Market Summary for February 2011
The bull in global equity markets remains deeply entrenched despite the recent political unrest in the Middle East and North Africa (MENA). Global equity represented by MSCI AC World index gained 2.8% in February, bringing year-to-date returns to 4.3% (as of 28 February 2011 in local currency terms). However, regional equity returns saw a divergence between emerging markets and developed markets. Both the MSCI Asia ex-Japan and MSCI Emerging Markets fell 4.0% and 1.0% in February while S&P 500 (US), Stoxx 600 (Europe) and Nikkei 225 (Japan) gained 3.2%, 2.3% and 3.8% respectively over the same period.

Oil prices skyrocketing over violent protests at the MENA Front
The recent unrest among the MENA countries has resulted in a sudden surge in oil prices. Within a short span of 1 month, the Brent Crude surged 10.6%, rising from US$101.12 as of 31 January 2011 to US$111.80 as of 28 February 2011.However, the same observation cannot be made on the WTI Crude which gained only 2.9% over the same period. As a result, the spread between the two commonly quoted crude oil prices widened to US$14.83 as of end February, almost twice the spread of US$7.63 as of end January and significantly higher than the US$1.90 spread as of end 2010. We believe this to be a short term shock and oil prices should converge and normalise once the tension over the MENA front eases. Hence, based on our current evaluation, we do not think that global growth would be dislodged. You may wish to refer to the article “Markets Roiled by Oil's Turmoil” for a quick update on the turmoil in MENA as well as “Drilling Deep into Oil” for our view on oil.

Buffering for rising rates – Shorten duration and/or go for yield
Yields on high yield bond, as represented by the widely-tracked BofA Merrill Lynch High Yield Master II index, have hit the record low level of 6.8% on 18 February 2011. This is lower than the previous record of 6.81% in December 2004. According to Lipper, the purchase of high yield bond fund amounted to US$32 billion in 2009, US$14 billion in 2010 and US$5 billion year-to-date as at 17 February 2011. The demand for high yield bonds has been robust since 2009 as investors want to take advantage of low interest rates to receive the attractive yields and potential capital gains.

In view of the rising interest rate expectations, we believe that high yield bonds, which are typically of shorter duration, will be less impacted. Alongside the higher yields compared to investment grade bonds, an improving global economy should translate to lower default rates going forward. The default rate for speculative-grade debt peaked at 12.9% in November 2009. It is expected to fall to 1.8% by end 2011. We continue to believe that high yield bonds remain relatively more attractive than other bond classes.

We have a series of bond related articles which you may find useful. Some of these recent articles are as follows:

1. Short Duration Funds – When Short is Stout
2. Understanding Bonds: Are Rising Bond Yields Good For You?
3. How Some Funds Benefit From Rising Interest Rates
4. Bond Duration - What, How & Why?

Global equity diversification held up portfolio performance
Being globally diversified, the portfolios have lower concentration risk. As a result, they managed to benefit from their developed markets exposure, which have been the key drivers of returns in global equity this year. Should we have had an Asia or emerging market centric portfolio, the returns would have been heavily beaten down by the 3.8% decline in emerging markets and 5.0% decline in Asia ex-Japan equities year-to-date (represented by MSCI Emerging Market index and MSCI Asia ex-Japan index in local currency terms). The moderately aggressive portfolio, buffered by its exposure to bonds, managed to edge marginally above the aggressive portfolio to emerge as the top performing portfolio with a 0.3% gain.

Bond funds end losing streak while developed market equities outperform
After three consecutive months of negative returns, the bond funds within the portfolios appear to be ending their losing streak in February. All the bond funds within the portfolios were up except UOB United Glb Emerging Mkts Portfolios S$ which fell marginally by 0.2%. Meanwhile, developed market equities continue to outperform in February. Aberdeen American Opportunities, LionGlobal Japan Growth Fund and PRU Pan European Fund returns were positive and have helped to compensate for the 5.0% decline in Schroder Asian Growth Fund. For more details of the fund performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.

Table 3 shows our current funds selection as well as their respective weights for each of the five FSM recommended portfolios. You may refer to table 4, 5 and 6 under the “Appendix” section for more details on the asset allocation breakdown.

Start with $20,000
Investors should be able to follow the target allocation in Table 3 with S$20,000 as starting capital. The research team at iFAST will be providing the portfolio review on a monthly basis at the start of each month.

Latest Portfolio factsheets
The portfolios' factsheets are updated on a monthly basis and links for the most up-to-date factsheets are as provided below:

1. Conservative Portfolio
2. Moderately Conservative Portfolio
3. Balanced Portfolio
4. Moderately Aggressive Portfolio
5. Aggressive Portfolio

previous months portfolio summary

1. December 2010 - FSM Portfolios: And the winner is….. the BALANCED PORTFOLIO!
2. November 2010 - FSM Portfolios: Performance mostly flat on weak sentiments
3. September 2010 - FSM Portfolios: Sep was probably the best month for most equity markets in recent times
4. August - FSM Portfolios: Equity market volatility evident in portfolio performance
5. July 2010 - FSM Portfolios: Risk takers rewarded with bigger winnings
6. June 2010 - FSM Portfolio: Supplementary portfolio can be a double edged sword
7. May 2010 - FSM Portfolio: Bonds helped preserve portfolio’s capital
8. April 2010 - FSM Portfolio: It pays to be safe
9. February 2010 - FSM Conservative Portfolio outshines once again
10. January 2010 - FSM Recommended Portfolio Review – As of end January 2010

Appendix