1. Introduction

According to the case, the following below are Dr. Lim personal details:

Client Name

Mr. Lim

Age

55 years old

Career

Husband (Mr.Lim) : Medical doctors

Wife : Full time housewife

Marital Status

Married with 2 childrens

Investment Capital

RM 1,000,000

Dr. Lim is subject to financial commitment every month because he is the sole bread winner in his house. His children are going to graduate from secondary school after 3 years. (Appendix 1.1) Additionally, Dr. Lim had planned to send his children off to England to complete their University. Dr. Lim will be free from financial commitment for his family members after age of 60 years old. However, Dr. Lim would have to incur higher financial commitment after his children started to pursue their Bachelor of Degree in England.

After seeking our advices, Dr. Lim willing to let us manage his RM1,000,000 from life insurance proceeds to manage his investments portfolio. From the information given, we have enough data to assume that Dr. Lim is a high net worth individual due to he has ability to pay high amounts of insurance premium to his life insurance endowment plans. (Appendix 1.2) Moreover, we also assumed that Dr. Lim is a sole proprietary which has his own clinic business. Thus, throughout our assumptions, we can conclude that Dr. Lim has ability to bear moderate high risk. Therefore, we advise Dr. Lim invest 95% of insurance proceeds (RM1, 000,000) in Bursa Malaysia to earn above average investment return while remaining 5% retain as liquidity and rebalancing purposes in the future.

Before investing, we will develop an investment policy statement (IPS) to meet with Dr. Lim investment and considerations. IPS is useful in providing guideline in selection of stocks to construct a portfolio. After portfolio constructed, we will compare portfolio return with two mutual funds that have same level of risk and global market indices including bank fixed deposits, Kuala Lumpur Composite Index (KLCI), Japan Nikkei 225, Singapore Straits Times Index, Dow Jones Industrial Average (DJIA), Financial Times Stock Exchange 100 (FTSE 100), and Hong Kong Hang Seng Index (HIS). By comparing with Dr.Lim portfolio return against benchmark for the year 2012, 2013 and 2014, we can have a snapshot of the potential of the portfolio while return on June 2015 will be the first test on the portfolio.

2. Investment Policy Statement (IPS) (Appendix 2.1)

IPS is a written road map used through an uncertain future which leading to achievement of an individual investor's financial objectives. According to CFA institute, IPS is a written document that communicates a plan with client investment objectives and constraints that apply to client portfolio and achieving investment success. (CFA Institute)[footnoteRef:1] This process involves evaluation on investor objectives, liquidity, time horizon, tax factor, legal and regulatory and unique preferences. [1: Institute, CFA. 2015 CFA Level I Volume 4 Corporate Finance and Portfolio Management. Wiley Global Finance, 2014-07-14.]

2.1. Investment Objectives

2.1.1. Risk

Throughout our analyzed and assumption, Dr. Lim is a moderate high risk tolerance investor. He is a high net worth individual as sole proprietary healthcare business. From his endowment insurance premium, Dr.Lim had paid approximately RM30,2423.58 annually as insurance premium(Appendix 1.2). Assume that annual insurance premium is 10% of his total income, Dr. Lim has approximately RM300,000 in his total income (RM300,000 X 10% = RM30,000). Additionally, Dr. Lim subjects to tax rate of 24% due to his chargeable income is within the range of RM250,001 to RM400,000. (Appendix 1.3) Thus, Dr. Lim considers high income individual and has high ability to bear risk to lose RM 1million.

2.1.2. Return

The objective of portfolio is to earn excess return than bank fixed deposits, major stocks indices the world, and unit trust funds with the same level of risk. Thus, Dr. Lim should have higher return to compensate higher risk exposure in portfolio. In order to earn higher return, the portfolio would allocate extreme portion of 95% in Malaysian stock market to ensure objective is reached.

2.2. Investment Constraints

2.2.1. Liquidity

Dr. Lim needs cash flow in years 3 which is after age of 58 years old for his childrens further education. (Appendix 1.1) Thus, income stream is important to Dr. Lim in year 3 but the amount cash flows required by Dr.Lim in the first three years is very low. Income stream from dividend stocks would also help to cover some expenses met in his childrens education without liquidate much stocks while income stream in first few years will reinvest. Dr. Lim is still have other sources of income from his business, allow him to put this portfolio aside in no worries.

2.2.2. Time Horizon

The portfolio is designed for investment period of 5 years from 1 June 2015 to 31 May 2020. However, Dr. Lim might withdraw part by part of invested capital in years 3 to cover for his childrens educations fees in England. Thus, investment time horizon considered as medium term. Additionally, the portfolio might minimize the portfolio risk and expect higher potential return. Historically, short term investment might tend to panic and long term investment allows providing potential higher range of return. Thus, the long term investment allows reduce volatility portfolio return and offset the effects of inflation.

2.2.3. Tax Factor

While taking consideration of the tax factor, the main objective is to reduce the tax payable to minimal. The investment portfolio for Dr. Lim has no tax concerns for Dr. Lim. In Malaysia, stock dividend is charged under single-tier system, which will not be tax again after received the dividend. Apart from that, capital gain from stock is not taxable. The medium to long term investment invested in Malaysia stock market is not subject to tax and the nature of income for Dr. Lim is not from his investment return. Thus, Dr. Lim is allows to enjoy tax exemption from his investment return.

Apart from that, as we mentioned in investment objective, Dr.Lim is a high net worth individual operating his own clinic with an approximately RM300,000, therefore he is still subject to income tax at 24% tax rate.

2.2.4. Legal and Regulatory Constraints

There are some legal and regulatory constraints needed to comply in our investment services. It is necessary to enter into a contract to appoint our company as agent of Dr. Lim. The relationship between our company and Dr. Lim is Principal-Agent relationships. As an agent, our company should think in the best interest of Dr. Lim. Our company should not make use of Dr. Lims money for own purpose and should open a separate account to manage it. Therefore, our company is subject to Law of Agency governed under Part X of Contracts Act 1950. Apart from that, our services also governed by Part V Capital Market and Services Act 2007[footnoteRef:2]. This is to prevent agents misconducts which may lead to suit case. Misconducts may include market manipulation (Subdivision 1) and insider trading (Subdivision 2). [2: http://www.sc.com.my/wp-content/uploads/eng/html/cmsa/cmsa2013/2013_cmsa_full_121228.pdf ]

2.2.5. Unique Needs and Preference

Dr. Lim has strong cash positions after receives his life insurance endowment plan proceeds. With his wish to use the endowment proceeds to support his children education fees, an investment portfolio is required to achieve capital appreciation.

3. Portfolio Allocation

3.1. Top Down Approach (definition)

3.1.1. Economic Analysis

Top down approach is used to understand the market condition first before anything start. Economic analysis refers to the process of understanding the macro-environment before it go depth into industry and security analysis.

For external macroeconomic environment, current US job market continues to improve and sustained recover in housing market signaling that US Federal Reserved (Fed) is going to increase interest rate. (Appendix 3.1.1.1) The increase in interest rate at US Federal Reserve (Fed) might reduce global economic growth in the future. Apart from that, the instability of Eurozone especially Greece financial crisis affect the whole world investors confidence. Greeces issue involved decision whether the country falls out from Eurozone, debt negotiating with IMF and European Committee Board (ECB).

For internal economic environment, Malaysia is a country with natural bless. Flourish in natural resources allows Malaysia to have competitive strengths in certain industries such as tourism and manufacturing. Recently, the foreign investors and local retail recorded RM3153.6 million and RM72.4 million of outflows respectively. (Appendix 3.1.1.3) This poor economy performance mainly due to political instability issues and dropped in commodity price. However, it was believed that the situation is just temporary and would recover after issues solved. According to Maybank Research, Malaysia GDP able to maintain stable GDP growth rate since 3Q 2014 mainly due to domestic demand. Malaysia net external demand had decreased from +12.8% YoY to 10.2% YoY in 1Q 2015. (Appendix 3.1.1.4) However, domestic demand had increased to 7.9% YoY in 1Q2015 from 5.9% in 2014. This mainly contributed by private sectors benefited from growth in pre-GST sales increase +8.8% YoY. Among all industries, both manufacturing and construction sectors had shown the positive contribution to real GDP growth.

3.1.2. Industry Analysis (definition)

Malaysia KLSE Main Board is divided into 14 sectors. After screening through the industry, some industries were filtered away while potential industries are emphasized. (Appendix 3.1.2)

3.1.2.1. Trade and Services Sector

Trade and services industry is main contribution to real GDP growth rate in Malaysia. Malaysia Third Industrial Master Plan (IMP3) aims to promote global competitiveness by transform manufacturing and services sectors into major industry[footnoteRef:3]. Services sector contributed 6.5% YoY in 2014 and 6.4% YoY in 1Q 2015 to Malaysia real GDP (Appendix 3.1.1.4). [3: http://www.miti.gov.my/index.php/pages/view/1690 ]

Under Eleventh Malaysia Plan, government placed service sector as the primary force for economic growth. Among services sector, communication sector has the largest growth rate of 9.7% in 2014 due to highest productivity growth rate in Information and Communications technology (ICT)[footnoteRef:4].(Appendix 3.1.2.1) [4: http://rmk11.epu.gov.my/pdf/strategy-paper/Strategy%20Paper%2018.pdf ]

Also, government will promote wholesale and retail trade sub sector which supported by strong labor market condition, domestic household spending, and high tourist arrival. The wholesale and retail trade contributed 8.9% growth in services sector. (Appendix 3.1.2.1) The main driver due to increasing structural and size of retail trade, growth in franchise industry, improve of consumer protection, and productivity level[footnoteRef:5]. [5: http://rmk11.epu.gov.my/pdf/strategy-paper/Strategy%20Paper%2018.pdf ]

Throughout our research, we allocate 25% to 30% of funds of our portfolio in trade service industry due to strong growth in coming next 2016 to 2020 under 11th Malaysia Plan (Appendix 3.1.2). Additionally, most of the trade and services stocks are giving high dividends payment to shareholders and fluctuation of stock price is minimize. Thus, trade and services stocks enable improve portfolio return stability and lower risk

3.1.2.2. Technology Sector

The development of industrialized nation required technological advancement to promote competitive of manufacturers. According to BMI Research, some of the hardware and software upgrade increase in demand due to increase in competition across in South East Asia[footnoteRef:6]. [6: http://store.bmiresearch.com/malaysia-information-technology-report.html]

Technology developments in broadband powered network was under development and its important to facilitate cost effectively, information transfer between all stakeholders, establish relationship, and socioeconomic development. Thus, under 11th Malaysia Plan, government planned to increased telecommunication towers to enable increase internet penetration rate especially rural community to promote new skills and knowledge[footnoteRef:7]. Additionally, increase in affordable data connectivity allows to increase in data to respond with high competitive of Southeast Asia market. [7: http://www.pikom.org.my/2014/ICT-StrategicReview/ICT_StrategicReview2013-2014.pdf ]

Nonetheless, a technology sector is risky due to its new innovation needed. Moreover, high capital expenditure in research and development required to respond with high competitive environment. Technology sectors have relative higher price fluctuation and higher risk than others sectors. Thus, we allocated technology sectors as our second highest fund allocation in between 20% to 25% of fund in order to aim for price appreciation portfolio return. (Appendix 3.1.2)

3.1.2.3. Consumer Sector

The changes of the Malaysias subsidy and the implementation of a 6% goods and services tax (GST) in April 2015 will cause the slowdown in domestic consumption in post-GST implementation[footnoteRef:8]. However, inflation is still under manageable after implementation of GST. The Producer Price Index (PPI) was declined from 3.0% in 3Q 2014 to 2.8%in 4Q 2014 driven by lower inflation in non-alcoholic beverage and food category. (Appendix 3.1.2.3) [8: http://www.fastmr.com/prod/987494_malaysia_food_drink_report_q3_2015.aspx ]

Consumer sector majority made up of defensive stock which has lower beta and lower correlation with market condition. Hence, we allocate 8%-10% of fund to portfolio to diversify the portfolio because of its lower risk and higher dividend receipts. (Appendix 3.1.2)

3.1.2.4. Finance Sector

The local rating agency, RAM Ratings had recently maintained the stable outlook towards finance industry in Malaysia. This mainly due to lower interest rate environment allows promoting strong capitalization and good quality loan performance[footnoteRef:9]. Therefore, we expect finance sectors will maintain a positive outlook in the future. Additionally, banking and finance industry underpinned by a strong regulatory and supervisory framework. Thus, finance sectors relative stable and might contribute stable dividends income to our portfolio. Thus, we distributed 8%-10% of fund into finance sector as our portfolio selection. (Appendix 3.1.2) [9: http://www.bloombergtv.my/ram-ratings-assigns-stable-outlook-malaysias-banking-sector/ ]

3.1.2.5. Construction Sector

In 1Q 2015, construction sector contributed positive growth rate to 0.4% YoY in real GDP (Appendix 3.1.1.4) Currently, construction sectors mainly support by Malaysian government spending on transport and energy infrastructure would drive for construction activity in next future years[footnoteRef:10]. The infrastructure construction under 11th Malaysia Master Plan involved Mass Rapid Transit (MRT) projects, road construction, and power plan constructions. Moreover, there are more states under urbanization progress. Hence, more construction opportunities are coming in the future could stimulate and maintain the strong real growth forecast to the construction sector. With this, 8%- 10 % of fund will be allocated into construction sector in order to enjoy the growth of the construction sector. (Appendix 3.1.2) [10: http://www.bmiresearch.com/news-and-views/infrastructure-to-drive-construction-growth-in-2015 ]

3.1.2.6. Real Estate Investment Trust (REITs)

Malaysias commercial real estate market is in advantage with the location in South East Asia and the welcoming attitude of government to foreign investment. The Malaysia House Price Index has shown dropped from year 2013 due to lower demand for property sector. (Appendix 3.1.2.1) However, even the price of the property has shown reduced, but the stable of rental received from resident and commercial property able to support the stable earning for REITs sector. Thus, allocation of 3%-5% into REITs sector might able to provide stable earning to our portfolio return (Appendix 3.1.2).

3.1.3. Hotel

The tourism sector contributed 12% of Malaysia GDP growth[footnoteRef:11]. The leisure and business tourism involved development of shopping destination, integrated resorts, entertainment zones, and quality hotels. Malaysia government continues to push the tourism and culture sector to attract global hotel groups development to meet demand for tourism market in Malaysia[footnoteRef:12]. Thus, we allocate 3% to 5% of fund into hotel sector for portfolio selection to aims for high dividend yield. (Appendix 3.1.2.1) [11: http://etp.pemandu.gov.my/Tourism-@-Tourism.aspx ] [12: http://www.marketresearch.com/Business-Monitor-International-v304/Malaysia-Tourism-Q2-8925815/ ]

3.2. Security Analysis (Appendix 3.2)

Securities analysis is the third step in top-down approach. Among selected industries, each industry has variety of companies categorized under it. Choosing the right securities in these industries will be crucial to attempt to outperform market by using certain indicators.

3.2.1. Stock Selection Strategy (Appendix 3.2.1)

Due to high net worth of Dr. Lim, we will construct a portfolio invested in stock and financial instruments listed in Bursa Malaysia. There are several strategies and indicators to construct the portfolio.

3.2.1.1. Stock Categories

Firstly, all the stocks selected are listed Bursa Malaysia Main Board. This is to ensure the size of the company is large enough and to ensure portfolio has relatively stable portfolio return.

Secondly, our stocks selections in the portfolio are divided into two categories which are dividend yield stocks (Appendix 3.2.1.1) and growth stocks (Appendix 3.2.1.2). While constructing the portfolio, the balance of the portfolio is considered in order to meet Dr.Lims objectives. Dr. Lim is unable to sustain higher risk for his investment portfolio, stable dividend stocks combining with growth stocks allow minimizing entire portfolio risk. Therefore, defining dividend yield a minimum threshold of 5% dividend yield per year, we allocate 65% of dividend yield stocks, 30% of growth stocks and 5% cash reserves into portfolio. 9 dividend yielding stocks and 5 growth stocks shall include in portfolio and cash reserves of 5% is used for rebalancing purpose and liquidity.

3.2.1.2. Beta (Appendix 3.2.1.2) (Source definition)

One of the indicators used to select stock for portfolio is by beta (). The portfolio is consists of 14 stocks with 7 high beta and 7 low beta stocks. (Appendix 3.2.1.2) The reason behind is to find a chance to outperform market during market boom with high beta stocks. Furthermore, the weighed beta for the portfolio is 0.96. (Appendix 3.2) It means that Dr.Lim portfolio is slightly safer than the market and therefore would have the lower portfolio risk against market risk.

3.2.1.3. Return On Equity (ROE) Source definition

The last indicator used is ROE. We had set minimum 9% of ROE as our benchmarks to evaluate company efficiency in manage its equity to generate profits. (Appendix 3.2.1.2.3) In the construction of the portfolio, most stocks follow the benchmark, having ROE more than 9%, except GHL System Berhad, Shangri-LA Hotel Malay Bhd, and Bina Darulaman Bhd which have ROE of 4.31%, 7.84%, and 5.94% respectively.

3.2.2. Stock Selections (Appendix 3.2)

For Trade/Services sector, Harbour-Link Group Bhd (Habour), Hap Seng Consolidation Bhd (Hap Seng), Maxis Bhd (Maxis), Pansar Bhd (Pansar) , and Atlan Holdings Bhd were chosen. For Trade/Services sector, Harbour and Hap Seng are the main stocks. Harbour is enrolling in shipping and total logistics services, engineering & construction industry[footnoteRef:13] while Hap Seng is a well-diversified conglomerate in plantations, property development and investment, credit financing, automotive, fertilizers trading, quarry and building materials as well as trading[footnoteRef:14]. The reason for choosing Harbour is because of its high ROE and negative beta that can indicate Harbour to have higher profit in the situation that market is not good. In contrast, Hap Seng was chosen because of it has ROE and dividend yield that exceeded benchmark and the high beta would allow Hap Seng to have higher return than market. Moreover, Pansar is supplier and service provider of building products, marine & industrial, wood engineering, electrical & office automation and mechanical & electrical engineering[footnoteRef:15] . Pansar has ROE of 9.53% and low beta that fulfilled ROE benchmark and lower beta is effective to defense against market downturn. Furthermore, Maxis might benefit from 11th Malaysia plan to expanding its telecommunication connectivity and to meet demand for increase in cellular phone subscribers. Maxis has beta of 0.45 and high dividend yield of 6.01% allows enjoying lower risk and stable dividend return. [13: http://www.harbour.com.my/ ] [14: http://www.hapseng.com.my/about-us.html ] [15: http://pansar.com.my/about-us/ ]

For finance industry, Malayan Banking Bhd was picked. Malayan Banking Bhd is the top 1 bank in terms of banking experience with services such as commercial and Islamic banking in Malaysia and other countries[footnoteRef:16]. Apart from that, insurance (both general and life), stock and futures broking, leasing and factoring services were also provided through subsidiaries[footnoteRef:17]. Malayan Banking Bhd also had won many awards include Best Bank in Malaysia[footnoteRef:18]. With such high glory, Malayan Banking Bhd is the best candidate to fill in the position in our portfolio. Malayan Banking Bhd also had fulfilled ROE and dividend yield benchmark. The beta of 0.82 can also help to reduce market risk while profits from dividend income. [16: http://top10malaysia.com/home/index.php/news-and-events/top10-banks-in-malaysia-peoples-choice-for-best-banking-experien ] [17: http://www.bloomberg.com/quote/MAY:MK ] [18: http://top10malaysia.com/home/index.php/news-and-events/top10-banks-in-malaysia-peoples-choice-for-best-banking-experien ]

For consumer product industry, Carlsberg Brewery Malaysia Bhd (Carlsberg) took a major portion. Carlsberg is an established brewery that manufactures and distributes beers, stout and other beverages mainly in Malaysian market while having investments in foreign alcoholic beverage company[footnoteRef:19]. High ROE in Carlsberg made it the lead in our consumer product sector with dividend yield higher than the benchmark. Apart from that, consumer product sector considered a defensive sector which has more sustainability during market downturn[footnoteRef:20]. However, with its 1.2 beta, Carlsberg would face higher market risks but at the same time have higher chances to outperform than market with its defensive characteristic. [19: http://www.carlsbergmalaysia.com.my/web/company/cm_carlsbergmsia.aspx ] [20: https://www.fidelity.com/sector-investing/compare-sectors ]

For real property investments (REITs), REITs is a more preferable investment in terms of small capital. YTL Hospitality REIT had been chosen to form part of the portfolio with the purpose of diversification. YTL Hospitality REIT focuses its real estate portfolio on hotel and hospitality related properties in Malaysia, Japan and Australia[footnoteRef:21]. With a beta of 0.31, YTL Hospitality REIT would have less fluctuation to the market which may due to real estate investments that considered as long terms investment and it do not have direct relation to the share market performances. However, its tradability made it tradable and with stable dividend income, YTL hospitality REIT is able to provide enough income streams while on the other hand protect investment from downturn. [21: http://www.bloomberg.com/quote/YTLREIT:MK ]

Technology sector always associated with high risk. However the technology advancement allows them to make extraordinary return than other sector. In the portfolio, JCY International Bhd held major share in this sector. JCY International Bhd doing business on manufacturing base plate, top covers, Actuator Pivot Flex Assembly, Flip Chip on Flex, antidisc to IT company[footnoteRef:22]. JCY allows taking advantages in hardware and software development to meet in increasing demand. JCY had fit all the indicators, ROE higher than the benchmark and is a dividend yielding stock. Its high beta of 1.9 shows its strong relationship to market and seeks to have extraordinary gain or loss when market in boom or downturn. [22: http://www.jcyinternational.com/index.php?option=com_content&view=article&id=52&Itemid=57 ]

For Hotel sector, there are three stocks in the sector. Throughout these three stocks, Shangri-La Hotel Malaysia Bhd performed the best among all. With the intention of diversification, Shangri-La Hotel Malaysia Bhd also has a seat in the portfolio even though it does not fulfil the benchmark set in the policy statement. However, due to fame of the Shangri-La Hotel in all the awards including best hotel in Malaysia, we would expect more people would like to go there and enjoy their meal and services[footnoteRef:23]. [23: http://www.shangri-la.com/kualalumpur/shangrila/about/awards/ ]

For construction sector, Bina Darulaman Bhd is the stock in the portfolio. Same as hotel sector, the presence of construction sectors stock is to diversify. Bina Darulaman Berhad involving in core businesses of engineering & quarrying, townships & property development, tourism & hospitality[footnoteRef:24].The valuation of construction sector is different from other sectors. It was indicated by P/E ratio. Because of the slowdown in construction sector, the past glorious history does not have much impact on future earnings. According to Reuters, Bina Darulaman Bhd has a low P/E of 4.39 compared with its sector average of 24.71, which is highly undervalued in terms of P/E ratio. It would have high possibility that the price will go back to normal. [24: http://www.bdb.com.my/index.php/Corporate-Info/background.html ]

4. Selection of Unit Trust Funds

In order to compare the performance of the portfolio, two mutual funds are chosen, which are CIMB-Principal Equity fund[footnoteRef:25] and Kenanga Islamic fund[footnoteRef:26]. There are several reasons to pick both of the funds to make comparison, where majority due to the similarity characteristics of the unit trust funds and our portfolio. [25: http://www.fundsupermart.com.my/main/fundinfo/viewFund.svdo?sedolnumber=MYCIMB015 ] [26: http://www.fundsupermart.com.my/main/fundinfo/viewFund.svdo?sedolnumber=MYKNGKIF#snapshot ]

4.1. Background of Unit Trust Funds

CIMB Principal Equity fund launched at 1/8/1995 has fund size of RM531.00 million (as at May 31, 2015) whereas Kenanga Islamic fund established at 15/8/2002 which have RM47.26 million (as at May 31, 2015). Kenanga Islamic Fund is Shariah-complaint fund where CIMB Principal Equity fund is non Shariah compliant fund.

4.2. Fund Objectives

The Kenanga Islamic Fund is a Shariah Principles based funds aims to provide stable income distribution and capital appreciation over the medium to long-term by investing in a diversified portfolio of authorized investments. In contrast, the CIMB Principal Equity Fund objectives are to maximize capital growth over the medium to long-term through the stock market in Malaysia.

4.3. Investment Horizons

The investment horizon for CIMB and Kenanga funds are long term horizon. CIMB fund is recommended for five (5) years or more while Kenanga fund is recommended for long term investment horizon investors. Hence, both funds are match with Dr.Lim portfolio investment horizon of five years.

4.4. Asset Allocation

Both CIMB and Kenanga funds are Malaysia-based investment funds which fully invested in Malaysia stock market. Thus, Dr.Lim portfolio and selected unit trust funds asset classes have same geographical allocation.

Both Kenanga Islamic Fund and CIMB Principal Equity Fund invested fund major in trade and services industry which are 32% and 39% respectively. (Appendix 4.2.1 & 4.2.2). On the other hand, Dr.Lim portfolio also heavily invested 30% of funds into trade and services industry. Hence, this could use to compare the returns of funds and our portfolio accurately and without biased. (Appendix 3.1.2 ). Additionally, both of the funds asset classes have similar asset allocation with the portfolio. Both of the fund allocation majority invest in equity (stock) and keep a little portion of cash with the portfolio for liquidity and rebalancing purposes.

4.5. Risk And Return

Under Fundsupermart risk rating, both Kenanga Islamic Fund and CIMB Principal Equity Fund is considering moderate high risk unit trust funds. According to Fundsupermart, moderate high risk means that its provides higher return compare to bond funds and invested in single country[footnoteRef:27]. Kenanga Islamic Fund and CIMB Principal Equity Fund hold the market portfolio which major in blue-chip stocks. (Appendix 4.2.2 & 4.2.1). Additionally, all the stock selection in Dr.Lim portfolio is listed in main market. Thus, both unit trust funds against Dr.Lim have large market capitalization and volatility in the market. [27: http://www.fundsupermart.com.my/main/images/riskrating.gif ]

Both of the mutual funds benchmarks for CIMB Principal Equity Fund and Kenanga Islamic Fund are used FTSE Bursa Malaysia 100 and FTSE Bursa Malaysia EMAS Shariah respectively. Both of the funds had outperformed its benchmarks market return where CIMB Principal Equity Fund has -4.22% whereas Kenanga Islamic Fund has -1.84 % of fund performance in year 2014. (Appendix 4.5.1 & 4.5.2). Compare historical return in year 2014, Dr.Lim portfolio is outperformed than both unit trusts funds. (Appendix 5.1.1.2) However, CIMB Principal Equity Fund has performed better than both Dr.Lim portfolio and Kenanga Islamic Fund.

5. Historical Performance

5.1. Historical Return for 2012, 2013, and 2014

Summary Historical Return for constructed portfolio, market indexes, unit trust fund in years 2012, 2013, and 2014

2012 Annual Return

2013 Annual Return

2014 Annual Return

Holding Period Return

Holding Period Yield

Holding Period Return

Holding Period Yield

Holding Period Return

Holding Period Yield

Dr.Lim's Portfolio

1.1554

0.1554

1.2241

0.2241

1.0462

0.0462

Bank Fixed Deposits

1.0300

0.0300

1.0300

0.0300

1.0325

0.0325

Kuala Lumpur Composite Index (KLCI)

1.1085

0.1085

1.1079

0.1079

0.9440

-0.0560

Japan Nikkei 225 (N225)

1.2159

0.2159

1.5363

0.5363

1.0807

0.0807

Singapore Straits Times Index (STI)

1.1968

0.1968

0.9934

-0.0066

1.0583

0.0583

Dow Jones Industrial Average (DJIA)

1.0722

0.0722

1.2650

0.2650

1.0755

0.0755

Financial Times Stock Exchange 100 (FTSE 100)

1.0584

0.0584

1.1443

0.1443

0.9729

-0.0271

Hong Kong Hang Seng Index (HSI)

1.2070

0.2070

1.0195

0.0195

1.0065

0.0065

CIMB PRINCIPAL EQUITY FUND

1.1171

0.1171

1.2456

0.2456

0.9578

-0.0422

KENANGA ISLAMIC FUND

1.0869

0.0869

1.1980

0.1980

0.9816

-0.0184

Appendix 5.1.1.2.: The line graph of constructed portfolio against benchmarks &market indexes

6. Graphical format of historical return

Constructed portfolio return against unit trust fund, KLCI and fixed deposit

The line graph of historical return of constructed portfolio against market indexes (colour adjust )

Appendix 5.2.: The histogram below shows the summary of portfolio return against unit trust funds and market indexes for June 2015

Portfolio with KLCI, Fixed Deposit and Mutual Funds

The market performance of CIMB Principal Equity Fund, Kenanga Islamic Fund and Dr. Lims showed an upward trend from 2012 to 2013 and then plunge significantly in 2014. Meanwhile, the market performance of the fixed deposit remains stagnant over the three years from 2012 to 2014. (Appendix 5.1.1.1 & 5.1.1.2)

The upward movement of all the performance of CIMB Principal Equity Fund, Kenanga Islamic Fund and Mr. Lims portfolio in year 2013 is due to the outcome of Malaysias general election. Before the 13th General Election in Malaysia is conducted, the market is very volatile due to the political instability. However, after the announcement of Barisan Nasional's (BN) victory and it will continue to serve as the ruling party of Malaysia for the next five years, Malaysia stock market recorded its most bullish week pushing the FBM KLCI to a new high. According to FreeMalaysiaToday (FMT) news, this bullish trend of the local stock market is anticipated to continue as they are pretty confident that the retail investors will return back to the equity market. This explain the reason why there is a great performance in the year of 2013 as majority of the funds in Mr. Lims portfolio, CIMB principal Equity Fund and Kenanga Islamic fund are allocated in equity market. This helped to boost the return performance of Mr. Lims portfolio to 22.4%(2013) from 15.5% (2012), CIMB Principal Equity Fund to 24.6%(2013) from 11.7%(2012) as well as Kenanga Islamic Fund to 19.8%(2013) from 8.7%(2012).

In years 2014, overall Malaysia stock market performance is under depressed. All of benchmarks return has dropped. (Appendix 5.1.1.2) However, Dr. Lim portfolio return has outperformed against both CIMB Principal and Kenanga Islamic Fund. This mainly due to internal factors which involved Malaysia Ringgit currency declined sharply in late 2013 along with the U.S Federal Reserves change in monetary policy and decision to reduce quantitative easing (QE). Also, Malaysian economic suffers capital outflow and accumulated a total of USD394,869 million (RM1.3trillion) lead outflows. Besides, Malaysian national debt is triple grew in a year from RM196 billion at the end of 2013 to RM740.7 billion in the third quarter of 2014. Therefore, the negative events lead dropped in overall market performance in 2014.

Portfolio with Indices

The Appendix 5.1.2 shows the performance of major indices from all over the world from 2012 to 2014. The performances are quite deviate from each index. 2012 is a good year whereby all indices shows a positive return and indices point rose vary from 5.84% to 21.59%. However, the situation changed as time goes. There are some extreme changes in 2013 and 2014.

In 2013, NIKKEI 225 showed super growth of 53.63% due to the quantitative easing measure and expansionary policy by Japan government. Additionally, DJIA rose by 26.5%, mainly due to US Federal Reserve expansionary policy and increased in consumer discretionary and health care industry[footnoteRef:28]. In contrast, STI dropped by 0.66% while other indices growths are vary from 1.95% to 14.43%. [28: http://www.cnbc.com/id/101303244 ]

In 2014, China has slows down and unable to meet its GDP target of 7.5% in 2014[footnoteRef:29]. Hang Seng Index is dropped gradually from 20.70% in 2012 to 0.65% in 2014. Additionally, dropped in crude oil price due to increased supply of crude oil production has lead dropped in KLCI as major of oil producers companies unable to response change in oil price. Also, the Fed Quantitative Easing (QE) led US Dollar appreciated against major currencies[footnoteRef:30]. DJIA benefited from Fed stimulus packages increase in 14.43% in 2013 but dropped 2.71% in 2014. For Japan, government inject more government expenditure under fiscal stimulus package has not fully reflect its response and lead depreciation of Japanese yen. Nikkei 225 has largest dropped from 53.63% in 2013 to 8.07% to 2014. Also, Western Europe GDP rate still maintained weak at pre-crisis level due to weaken unemployment situation and Greece debt issues lead dropped in investor confidence. Thus, FTSE 100 is dropped from 14.43% in 2013 to-2.71% in 2014 growth rate. [29: http://www.chinadaily.com.cn/business/2014-12/29/content_19188110.htm ] [30: http://www.un.org/en/development/desa/policy/wesp/wesp_current/WESP2014_mid-year_update.pdf ]

7. Monthly and annualized return of portfolio with Mutual Funds, Fixed Deposits and indices

Appendix 5.2.1 : The histogram portfolio return against market indices and mutual funds

8. Graphical format of monthly and annualized return

Annualized portfolio return against Fixed deposit, KLCI and mutual funds and Indices for June 2015

8.1. Annualized Historical Performance For June 2015 (Appendix 5.2.)

For Dr.Lim portfolio return, the Harbour Link Group Berhad achieved the highest return of 3.152% annualized return. While JCY international Bhd declined 0.608% which recorded largest declined among individual securities. In overall, Dr.Lim portfolio achieved 51.02% annualized return in June 2015. Dr.Lim portfolio has outpaced against all market indexes and selected unit trust funds.

The Appendix 5.2.1 shows the comparison between performances among Dr. Lims portfolio, fixed deposit, KLCI, CIMB Principal Equity Fund and Kenanga Islamic Fund. From the graph, we can conclude that the overall stock market in Malaysia is not performing well except Dr. Lims portfolio and Fixed Deposits. KLCI shows the biggest loser with a drop of 26.91% while CIMB Principal Equity Fund is the second loser with a drop of 25% for the month. Kenanga Islamic Fund also had shown negative result of 14.42% of annualized return. In contrast, Dr. Lims portfolio able to achieve positive portfolio annualized return of 51.02%. It cant be denied that the poor performance of Malaysia stock market due to reasons of instability political issue and 1MDB issue caused dropped in investors confidence. Also, this also might due to external environment effect in the events of Greece debt crisis and dropped in crude oil price.

8.2. Annualized return for June 2015

The Appendix 5.2.1 shows the comparison of performance in annualized return for the month of June 2015 from the major indexes all over the world. As to a grasp on the graph, it can be seen that the world indexes are coming into a downturn in June. The worst performance for the monthly return is FTSE 100 which dropped by 6.63%, followed by HSI with 4.10%; KLCI with -2.58%; DJIA with -2.21%; STI with -1.71% and NIKKEI 225 with -1.02%. Annualizing the returns will show the annualized return of -56.12% to FTSE 100, -26.91% to KLCI; -11.59% to NIKKEI 225; -18.70% to STI; -23.53% for DJIA; -56.12% to FTSE 100 and -39.51% to HIS (Appendix 5.2.1).

Global issue may be one of the issues in causing such global decline. The uncertainty for Greece to accept IMFs bailout toggling the volatility in the global view and the default of Greece on its debt repayment will definitely affect investor confidence. Apart from that, FTSE 100 was impacted heavily due to the underperforming in euro zone (Greeces debt crisis) in macro while the significant drop in mining supermarket sector had made FTSE 100 performed worse.

9. Conclusion

While the first month, June 2015 annualized portfolio result had come out, the investment policy is required to review and monitor to ensure that the portfolio is stand in line with objectives. The portfolio had successfully met the requirement which set in the policy statement. Besides that, the dividend received during the holding period will be reinvested and weightage of stocks will be monitored at the same time. Furthermore, Dr.Lim might able to withdrawal some part of dividend after years three to meet his liquidity needs. We able constructed a medium high risk portfolio which consisted of 65% of dividend yield stocks and 30% of growth stocks and remaining 5% for liquidity and rebalancing purposes.

Under comparison benchmarks return, Dr.Lim portfolio is had a consecutive outperformed history (for three years) than the KLCI and fixed deposit rate. Furthermore, the Dr.Lim portfolio is outperforming market in the first milestones of investment horizon in June. The Dr.Lim portfolio monthly return has around 3.5% compared with KLCI and Fixed Deposits which having -2.58% and 0.35% return respectively. (Appendix 5.2) Furthermore, instead of falling with KLCI, Dr Lim portfolio is able to sustain the profitability. This had fulfilled the promised we had made to Dr. Lim in which portfolio return might outperform Fixed Deposits and KLCI.

In conclusion, even Dr.Lim portfolio is outperformed against major market performance, but the performance of June 2015 cannot indicate the overall perform across the investment horizon. It only represents the success to increase the wealth in June. The performance and the allocation of assets is still subject to rebalance and review periodically according to policy statement.

appendix

3.2.1.1 Definition of Dividend Yield Stocks

According to CFA institute, dividend yield stocks means earning of the company is relative stable and without affected by changes in business cycles[footnoteRef:31]. Dividend yield stocks also categories as defensive stock which grants high dividend payment. [31: http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/analyzing-companies-stock-types.asp ]

3.2.1.2 Definition of Growth Stocks

According to CFA institute, growth stocks refer to company stock that able to provide consistently growth rate by business expansion to generate sustainable growth rate[footnoteRef:32]. Investors allow enjoying high rate of return with the similar risk profile under growth stock. Growth stock return received higher in capital appreciation against dividend payment. [32: http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/analyzing-companies-stock-types.asp ]

3.2.1.3 Definition of Beta

Beta indicates the tendency and volatility of a stock in relation with the market movement. The beta for the market is 1 while individual stocks will be ranked according to their deviation to the market. The stock which tends to move wider than market over would indicate a beta above 1. Additionally, beta less than 1 represent stock has less risky than market. High beta stocks would be riskier but enjoy a potential high return due to their high standard deviation to the market. In turn, low beta stocks would be safer but pose with lower return than the market.

3.2.1.4 Definition of ROE

ROE reflect the profitability ratio which measures how efficient a company manages their equity to generate profits. It means that how much profit earned by each dollar contributed by shareholders[footnoteRef:33]. High ROE represent the high earnings turnover by using equity fund, in turns shows high efficiency of the company to utilize its fund to generate income. On the other hand, low or negative ROE shows poor earning ability and efficiency in utilizing companys fund resulting very low profit or even loss in the financial year. [33: http://www.myaccountingcourse.com/financial-ratios/return-on-equity ]

INDEXES PERFORMANCE (2012-2014)

KLCI2012201320140.10850.10788-5.5989999999999998E-2N2252012201320140.215875941863539010.536263850252250988.0707649586252705E-2STI2012201320140.19677291363576199-6.6361620653644102E-35.8333097459799303E-2DJIA2012201320147.2247465263202595E-20.264978671123218997.5481967660240096E-2FTSE 1002012201320145.8413940383683603E-20.14434195801824401-2.71147264079655E-2HIS2012201320140.207040356642075011.95159720475498E-26.4930524168585E-3Portfolio 2012201320140.155400000000000010.224099999999999994.6199999999999998E-2

Years

Return (%)

PORTFOLIO VS BENCHMARKS (1 JUNE-30 JUNE 2015)

Portfolio421560.51019999999999999FD421564.2799987944965902E-2KLCI42156-0.26914826666976799CIMB PRINCIPAL EQUITY FUND42156-0.249974869529351KENANGA ISLAMIC FUND42156-0.14420117390855999

PERFORMANCE OF INDEXES (1 JUNE - 30 JUNE 2015)

KLCI42156-0.26914826666976799N22542156-0.115906103923759STI42156-0.18697934048053999DJIA42156-0.23528608947228FTSE 10042156-0.56124592963383002HIS42156-0.39510853504710602Portfolio421560.51019999999999999

PORTFOLIO VS BENCHMARKS (2012-2014)

Portfolio2012201320140.15543503470.22406469164.6161617410000001E-2FD2012201320140.030.033.2500000000000001E-2KLCI2012201320140.10850.10788-5.5989999999999998E-2CIMB PRINCIPAL EQUITY FUND2012201320140.11710.24560000000000001-4.2200000000000001E-2KENANGA ISLAMIC FUND2012201320148.6900000000000005E-20.19800000000000001-1.84E-2

Years

Return (%)

1-Jun30-JunMonthly Return (%)Annualized Return (%)

Dr.Lim's Portfolio3.49479717851.01573938

Bank Fixed Deposits0.34985554.279998794

Kuala Lumpur Composite Index

(KLCI)

1,751.821,706.64

-2.579032092-26.91482667

Japan Nikei 225 (N225)

20,444.5420,235.73

-1.021348487-11.59061039

Singapore Straits Times Index

(STI)

3,375.053,317.33

-1.710196886-18.69793405

Dow Jones Industrial Average

(DJIA)

18,017.8217,619.51

-2.210644795-23.52860895

Financial Times Stock Exchange

100 (FTSE 100)

6,984.406,521.00

-6.634786095-56.12459296

Hong Kong Hang Seng Index

(HSI)

27,373.0626,250.03

-4.102683441-39.5108535

MUTUAL FUNDS

CIMB PRINCIPAL EQUITY

FUND1.7691.7271-2.368569813-24.99748695

KENANGA ISLAMIC FUND0.62050.6125-1.289282836-14.42011739

2015