If you are a regular investor in Malaysia, you would have at least one residential property, some unit trust funds, and some stocks in your investment portfolio. It’s likely that pretty much all your investments would be based in Malaysia or on Malaysian assets.
Have you asked yourself, what if the country is hit by a sudden down turn? Would your investments be able to weather a financial crisis?
If your portfolio consists of domestic investments only, the answer is likely no.
Investment diversification has been talked about to death, but it is more than just investing in different companies or industries. It is also about geographical diversification.
Fujio Mitarai, the CEO of Canon Inc. once said, “Diversification and globalisation are the keys to the future,” and he is right.
What is geographical diversification?
Geographical diversification refers to diversifying one’s investment portfolio into different geographic regions to reduce investment risks and to improve the overall returns on the investments.
In a geographically diversified portfolio, all investments generally don’t move in the same direction at the same time. The different asset classes could have negative, positive or no correlation at all – which tends to smooth the overall returns of your investment portfolio.
Geographical diversification can have low or zero correlation to the domestic assets you are holding. This is why achieving geographical diversification can help investors to achieve potential upside returns over a medium- to long-term.
Every year, the economy of different parts of the world performs differently – some better and stronger than others. A portfolio that is geographically diversified will have a higher chance of making money even when one part of the world is going through a sluggish economy, for example China, because another part of the world is doing a great deal better, for example, the US.
In the past five years (refer to the following graph), though the Malaysian stock market index has been steadily climbing up, the US market has gone up at a much faster pace, while China has been fluctuating quite frequently.
Between 2000 and 2009, stocks from emerging markets outperformed the S&P 500. Emerging markets refer to developing markets such as China, India and even Malaysia. However, in the past few years, the situation has reversed with China showing more volatility last year.
If you were riding the hype on investing in China, you would have likely gone through a bumpy ride but this can be cushioned by holding funds from developed markets such as Europe and the US. A geographically diversified portfolio should hold different types of assets at the same time to weather through these volatility successfully.
Can this work even for Investment Linked Insurance Plans (ILP)?
Investment-linked insurance offers you the option to combine protection, investment and savings all into one plan. A portion of the premiums paid are used to purchase units in investment-linked funds of your choice. Every month, some of the units in your policy are sold off to pay for insurance and other charges, while the rest of the units remain invested. However, most of us with investment linked insurance plans haven’t put much thought to mitigating the geographical risks of our funds. Maybe it’s time we did.
Just like your other investments, there are no guaranteed returns and policy holders/investors bear 100% of the risk investment in an ILP. Therefore, we should definitely be actively managing our funds in an ILP.
If you think your ILP is just like a regular life insurance policy, you would be missing out on all the flexibility that an ILP offers. For example, unlike the conventional life insurance, you can top up your investments on an ad-hoc or regular basis, make withdrawals and even switch funds.
For most ILPs, the returns you get from the investment can be used to pay for your premiums, which allow you to stop paying temporarily without terminating your plan (provided your policy has accumulated enough units to remain in-force without consistent premium payments). This is known as premium holiday and it comes into handy in situation where your income or cash flow may be affected temporarily, such as job loss or sickness.
To make it easier for you to diversify your investment portfolio in your ILP, Zurich Insurance Malaysia Berhad (Zurich) offers six foreign funds on top of its local Malaysian funds.
Zurich’s foreign funds invest its assets into international funds that diversify into different industries such as information technology, financials, health care, consumer discretionary and industrials. By including these foreign funds in your investment portfolio, you will be exposed to different foreign equities, on top of the local funds.
Zurich’s latest offerings include the Europe Edge Fund and US Edge Fund, which invest into the developed markets in the Europe and the US respectively. Economies that are showing signs of recovery and growth offer attractive opportunities to capitalise on relatively cheaper equities to gain potential upside returns over a longer term.
Another fund worth paying attention to is the Zurich Health Care Fund, which invest its assets in the Vanguard Health Care Fund for exposure to the US and global companies principally engaged in the development, production, or distribution of products and services related to the health care industry.
As reported by the United Nations, the number of older persons (aged 60 years or over) is expected to more than double, from 841 million people in 2013 to more than 2 billion in 2050. There is huge potential in pharmaceuticals as well as health care equipment, technology and managed health care companies; as health care consumption grows in tandem with the aging population across the world.
Getting the most out of your ILP
It is important to match your funds with your financial goals and risk profile. As goals and risks change over time, you should review your funds periodically, and if need to, move your money from one fund to another. However, there will be fees and charges involved for fund switching. Find out how much these fees are as they can eat into your returns.
Unlike endowment plans, ILPs can earn potentially higher returns over the long-term because you will enjoy the full returns of the units that remain in your policy at the point of maturity or cashing out. This is especially true if you take a more active role in managing which funds you are investing into. You also have the flexibility to vary your level of insurance coverage, and even topping up your premiums when the time is right.
Just like any other investment product you choose to put your money in, it is important to understand how they work and the risks involved, and ensure that they are aligned with your financial goals. If you aim for high growth, then make sure that the funds you invest in can deliver on your expected returns. The same strategy should apply for an ILP. The key is to save consistently every month, stay diversified and you will benefit from dollar-cost averaging.
It’s time we all put investment-linked insurance plans in our investment portfolio and take control of our investments.
For more information about Zurich’s range of local and foreign funds, do visit their website.
