Asian investors will never achieve their financial goals using their current investment portfolios, according to a new report.
With a high proportion of investors’ holdings made up of cash, their compounded shortfalls over the years will likely leave them facing penury.
Indonesians are facing the toughest retirement in Asia, and the survey indicates that Hong Kong investors will struggle to even come close to having enough assets for a 30-year retirement.
The latest report from Manulife Asset Management has revealed that the average Asian investor will have a potential annual investment shortfall of 3.3%, which represents a large sum when compounded over 10-20 years.
“Investors rely heavily on cash savings despite the record low interest rates,” said Michael Dommermuth, head of wealth and asset management for Asia at Manulife.
Based on a Manulife survey, an average 37% of assets across the region are held in local currency, which rises to 42% if foreign currency is included.
“This means over a third of investors’ wealth is allocated to one of the lowest-yielding assets as local currency returned an average of just 1.7% a year over the past five years,” said Dommermuth.
The investment shortfall arises because of the rising costs of the five most cited financial goals across Asia: savings for retirement; for rainy days/healthcare emergencies; for higher education; for maintaining a current lifestyle; and saving up to buy a home.
The prices of these financial goals have risen an average of 6.0% per annum over the past five years while the portfolios of the investors surveyed delivered average returns of just 2.7% per year during the same period.
The Manulife survey covered mainland China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore and Taiwan.
On a market level, the survey showed that potential shortfalls range from 0.3% in Taiwan to 6.6% in Indonesia. Japan is an aberration with a potential surplus of 2.7% brought about by a long period of almost zero inflation and a stock market rally driven by Abenomics, which is not seen as sustainable in the long run.
Hong Kong face an aggregate 2.5% per annum shortfall in meeting the five financial goals, not because of a lack of financial resources but more due to allocation of resources. Hong Kong investors allocate 45% to local cash, which earns no returns and does not keep up with inflation.
“Cash has served the Asian household really well in the past but the world has changed dramatically. Cash has become an albatross around their neck,” said Dommermuth.
“I just think it is a legacy of a bygone era. It will take a while to move the cash level down. But it’s inevitable they have to. The way Hong Kong people have organised their financial assets, there is no way those assets can withstand a 30-year retirement.”
Investors can reduce the potential shortfall by making changes to their asset allocation. Manulife said shifting 50% from local currency to local equities could reduce the potential shortfall of Indonesians from 6.6% to 0.5%, erase the 3.5% returns shortfall of Filipinos, and move Taiwanese investors to a possible surplus.