoon. "As a result, the 'buy and hold' strategy has somehow been distorted, says Choo. "The risk of having a 'buy and hold' strategy has somewhat increased and investors must now closely monitor their investment portfolio to maximise long-term returns. In other words, investors need to be more proactive and must use a 'sell strategy' when appropriate."

The question of "having faith in stocks" can be divided between the quality companies and "not-so-good" companies, opines Gary Gan, general manager of business development & marketing, Pacific Mutual Fund Bhd. "In bad times, because og negative sentiment and selling pressures, stock prices of all companies, good or bad, will undoubtedly fall, but note that history has shown that when markets eventually recover, the quality company's stock price will surge accordingly while the 'not-so-good' still be stagnant and perhaps even worsen more." The KLCI may not have moved much in 10 years but quality stocks and performing mutual funds have gained much more, he adds.

On the flip side, Puah Ser Sze, practice leader - investment consulting of Watson Wyatt (M) Sdn Bhd, thinks that one should take a forward-looking view instead of looking at the past. "For instance, we are currently facing an extreme market condition. We do not recommend increasing risk where there's more deleveraging to come. The excesses in the system that was built up over many years will take some time before it's sorted out."

So where does this put the investor? "For equity investors, it is often no whether you entered at the right time ot not, but more importantly, how you manage your portfolio that will determine how the end result will be," says Gan. Although the principles of looking at diversifying an investment portfolio - building a balanced asset allocation and ringgit cost average, seem all too wirn out and cliched, it still holds true, says Yoon.