How risk is managed in PRS funds
IN MY last article, I shared about the robust Private Retirement Scheme (PRS) regulatory framework that forms the foundation of safeguarding PRS funds.
In this article, we will explore the investment management aspects of PRS funds and how risk is managed while pursuing return opportunities.
The PRS uses the Collective Investment Scheme (CIS) structure that pools together investments for PRS into a portfolio of assets to achieve the mandate and objectives of the fund. The CIS structure makes it possible and affordable for the public to save and invest their retirement savings by sharing in the underlying assets through unit ownership in the PRS fund.
Each PRS fund is regulated by their respective mandate and objectives documented in the fund’s Disclosure Document and Product Highlight Sheet which dictate how a fund should be managed and what underlying assets it can invest it.
The Disclosure Document and Product Highlight Sheet of a PRS fund must secure approval of the Securities Commission Malaysia (SC) before PRS funds are offered to the public.
In addition, PRS funds are safeguarded with restrictions on types of investments and concentration limits (for example, investment in a single asset must not exceed 10% of the fund’s Net Asset Value) which minimise the inherent risks of PRS funds.
Furthermore, PRS funds are closely monitored by independent trustees to ensure that investment managers fully comply with the mandated requirements and investment restrictions of the fund.
PRS funds are invested in a portfolio of diversified underlying assets as prescribed by the mandate and objectives. Diversification helps to minimise risk and is imperative to smooth out unsystematic risk events in a portfolio so the positive performances will neutralise the negative.
Each PRS fund has its own allocation of underlying assets (be it stocks, bonds or money market instruments) to generate the potential returns of the fund. For example, the asset allocation of a fund can be 70% invested in equities and 30% in fixed income and money market instruments.
There is no simple formula to find the perfect asset allocation for every individual. But getting it right can mean finding the right risk balance and return.
Whilst the fund is being managed to generate its potential returns, the asset allocation diversifies the portfolio risks by “not putting all your eggs into one basket”. PRS funds are therefore invested to potentially optimise returns while managing the fund’s portfolio risks.
PRS funds are managed by licensed and professional fund managers. Their job is to generate potential returns while managing the fund’s risks based on the mandate and objectives of the fund.
To be fund managers, they have to be licensed by the SC to ensure that they have the qualification and experience to manage PRS funds.
The fund manager has the responsibility, investment knowledge and market insights to manage the fund performance through the underlying assets’ performance vis-a-vis market outlooks and sentiments. As PRS funds are primarily invested for the long term, portfolio managers can take a longer market view in managing market volatilities and opportunities.
Having full-time professional fund managers to manage the performance of the PRS funds makes it easy for the public to save and invest for their retirement, without having to do their own research.
Investment performance is subject to market volatility and opportunities. While fund managers endeavour to optimise PRS funds’ performance, it is important that PRS members also take responsibility in monitoring the performance of their funds.
PPA (the Private Pension Administrator Malaysia) has made it easy for members to access PRS fund performances which are uploaded and reported daily by independent fund researcher, Morningstar. PPA encourages members to monitor their PRS fund performances at least on an annual basis to review their fund managers.
Taking time to review and monitor their funds will ensure that retirement objectives are on track and corrective measures can be taken, if necessary. Taking a pro-active role in monitoring your retirement savings, I believe, is the best recipe for a good night’s sleep, knowing that everything is going according to plan.
In the next article, I will highlight how members can play a role in adding another layer of protection to their retirement savings to further safeguard their retirement funds.
* Dato’ Steve Ong is the CEO of the Private Pension Administrator Malaysia (PPA), the central administrator for the Private Retirement Scheme (PRS). The PPA is tasked by the Securities Commission Malaysia to promote the growth of the PRS industry, create general awareness and educate the public on retirement savings. The PPA also works to protect the interests of PRS contributors. This article by PPA first appeared in PRS Youth.
If you have any questions related to retirement planning, email AskPPA@ppa.my.