Indicators for Sector-Specific Unit Trusts
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Contents |
Introduction
Indicators are very important for investors in making their investment decision in unit trusts. Without indicators, investors are like driving a car to an unknown place without a map or navigator. They will have less chance of building a large enough retirement fund.
Many investors are exposed to these indicators in newspapers and magazines but some of these articles only briefly explain these indicators. Moreover these indicators are only presented at one moment of time and seldom referred to in future reports. The objective of this article and is to give in greater details, if possible, the indicators and what they can mean. This would help investors to extract more information.
We will first look at the indicators for Sector-Specific Unit Trusts. Most of these indicators can be easily found in newspapers like Business Times and investment-related magazines like Pulses, Fundsupermart and The Edge Singapore.
Healthcare & Biotechnology (H&B)
Demographic patterns
One indicator investors can look out for is demographic patterns of countries or the whole world. One trend to look out for is the percentage of world or developed countries population that are above the age of 40. This is because there is a tendency for this group of the population to alter their consumption and savings behavior toward greater emphasis on healthcare due to the higher incidence of illness. Moreover, this age group has higher health risk than other age group. Thus the greater the percentage of this age group, the greater demand for healthcare and biotechnology products.
Technology
Another indicator to look out for is the rate of technology advancement. More accurate and less invasive technology is preferred. The higher the rate of advancement, the more accurate and/or less invasive is the diagnosis or treatment method given by the advancement. This in turn would mean greater demand for these advancements.
Another technological indicator is the speed of drug development. Drugs that cure faster and improve lifestyle are in great demand. Example of lifestyle drug is Viagra, developed by Pfizer that has high demand in developed markets. Thus the speedier the drug development, the greater is the interest and demand generated.
Regulations
We know that the H&B sector is one of the more regulated industries. The approval process for drugs can take a long time. Thus if there is any improvement on the regulations or shortening of the approval process of drugs would be favorable for H&B companies. Investors should look out for indicators on the changes in regulations or approval process when investing in H&B unit trusts.
Mergers and Acquisitions (M&A)
Another indicator to look out for is the amount of (M&A) in the H&B industries. For H&B companies, they require a huge capital outlay for R&D, anywhere from US$300m to US$800m (Smart Investor, August 2002). Thus with M&A, this would make available a larger pool of capital for the merged entity. Moreover, the merged companies can share their R&D knowledge thus moving the merged entity higher the learning curve, increasing the development of drugs.
Internet, Technology and Telecommunications
Business Spending
Investors should look out for how much of business spending is allocated to IT. Businesses need to replace and maintain PCs, network equipment and others to maintain or improve their competitive edge. Given this thinking, the higher the allocation of business spending to IT, it translates to more sales for technology firms. But note that for it to be an indicator in medium term, investors should note that there is a sustainable trend in the increase of IT spending by business.
Consumer Spending
Consumer spending together with business spending forms the core of the end demand. As the standard of living improves, so does the demand increase for electronic goods and appliances.
There are many factors that will see whether consumers will spend more on technology. Firstly we know that what used to be luxury electric appliances has now becomes a necessity for many household. Secondly, as we know there are many multi-functional electric and electronic goods. And with technology advancement, these goods are getting more sophisticated. Last but not least, with the combination of Internet on many electric appliances, these would spur the demand for semiconductors. So investors should look out for the product cycles of these technologies in the medium term and determine for themselves if these technologies will fit into the above factors. Like business spending, there should be a sustainable up-trend in consumer spending for it to serve as a medium term indicator.
Internet and Mobile Phone Penetration
This can be seen as the percentage of population who have access to Internet or has a mobile phone. The greater the penetration would mean that there is an increase in market for e-commerce and firms providing Internet-related services. But investor should see this together with other advancements mentioned in the next indicator. With the advancements would translate higher revenue for many Internet-related companies. This is a long-term indicator.
Technology
Like H&B, the trend to look out for is the rate of technology advancement. Improvements in Internet security would promote the use of e-commerce facilities on the Internet. Improvements in compression and transmitting technology would promote the use of Business to Business facilities and also industries that need to transmit a large amount of information and data for example the movie and music industry. Improvement and greater use of fibre optics would increase the demand for communication network. More user-friendly and better software would increase market size.
Another indicator, investors could look out for is the emergence of a 'killer application'. This application should create a large amount of consumer demand, an application that will become a must have for consumers.
PC and Mobile Phone Sales
As it states, the amount of sales would translate into higher earnings for companies. Investors should look out for the trend and not at only one time period as they can be greatly distorted by seasonal factors like end of the year holiday season and annual maintenance and replacement of PC in companies.
Book to Bill Ratio
This indicators may not be familiar with beginners but this is an indicator that is come out by US based Semiconductor Equipment and Material International. (The Business Times, 24 April 2002) It is actually a ratio between new orders received and product billed. For example, if the book to bill order ratio is 1.07, it means that the semiconductor industry has received US$107 worth of new orders for every US$100 of products shipped. Readings above unity would mean that the industry is expanding. As usual, a persistent trend should serve as a medium term indicator.
Factory Utilisation Rates
This is often published when companies report their quarterly earnings. It is applicable to chip and semiconductors manufacturers. It states the percentage of factory resources is put into production. It is an indicator on future sales. Thus investors need to look out whether there is an increase of the utilisation rates. The higher it is, means higher sales, which may translate to higher profits for firms.
Gold and Minerals
For gold and commodity unit trusts, since gold is the main theme of these unit trusts, the world demand and supply of gold would form the basis for assessing the outlook for this fund. Gold itself is seen as a very good hedge for inflation, preserving the purchasing power of holders.
According to statistics, India and China account for most of the gold consumption in the world, together they form more than 20 percent of gold demand1. These countries are the largest consumers of gold due to culture and traditions. Thus investor when thinking of investing in these unit trusts should note the economic health of these countries.
Corporate Profit Warning and Report
In the US, companies are required to report quarterly earnings and sometime before companies report their quarterly earning, if they cannot meet their forecasted earnings there will be profit warnings.
During the report, the Chief Executive Officer (CEO), will usually, explain why it did not meet forecasts or what has contributed to strong earnings growth. They also reports its outlook for the next year or quarter. These are good indicators for investors since CEOs have the first hand feeling of the pulse of the industry cycle and the professional knowledge to predict the direction of the industry.
