Investors are losing ground each year as savings grow more slowly than costs due to inefficient asset allocation, with excessive cash holdings emerging as the key culprit, according to a new report by Manulife Asset Management.
This is the case in Singapore too, as Manulife said that local investors face a potential investment returns shortfall of 3.6% a year versus the annual growth in the cost of their goals. That looks manageable as a percentage, but it represents a large sum when compounded over 10 or 20 years.
The report, entitled “One step forward, half a step back: Meeting financial goals in Asia”, is the sixth in Manulife Asset Management’s Aging Asia series. It analyses the five most cited financial goals on a pan-Asia basis – retirement, paying for children’s higher education, meeting current living expenses, purchasing a primary residence and saving for a rainy day (which includes unexpected healthcare costs) – and the saving and investment strategies that investors are employing to meet these goals (see Chart below).
Mr Michael Dommermuth, Executive Vice President, Head of Wealth & Asset Management, Manulife Asset Management, said: “For Singapore, we highlighted education and purchasing a home. We found that higher education has the potential to deliver attractive returns in the island nation’s knowledge-based economy, justifying the astonishing 12.3% a year cost growth rate over the past five years. Meanwhile, we found that more than 90% of Singapore residents own their own home despite 4.6% a year cost growth in the same period.”
Singapore’s potential returns shortfall of 3.6% a year arises because the cost of the five goals has risen an average of 5.8% a year over the past five years while self-reported investment portfolios delivered average returns of just 2.2% a year in the same period.
Mr Dommermuth commented: “Singapore’s potential shortfall exceeds the Asia (ex-Japan) average potential shortfall of 3.3% because, while the cost of its key financial goals are rising at a moderate rate relative to regional peers, we found that potential local-currency returns on self-reported investment portfolios are the lowest in the region.”
Shift to local market equities or fixed income
The research reveals the relatively low local-currency returns and the resulting shortfall is primarily the result of the high level of cash investors hold in their portfolios. According to the survey, the average Singaporean holds 33% of their assets in local currency.
Mr Dommermuth said: “Singaporeans are hardly alone, with survey respondents across Asia reporting that 37% of their assets are allocated to local currency. Our research reveals that this level of cash holdings is the key factor compromising investors’ abilities to generate returns that match or exceed the growth in the cost of their five leading financial goals. Indeed, we found that local currency delivered a mere 0.5% a year in Singapore over the past five years versus average returns of just 2.0% on a pan-Asia basis (ex-Japan).”
According to Ms Jill Smith, Senior Managing Director with Manulife Asset Management (Singapore) Pte. Ltd, reallocating a portion of this cash to more efficient assets such as local-market equities or fixed income could meaningfully reduce the potential returns shortfall facing Singaporean investors.