Another way to pick Mutual Funds

Pointers in picking a country fund.

According to Ms The Hooi Ling (CFA,MSc ,BBA NUS) senior correspondent of Singapore Business Times, her research shows that the strategy in which picking the worst performing country fund the year before turned out the be a terrible one and does not advise blindly going into a market just because it has been in the top loser spot of that year. The results are as follows

Using 17 Asian country indices downloaded from Bloomberg.
1) Japan’s Nikkei
2) Hong Kong Hang Send
3) Australia S&P ASX
4) China’s Shanghai Composite Index
5) Shenzhen Composite
6) Taiwan’s TWSE Index
7) Korea’s Kospi
8) New Zealand’s NZSE
9) Pakistan’s KSE
10) Sri Lanka’s CSEALL
11) Thailand’s SET
12) Indonesia’s JCI
13) India’s Sensex
14) Singapore’s STI
15) Malaysia’s KLCI
16) Philippines’ PCOMP
17) Vietnam’s VNIN

Data of each index was observed from Dec31 1981 to Dec31,2003 and the yearly returned for each year are shown below

The Best
Year Country Return
1982 Nikkei 2.40%
1983 KLCL 37.90%
1984 Hang Seng 39.70%
1985 Hang Seng 41.70%
1986 Nikkei 88.00%
1987 Taiwan 156%
1988 Taiwan 116%
1989 Thailand 114.70%
1990 Sri Lanka 97.20%
1991 Pakistan 136%
1992 Hang Seng 29.80%
1993 Philippines 129.30%
1994 Nikkei 15.20%
1995 Hang Seng 19.40%
1996 ShenZhen 186.60%
1997 Shanghai 57.00%
1998 Kospi 83.90%
1999 Jakarta 95.10%
2000 ShenZhen 64.50%
2001 Kospi 39.40%
2002 Pakistan 105.20%
2003 Thailand 131.60%


The worst
Year Country Return
1982 Hang Seng -49.50%
1983 Kospi -12.60%
1984 KLCI -25.60%
1985 KLCI -25.40%
1986 India -4.60%
1987 India -22.20%
1988 Sri Lanka -30.60%
1989 Sri Lanka -14.40%
1990 Taiwan -57.40%
1991 Kospi -22.40%
1992 Sri Lanka -32.70%
1993 ShenZhen -15.60%
1994 ShenZhen -44.90%
1995 Sri Lanka -39.40%
1996 Thailand -36.80%
1997 Thailand -70.50%
1998 Pakistan -53.20%
1999 Sri Lanka -7%
2000 Kospi -54%
2001 Nikkei -28.80%
2002 Vietnam -26.80%
2003 Vietnam -10.90%

The pattern here is that a lot of “doubles” are seen from the tables, particularly in the worst performer’s list. In other words, there was a tendency for a country index which had done badly in one year to continue to do so the following year.
Another point to take note is there were less repeated top performers in the top gaining indices list.
However do observe that price momentum for country indices lasts longer than a year , with the exception of a country going bankrupt (etc Iceland) a rebound will have to come at some point. So when is this point?

Let’s look at a scenario where you started investing your money in 1982, you observed Hong Kong Heng Seng Index dropped 49%, the following year it slipped again for another 6.5%. So you pumped your money into the market in 1984 and left it there for two years. End of 1984 Heng Seng jumped by 40% and the following year another 42%, hence doubling your money in just two years. Keeping an eye for the next “potential bad apple turning good” Malaysia’s KLCL was dropping at a rate of 25% a year (1984-1985) So at the end of 1985, you switched your money from Hong Kong to Malaysia , though the returns for the following year 1986 for KLCL was 4.3% it was still a positive one. The experiment was repeated and the outcome was an extremely positive one. By the end of 2002, the $1000 at the beginning of 1984 had grown to some $36,000. That is a compounded return of 20% a year!
No doubt there were occasions that this strategy doesn’t work. Example Korea’s Kospi fell 15% in 1995, 33% in 1996 and a whopping 61% in 1997. So sharp price declines is but ONE of the signals for investors to consider while placing their bets on country indices. For this implementation to work, it has to be backed up by an understanding of domestic economy. The explanation is as follows , if the stock market slump was a result of some structural impediments in the economy and the government was taking steps to correct them, then perhaps a rebound is bound to happen after two or three years of meltdown. Generally chances of the market coming back with a vengeance after having lost 40 or 50% of its value in the previous two or three years are good.

Summary
The strategy is to pick country index funds that underperform greatly for 2 years, study the country’s own government actions, see what are they doing to make the situation better and go in once deemed right.

Ps, im current very busy with my school work and other related competitions, pradon me for not updating new entries lately =D. All in all wishing all my readers a happy CNY