For good financial health, fund investments would also need regular check-ups
Along with a balanced lifestyle, regular check-ups are vital for living a healthy life. Renowned financial commentator Dr. Chan Yan-chong (better known as Tsang Sir) has more than 20 years of experience in the investment arena, and he believes that having regular 'health check-ups' on fund investments are equally crucial for maintaining financial wellness.
In addition to staying relaxed and adopting healthy habits, Tsang Sir reveals that his health philosophy centres on the adage "prevention is better than cure". "I go for health checks regularly so that if there is anything wrong, I can get proper treatment as early as possible," he says.
Given the chance to interview Tsang Sir, we seized the opportunity to ask his investment advice. Tsang Sir stresses that, while fund selection is critical for successful investments, the importance of conducting regular check-ups on the invested funds cannot be ignored. "Fund investments are similar to other kinds of investments - investors need to pay close attention, particularly if there are any changes to the fund managers."
Review Fund Performance Quarterly
Investors can easily keep track of any reshuffles in the investment personnel of a fund since funds usually take active steps to make such matters public. But how can we examine the performance of a fund, and in particular fund returns, which are often what investors care about the most? "When investors evaluate fund returns, they shouldn't just look at the profit or loss figures," says Tsang Sir. "Instead, they should compare the return of a fund with the return of its peers and the relevant benchmark index. Tsang Sir continues: "We should keep our fingers on the pulse of our fund investment to gauge its condition. Ask yourself, is there anything wrong with the fund? I usually look at the investment portfolios of the funds I have invested in to see if their investment strategies are still relevant."
But, as the saying goes, we are all human being and cannot be perfect all the time, so it is understandable that fund managers may perform poorly once in a while. Tsang Sir thinks that an occasional slip in fund performance doesn't justify a change in investment. Investors should ponder why the fund performed poorly and check if it was repeating its past mistakes. Before deciding whether to continue to invest in the fund, it is useful to evaluate the past performance of the existing fund.
Tsang Sir cautions that, if an underperforming fund manager continues to increase the stake in investments that detracted the performance of the fund without reasonable grounds, then we must be extra vigilant about that fund investment. Conversely, if a fund is able to beat the market against a bearish backdrop, this is testimony to the fund manager's fund-management capabilities, and investors can consider stepping up their investment in the fund when the price is low.
Focus on Volatility, Return Comes Second
As well as annual returns, Tsang Sir advises monitoring the volatility of fund returns. Assume that two funds - Fund A and Fund B - have the same average annualised return of 10% over the past five years but Fund A has an annualised volatility of five, lower than Fund B's annualised volatility of eight over the same period. It means that Fund A has relatively stable returns and the performance of Fund B was more volatile.
Risk and return are closely related in the investment world. With a lower risk profile, Fund A managed to obtain the same level of return as Fund B, implying that Fund A has achieved a higher risk-adjusted return and performed better than Fund B over the period. When we review the report cards of funds, we can use the Sharpe Ratio to compare their risk-adjusted returns.
To keep our bodies and our fund investments healthy, it's important to conduct regular check-ups and abide by the motto of "prevention is better than cure". While a once-a-year check-up may not be sufficient to keep your investment sound, a daily review may be overkill. Thus, Tsang Sir suggests a quarterly check-up on our fund investments: "Fund investments are like the human body; they can sometimes be susceptible to problems. Funds perform differently in different scenarios - volatility may amplify and diminish, returns may go up and down. Therefore, we need to conduct regular check-ups on our funds to detect any early symptoms of illness. Ideally, the check-up report will reflect a good condition, but if the report raises red flags, it would be wiser for us to treat the small problems before they turn into serious ones."
The benchmark index of a fund can serve as a performance indicator of the fund. It can be used for comparing fund prices and asset prices. For example, the Hang Seng Index is an appropriate benchmark index for Hong Kong equity funds but using it to gauge the performance of US equity funds would be inappropriate. To learn which benchmark index a fund is using, you can refer to the fund's prospectus.
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