Cost of financial goals outweighs Filipino investment returns

MANILA, Philippines – The average investor in Asia, including Filipino investors, are finding it harder to meet their big financial goals because costs are rising faster than their investment returns, a report from a global financial services firm reveals.

Such finding is disclosed in Manulife Asset Management’s report, “One step forward, half a step back: Meeting financial goals in Asia,” released Tuesday, June 16.

The report analyzes the top 5 financial goals across Asia:

1. Saving for retirement
2. Paying for children’s higher education
3. Meeting current living expenses
4. Buying a home
5. Saving for a rainy day (including unexpected healthcare costs)

It also looks at the saving and investment strategies that investors use to meet these goals.

Healthcare costs rising

“In the Philippines, we looked into the goals of saving for a rainy day and for children’s higher education. We found that healthcare costs have risen 11.9% annually over the past 5 years, said Michael Dommermuth, Executive Vice President, Head of Wealth & Asset Management, Manulife Asset Management Asia.

Dommermuth added that “the cost of education has risen an average of 8.2% a year over the past 4 years” in the Philippines.

The cost of retirement, education, living expenses, and healthcare in the Philippines has risen an average of 8.1% a year in the past 5 years, while Filipinos’ investment portfolios only delivered average returns of 4.6% a year in the same period.

The average investment returns are, thus, 3.5% lower than the annual increase in the cost of consumers’ key expenses.

“While P10,000 ($221) invested today has the potential to grow to more than P15,500 ($343) over 10 years, P10,000 in the cost of a basket of the top 5 financial goals is expected to grow to more than P21,500 ($476) in the same period – resulting in a shortfall of about P6,000 ($132),” said Manulife Philippines chief investment officer Aira Gaspar.

Looking further ahead, the potential shortfall stands to increase by more than 350% to almost P23,000 ($508) after another 10 years, and  almost triple to about P65,000 ($1439) by the 30^th year.

“Investors should seriously consider what this means, particularly as retirement was reported as one of their top financial goals,” Gaspar said.

Prevalence of cash

The research reveals that the limited investment growth is primarily the result of the high level of cash investors hold in their portfolios.

Based on the survey, the average Filipino holds 38% of their assets in local currency, with another 4% held in foreign currency, representing 42% of their assets.

“Filipinos are hardly alone, with survey respondents across Asia reporting that 37% of their assets are allocated to local currency and another 5% to foreign currency, said Dommermuth.

Reallocating a portion of this cash could increase returns and reduce the potential gap between investment earnings and growing cost.

“We found that shifting half of local currency holdings to higher yielding investments could allow Filipinos’ savings to grow more rapidly and possibly reduce, if not eliminate, the potential returns shortfall, Gaspar said.

“One of the most effective ways for Filipino investors to improve the returns on their investments would be to diversify their investments across multiple asset classes and geographies. This allows access greater opportunities for returns while also helping to moderate risk,” she added. – Rappler.com