Model Portfolio/ Recommended Sector Methodology
It starts with having a macro perspective of the capital markets. From which we select the attractive asset class for investment.

Macro
We borrowed an economic cycle model from Fidelity Man Fund Manager Treevor Greetham, who has defined an economy to be broken down into four stages. From his definition, an economy is said to be in reflation when we have declining interest rates and growth. It would be recovery if interest rates would be low and growth increases. The economy overheats as we see increasing interest rates and growth at the same time. The last stage is stagflation, where we see inflation with declining growth.

Our macro perspective largely stem from the United States. We look at them for a general direction of the global economy. Putting US into the context of the economic cycle, we determine the current stage of the cycle.

Upon determining the stage of the economic cycle, we will select the asset class which one should invest in. This is done with reference to table 1 shown below.


Table 1: Sector Selection
Source: Franklin Templeton Learning Academy, Phillip Securities Pte Ltd

Next, we will select countries/sectors which fit into the asset class. Countries/sectors are selected base on fundamental economic indicators such as GDP, composite leading indicator, CPI and many others. (Subjected to the availability of the data)

Fund selection
Upon selecting the countries/sectors, we move on to select the funds. Funds are compared based on three criteria: sector allocation, fund managers interview and weighted average risk adjusted return (60% of 3 years risk adjusted return and 40% of 1 year risk adjusted return). The last criteria is in line with the one used for quarterly fund recommendation. (Kindly refer to the quarterly fund recommendation methodology document for more details.)

Focus of the month
In selecting the appropriate fund, apart from looking at the risk adjusted return values and sector allocations, we will also determined if the “Focus of the month” should be included into the model portfolio. As the selection criteria for “focus of the month” is similar to the methodology used for the model portfolio, an additional clause is added to determine if “focus of the month” should be included into the model portfolio. This is as follows:
Establish a set of expected returns for countries in the existing portfolio. This is done with the aid of Fibonacci charts. If the expected return of the “flavor of the month” exceeds or falls within the existing range, it will be included
into the model portfolio.

Hypothetical scenario
Countries Projected Return
Singapore 6%
Malaysia 5%
Russia 7%
India 8% (case 1)
5.5% (case 2)

With reference to case 1, India will be included into the model portfolio as its projected return is greater than the projected return of the existing countries.

India will still be included in case 2 as it’s within the existing range (5% to 7%) of returns.

Although a set of guidelines has been established for the selection of countries and funds, analyst will be given some discretion in managing the portfolio. For any selection or changes made that is not in accordance to the guidelines, an explanation will be provided.

Summary



Allocation for investors with different risk appetite Countries and sectors selected with respect to the above methodology do not differ among investors with different risk appetite. However, the percentage allocated across various risk categories does differ. The following table depicts the percentage allocation.

Risk Profile Equities Bonds Cash
Conservative 20% 75% 5%
Balance 50% 45% 5%
Aggressive 75% 20% 5%

 

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