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| 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 |
HONG KONG, June 2, 2015 - (ACN Newswire) - For every step forward the average investor in Asia takes towards meeting their main financial goals, many fall half a step back due to the rising costs of those goals, according to a new report by Manulife Asset Management.
 | | Manulife Asset Management |
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 reveals that the average investor in Asia faces a potential investment returns shortfall of 3.3% (1.3% including Japan)[1] a year. That looks small as a percentage, but it represents a very large sum when compounded over 10 or 20 years.
The shortfall arises because the cost of the five most cited financial goals across Asia have risen an average 6.0% a year over the past five years (4.4% including Japan) while self-reported investment portfolios delivered average returns of just 2.7% a year in the same period (3.1% including Japan). The report compares the historical growth rate in the cost of the five leading financial goals identified by respondents to a proprietary Manulife survey[2] with the historical returns on investment allocations revealed in the same survey.
The survey covered Mainland China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore and Taiwan, where the main financial concerns were retirement, paying for children's higher education, meeting current living expenses, purchasing a primary residence and saving for a rainy day. The latter includes unexpected healthcare costs.
Michael Dommermuth, Executive Vice President, Head of Wealth & Asset Management, Asia, Manulife Asset Management, explained: "While US$10,000 invested today has the potential to grow to more than US$13,000 over 10 years, US$10,000 in the cost of a basket of the five most cited financial goals would have been on track to grow to about US$18,000 in the same period - representing a potential shortfall of US$5,000. While the shortfall may seem manageable over a period of ten years, it stands to triple to more than US$15,000 over the following 10 years and then more than double again to US$35,000 in the third decade. Investors should seriously consider what this means, particularly as the vast majority cited retirement 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, an average of 37% of assets across the region is held in local currency - 42% if foreign currency is included.
"This means over a third of investors' wealth is allocated to one of the lowest yielding assets, as local currency returned an average of just 1.7% a year over the past five years," said Dommermuth. "Reallocating a portion of this cash to equities or fixed income investments could dramatically reduce the potential shortfalls investors face in most markets."
The implications of shifting asset allocation away from local currency varied according to the market analysed and the asset selected:
Equities: As the countries and territories covered in the report are at different points in their financial market development, the report analysed exposure to local-market equities, the most universally accessible asset class. It found that shifting 50% of local-currency holdings to local equities could:
- Move Indonesian investors from the largest potential shortfall of 6.6% a year to a shortfall of just 0.5%;
- Erase the 3.5% per year potential returns shortfall for Filipinos;
- Shift Taiwanese investors from facing the smallest potential shortfall in the region (ex-Japan) of 0.3% a year to the possibility of surplus returns.
Fixed income: While a similar shift of 50% of local-currency holdings to local fixed income would cut potential shortfalls less dramatically than equities, the effect on the cumulative shortfall could be substantial when compounding is taken into effect. Such a reallocation could:
- Cut the potential returns shortfall for Malaysians from 2.8% a year to 1.9%;
- Decrease the potential returns shortfall faced by Hong Kong investors from 2.5% a year to 2.0%;
- Lower the potential shortfall for Singaporeans from 3.6% a year to 3.1%.
In some markets, recent market conditions caused distortions in the results of reallocation to local equities or fixed income:
- Investors in Japan actually face a potential 2.7% surplus in returns due to a history of low inflation and recent market gains under Abenomics. Reallocating local currency to local equities or fixed income could actually boost the surplus if this continues;
- In China, an extended period of lacklustre market returns ahead of 2014 means that a shift to local equities actually aggravates the potential 4.0% a year returns shortfall.
Dommermuth addressed this situation: "Where possible, we believe investors should consider diversifying their investments across multiple geographies. We are witnessing a trend of capital-market deepening and opening across Asia, most notably in China, which should give investors access to a wider array of opportunities for investment 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 accessed via mutual funds or an investment-linked insurance platform."
"In other markets, lack of financial market access remains a key challenge - in Indonesia, for example, only 20% of the population has an account with a formal financial institution. In these contexts, educating investors about the benefits of basic capital market participation can go a long way to boosting returns potential."
Manulife Asset Management's Aging Asia series of reports and related resources can be accessed at: www.manulifeam.com/agingasia.
[1] Figures are presented "ex-Japan" as Japan's results are skewed on the cost growth side by its history of low inflation and on the investment returns side by a recent spate of strong market performance under Abenomics.
[2] The Manulife Investor Sentiment Index (MISI) in Asia is a quarterly, proprietary survey measuring and tracking investors' views across eight markets in the region on the attitudes towards key asset classes and related issues. MISI findings quoted in this paper are the result of field research conducted between 30 May and 27 June 2014. See Appendix 1 in the report 'One step forward, half a step back: Meeting financial goals in Asia' for further details on the MISI survey methodology.
Contact:
Sadie Lam
sadie.lam@fleishman.com
Tel: +852 2586 7836
Topic: Research / Industry Report
Source: Manulife Asset Management
Sectors: Daily Finance, Daily News
https://www.acnnewswire.com
From the Asia Corporate News Network
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