As part of his ongoing efforts to drive home the importance of being prepared financially for retirement, veteran fund manager Vincent Chan has no lack of advice for the young. He once encouraged some young people to go to certain older housing estates to see for themselves how the elderly are coping. And in a recent interview with The Edge Singapore, Chan, head of multi-asset at Fullerton Fund Management, urged young singles to consider carefully their financial situation when choosing a life partner.
That is because the financial burden of supporting elderly parents and rearing children will fall on the shoulders of those belonging to this particular demographic, he explains.
Chan, who was with Singapore’s sovereign wealth fund GIC for 25 years before joining the private sector, knows the government has been very prudent when it comes to setting up a safety net for every citizen. However, he feels more could and should be done.
For one, Singapore’s demographics are changing. The population is ageing and the current life expectancy of 85 years’ old is likely to rise while family sizes are getting smaller. “Old people are taking care of even older people,” says Chan, recounting what he saw during hospital visits.
Yet, many parents in their 50s and 60s still assume that they can rely on their children for retirement. Unfortunately, Singapore’s double-digit growth is but a distant memory and young workers are getting yearly salary increments that barely beat inflation.
This means those who joined the workforce two decades ago would not have received steady and generous increments enjoyed by previous generations of workers and still have to be responsible for taking care of their parents.
Meanwhile, medical costs are rising at around 10% a year. Doctors are getting more costly to train and the equipment, facilties and medicine they use are getting more expensive as well. On the other hand, the pool of patients is growing and many of them demand better medical care: They preferred to be treated by specialists — ideally who are heads of department — instead of GPs.
Chan also laments that Singaporeans as a whole have been overly dependent on CPF because they think the savings will take care of everything after they retire. “That’s a very dangerous misconception to have,” says Chan. “The CPF Life government annuity system is excellent but it is only sufficient for a basic level of coverage and more needs to be done for a properly-funded retirement.”
Growing awareness
Fortunately, there is growing awareness among young Singaporeans that they need to save up and invest for retirement, thanks to higher financial literacy. In many ways, they are better off than those from the Pioneer and Merdeka generations who spent the better part of their lives struggling to make a living without the luxury of being able to plan 20– 30 years ahead.
However, acknowledging a problem does not always lead to corrective action. The young ones are willing to splurge on holidays for the “experience” and desire things to buy and own. “The focus is on the here and now, rather than what is needed much further down the road,” says Chan.
With decades of working life ahead, many young adults also assume they have plenty of opportunities to make and save money. However, the external economic environment is no longer as favourable as before. Since the dotcom crash of 2000, the global economy has experienced higher volatility.
“Those who joined the workforce in the last 20 years after graduation have to live with much lower growth. This will impede their ability to have take home bigger pay increases,” says Chan.
Back in the 1990s, the annual growth of Singapore’s economy was in the high single-digits. But in recent years, growth has averaged 2–4%. With Covid-19 this year, the economy is expected to contract between 4% and 7%.
To be sure, many other countries face similar challenges. However, Singapore’s open economy means it is easily buffeted by external headwinds. The republic’s total trade to GDP ratio is the highest in the world at more than three times.
Beyond the immediate fallout caused by Covid-19, the world economy faces two major long-term problems. First, there is too much debt in the financial system. While Singapore was able to draw on its reserves, many other governments tap debt and capital markets substantially to support growth. As a result, global debt levels have hit a record high. The obligation to retire debt upon maturity means resources have to be diverted away from more productive, income-generating purposes. Alternatively, taxes have to be raised, thereby, sapping consumption power. “Either way, they take away growth potential from the economy,” warns Chan.
The other big issue is the quickening pace of disruption brought about by Covid-19. Changes in the use of technology — already creeping up before the outbreak — has accelerated. Many daily human activities went from offline to online, forcing businesses and consumers to adapt. To cite a local example, hawker stalls jumped on the online ordering and delivery bandwagon in the hope of regaining some business. “In general, companies have to adapt quickly and change their working model,” says Chan.
Other long-term negative effects of the Covid-19 fallout have also started to surface. According to the Peterson Institute for International Economics, 50% of new jobless claims in the US were filed by people laid off as a direct result of the lockdown, such as those in retail and F&B industries. In addition, 20% of claimants chose to remain jobless as they were able to enjoy better unemployment benefits than when they still had a job.
The remaining 30% of the claims, according to the survey, were made by people whose jobs may have been lost permanently. Indeed, not only are business models changing, companies are adopting new processes like robotics and automation to raise productivity. What this means is that companies have to remake and restructure themselves continually. “A by-product of this change is job stability, which will be negatively affected. You will be seen as unique if you can hold on to the same job for the next five years,” says Chan.
Different preferences, same problem
To help improve financial security, Fullerton offers a range of funds. These include the Fullerton SGD Heritage series which caters to different types of investors with different requirements.
For younger investors, Chan says they should look for “growth” fund where they can make full use of their long investment horizon, invest more heavily in equities, and aim for maximum possible returns over a longer period of time. To address the problem of lack of fiscal discipline among some young people, Chan says the funds feature a regular savings plan which allows investors to top up their investments with monthly contributions.
Middle-aged investors in their 30s to 40s are what Chan calls the “sandwich” group who have parents and young children to look after. They may be drawing a stable income but are weighed down by many commitments, ranging from housing and childcare to medical needs. For this group of investors who may feel guilty about setting money aside for their own retirement, Chan recommends a balance mandate, which splits their investment equally between equities and fixed income. This is a “sweet spot” that offers regular distributions as well as substantial growth and capital appreciation, adds Chan.
Last but not least, there is the Fullerton SGD Heritage Income Fund for investors aged 50 and above. Even with retirement round the corner, some have yet to build up a sizeable nest egg. “In a way, they’ve missed the train so we just have to make sure the wealth they have built up is well protected,” says Chan. The focus of the fund is to help investors protect their capital. At this age, they should not be taking on unnecessary risks and so the investment is geared towards fixed income with monthly payouts. For added safety, the fund invests in Singdollar-based companies or assets so that there is no currency risk to worry about. “In that sense, we complement CPF, and we’ve designed something different for each age group,” says Chan about the entire Fullerton SGD Heritage series.
Investors of different age groups may have different preferences but everyone faces the same problem: the world economy is in a bad shape. With interest rates at record low levels and even falling into negative territory in Japan and Europe, banks in general are investments to avoid, says Chan. Although the stocks of some banks may look attractive when measured using traditional metrics like the price to book ratio, the stocks may actually be value traps. For one, interest margins are being compressed. In addition, banks are bracing for a higher percentage of loans going bad or underperforming, as many companies they lend to are expected to tackle business disruption with varying degrees of success. “Many of them will fail to adapt,” warns Chan.
Nevertheless, there are pockets of investment opportunities that could offer double-digit returns. Take stocks listed on the tech-heavy Nasdaq board. The index has sailed through the market volatility caused by Covid-19 to enjoy returns of some 20% year to date, thanks to tech companies riding on trends such as automation, communications, cloud computing and robotics. The Chinese stock market has also grown from strength to strength, with the healthcare, medical and tech sectors registering handsome gains.
“If investors can make the differentiation and the asset managers can find those growth areas, you will be rewarded handsomely,” says Chan.
