Inflation-linked bonds may help retail investors protect savings

SINGAPORE: While analysts say property and blue-chip stocks are two sound investment classes and remain good hedges against inflation, retail investors who are looking just to protect their savings currently have few choices.

Daryl Liew, head of portfolio management at Reyl Singapore, said: "The really missing ingredient is inflation-linked bonds. Because if you have that, it is something that investors can really park their money in and can be safely assured that over the long-term, their investments, the coupons they get are basically pegged to whatever the inflation rate is."

The Monetary Authority of Singapore said in Parliament on Monday that it is studying the possibility of introducing inflation-linked bonds to help retail investors preserve their savings, in light of near zero interest rates.

And while corporate bonds and government treasuries are available, observers say these are accessible mainly to high net worth individuals. Some high-yielding corporate bonds, for instance, require higher capital and may not be affordable for most retail investors.

Marcus Teo, head of high net-worth channel at HSBC Singapore, said: "I think the reality is that if you look at the 10-year SGS (Singapore Government Securities), the yield is approximately about 1.5 per cent and given that inflation is 5 per cent, it doesn't help much.

"Your purchasing power continues to erode on a yearly basis, so I think retail investors, unfortunately, have limited options, unless they are willing to take higher risk with their portfolio."

Wong Sui Jau, general manager of Fundsupermart, said: "Unfortunately, if you want to set a benchmark of 4 to 5 per cent, the inflation target you want to beat in terms of returns, then you need to go into the higher-risk type of bond funds. These would be your emerging market bond funds and high-yield bond funds."

Such funds offer close to 6 to 7 per cent yield, says Fundsupermart.

In the past quarter, some of these bond funds have also outperformed equities, with yields of up to 10 per cent.

Fundsupermart says that out of over 50 bond funds, it only carries one inflation-linked unit trust -- the Fidelity Global Inflation-Linked Bond Fund -- which has shown positive performance of 2.5 per cent year-to-date, despite its lack of popularity amongst investors.

Analysts say they do not see the introduction of inflation-linked bonds happening soon, citing the need for investor education on the risks and the right infrastructure to make the product available to retail investors in Singapore.

Analysts also warn that hedging against inflation is not just a race towards the highest yield.

"We do caution that you shouldn't just look at the yield because it comes at a price and its associated risks. For any security that gives you a very high headline yield, you should question whether you are comfortable with the risk that you are correspondingly willing to take," Mr Teo said.

With interest rates remaining low and inflation elevated, investors could also consider selective investments in precious metals and currencies to diversify their portfolio.

New Measures to Safeguard Investors

Our regulator the Monetary Authority of Singapore has released new measures and enhanced requirements aimed at safeguarding the interest of investors. These measures apply to unit trusts as well as other financial instruments and will go into full effect starting next year.

 

Under the new measures, a customer knowledge assessment is needs to be conducted by all distributors in order to assess on whether the consumer has the relevant knowledge or experience to understand the risk and features of the product they are buying. If he fails this assessment, then MAS will not allow “execution only” service to be provided.

 

This impacts online distributors like Fundsupermart is a major way due to our business model, which is essentially “self execution only”. Online unit trust distributors like Fundsupermart essentially function like online stock brokerages, except that we apply to unit trusts instead of stocks. The customer goes online, does the research himself, and then executes his own unit trust trades. It is generally all “self execution only”.

 

Now however, with the new measures, all distributors, including Fundsupermart will be performing customer knowledge assessments on our customers. If you pass the assessment, then well and good, you can still proceed with putting through the trades yourself online. However, when you fail, you will be stopped from “self execution” trades. Thus, literally, distributors are required to stop you from proceeding if you are assessed to have failed.

 

The criteria to fulfill the customer knowledge assessment are also very exact. The education and work experience requirements are very specific and such that we expect that only a relatively small proportion of investors will meet either the education or work experience requirement. The transactional criterion is the easiest to meet. The criterion is that the customer must have placed at least 6 transactions in unit trusts or ILPs over the last three years (can be from different distributors). So what will be the impact of all this for unit trust investors?

 

For the investors, it will clearly result in increased protection. The new customer knowledge assessment is required to be done on all investors investing into unit trust. Furthermore, if they fail the customer knowledge assessment, then they can only be allowed to transact with accompanying investment advice. This will likely have to be provided only by a specialized type of advisor who has the relevant expertise. There will be new procedures that must be added to ensure that these new regulations are met, hence investors might find it more cumbersome to transact in future.

 

For online platforms like Fundsupermart, the industry impact on this is that we expect business costs to go up. Compliance costs and the accompanying IT costs of implementing this will result in increased cost of doing business, especially in the online unit trust distribution space. As a result, players in the industry may become less keen on the online unit trust distribution business. Some may even choose to drop out of this channel of distribution entirely. (One of our online competitors has already ceased business). Even if there is no reduction in players, it’s possible that there may be few new distributors interested in entering this area of online unit trust business over time.

 

This may actually be an advantage to the incumbents in the business. For a market leader like Fundsupermart, for example, we will of course fully implement this and if we have to incur the increased costs, we will go ahead and incur them. 

 

Thus, for example, our IT systems are already being changed and modified to accommodate the new compliance changes, and we have hired client investment specialists who will be the ones who provide investment advice to clients who fail the customer. 

 

We are committed to this online unit trust business. Others, though when faced with the prospect of implementing this change to their systems or the increased costs, may reconsider. So, we may see some increase in our market share as a result of this. 

 

A new entrant to the online business, for example, will generally have much more new customers who will likely fail the customer knowledge assessment. Whereas an existing incumbent like Fundsupermart would already have a large number of clients who have the required number of transactions to meet the investment experience criteria (which is at least 6 transactions over the last 3 years).

 

Overall, the exchange for all this is increased consumer protection. Like it or not, consumers and distributors alike will all have to adapt to the new measures by the start of next year. We will all need to be ready. Personally though, I believe that regardless of additional measures implemented, the best protection is still educating yourself. 

 

All the best investors took their own knocks by putting their own money on the line and learning from their mistakes as markets went up and down. No amount of regulation can guarantee zero losses. In fact, I have never heard of a successful investor who has never ever lost money on a trade before. 

 

Even the professional fund managers just aim to get their bets right 60% of the time, which means that they are wrong 40% of the time. The truly successful investors are the ones which picked themselves up and learnt from their mistakes over the years. It’s like riding a bicycle, before you can breeze along, you would have first fallen numerous times before you found your balance. 

 

No amount of hand holding can prevent that. Thus, my personal take on these new measures is that in the end, as investors, educating ourselves, becoming an experienced investor is our own best way of protection.