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Structured products, the most famous of which is possibly the credit default swap, have burnt a lot of high net worth investors in the region during the current downturn.

However, Malaysian investors in structured products, unlike those in Singapore, suffered less losses stemming from the collapse of Lehman Brothers and other US investment banks, CIMB Private Banking co-head Alan Inn said during the panel discussion on Are structured products still relevant in today’s investment portfolio?.

CIMB executive vice president and head of structured products and derivatives Chu Kok Wei characterised structured products as having “some form of capital-protected element plus exposure to the upside”.

Despite the recent bad experience of investors, structured products were a valuable investment tool, said J.P. Morgan, Singapore executive director, derivative sales Yeoh Hong Nam.

While structured products had been sold as a capital-protected substitute for bank deposits, and investors had lost part of their principal in the global meltdown, these products had actually done their job of protecting capital, he said.

“In commodities, if you look at oil (at about US$48 a barrel yesterday), it is down more than 50% from its peak (of US$140 a barrel) but the structured products investor would only be down by about 10% (in his investment),” he said.

Hwang-DBS Investment Management Bhd chief executive officer Teng Chee Wai suggested simple structured products that were “easy to market, understand and buy”. Investors need to know when products provided capital protection and when they did not.

“The moment you feel uncomfortable with the underlying asset, you must sell,” Teng said.

On what was being done to address investor dissatisfaction, Yeoh said regulators in Singapore were taking steps to curb over-the-counter sales of structured products, allowing such investments to be sold only through private banking advisers.

“We have all heard the story of the grandmother who only speaks Hokkien buying a Lehman mini-bond. The Singapore government is taking steps to prevent that from happening again,” he said.

The panel concurred that there was a lack of understanding of structured products among investors and the need for institutions to “chase returns” with increasing complicated products.

As for Malaysia, Inn said local regulators had been more restrictive in the kinds of structured products on offer in the country, which had bode well for investors in the current crisis.

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The Malaysian equity market would be slower to recover compared with Hong Kong and Singapore, which could stage rebounds towards year-end, as investor confidence returns.

CIMB Private Banking co-head Carolyn Leng also said the KL Composite Index may not recover as strongly as other markets, as it had held up quite firmly during the recent crisis.

However, she said local companies in sectors such as oil and gas, and blue chips with strong track records, showed good earnings potential going forward.

“More importantly, companies with good cash flow would be able to withstand this crisis,” she said.
From left: CIMB Private Banking co-head Carolyn Leng, CIMB Bank head of retail banking Peter England and CIMB Private Banking co-head Alan Inn on March 18.

She noted that high net investors were slowly nibbling back into equity investments in markets such as China, as confidence slowly picked up with the introduction of the stimulus package by its government.

“There are investing activities in this market, but not as significant,” she said.

She added that CIMB Private Banking aimed to manage RM10bil in assets from RM4bil currently, but declined to give a target timeline.

Meanwhile, CIMB Investment Bank economist Lee Heng Guie said the Malaysian economy was envisaged to stage a strong recovery in 2011.

“Although Malaysia’s fundamentals are much stronger compared with the previous downturn, its (economic) growth has been affected by the global crisis,” he said.

He noted that to further support demand, Bank Negara would need to cut the overnight policy rate (OPR) by another 50 basis points to 1.5% by year-end.

“But it would not be constructive to cut OPR any further,” he added. – The Star

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Employees Provident Fund (EPF) contributors may have to be contented with lower returns in the coming years as the country’s biggest pension fund struggles to boost income amid steep falls in interest rates and a weak equity market.

Analysts said given the pension fund’s size and strict mandate, it would be very difficult to sustain payouts of above 5% in the coming years.

The 4.5% dividend declared for 2008 on Monday was generally well received, despite coming in lower than the 5.8% in 2007.

That the EPF was able to fork out steady dividends of above 5% between 2004 and 2007 was mainly due to gains from investments in equities.

The collapse in global equities last year, however, had eroded the value of EPF’s shareholdings, forcing it to make a provision of RM4.69bil to account for the lower value of its shares, both domestically and abroad.

The KL Composite Index fell 40% in 2008 and was down 3.3% so far this year at yesterday’s closing of 847.96 points.

Also, the economic slowdown has dragged down corporate profits. This, in turn, has impaired their ability to pay out dividends to shareholders, further reducing the return on investments for EPF.

The EPF has stakes in more than 100 companies listed on Bursa Malaysia, as well as smaller stakes in a number of big listed firms overseas.

Income from equities accounted for 35%, or RM6.67bil, of EPF’s total gross investment income last year.

Just how bad EPF’s dividend payouts will be affected by the current market situation remains to be seen.

It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.

There were calls for a review from various parties demanding a higher payout, but some quarters said the pension fund had done well in safeguarding the nation’s retirement savings amid the current economic crisis.

The question now is how will EPF fare in 2009 and beyond?

Already the fund has warned that this year’s payout would be less than that for 2008.

Weak equity markets will continue to hurt EPF in the near term, but in the longer term, the fund’s performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds.

The EPF had allocated a quarter of its RM342bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.

Malaysian Government Securities (MGS) debt papers maturing in three and five years are currently yielding less than 4% at today’s prices.

In comparison, MGS five-year notes yielded more than 5% a decade ago and above 7% during the 1997/98 Asian financial crisis.

Another big chunk of EPF holdings is in highly rated corporate bonds and low-risk guaranteed loans.

However, the global economic turmoil has cut the supply of new bonds coming into the market.

Cheaper lending rates had also reduced interest income from loans given out.

Investment in bonds and loans made up 40% of EPF’s total investments as at the end of last year.

Dwindling yields from these asset classes have been a drag on EPF’s income for the past couple of years. – The Star

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