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Archive for the ‘Investments’ Category

Buffett’s Hard Truth on analysts’ recommendations

In Financial competency, Investments on 10/02/2015 at 12:56 pm

Buffett said since he began investing in shares at the age of 11, he had never once bought something on the basis of an analyst recommendation. (FT)

Warren Buffett: Planet wrecker investor

In Environment, Investments on 18/02/2012 at 5:19 am

His investments are wrecking the world

http://www.huffingtonpost.com/r-paul-herman/warren-buffetts-billions-_b_1251884.html

2012: Not so bad leh?

In Economy, Investments on 09/01/2012 at 5:41 am

The outlook for 2012 is neither promising nor hopeless. Collapse of the global financial system, a return to the 1930s, a new depression, deflation – each threat to the world economy since 2008 has been real and has so far been averted. Euro collapse is the next threat. Policymakers will have to be resourceful again. That the world is still just about recovering shows that unlike in the 1930s they haven’t got everything wrong.

http://www.breakingviews.com/2012-another-year-of-living-euro-dangerously/1621498.article

Strategy for 2012: Same as in 2011

In Financial competency, Financial planning, Investments on 05/01/2012 at 5:54 am

Go buy stocks that pay good, sustainable dividends https://atans1.wordpress.com/2011/08/12/a-broker-who-almost-got-it-right/

BTW same as for 2010 https://atans1.wordpress.com/2009/12/31/investment-strategy-for-2010/

Also read

https://atans1.wordpress.com/2011/12/12/primer-on-yields-of-reits-biz-trusts/

https://atans1.wordpress.com/2011/01/02/investing-in-reits/

https://atans1.wordpress.com/2010/11/10/high-yield-low-pay-out-stocks-are-best/

https://atans1.wordpress.com/2010/08/24/buying-for-dividends-know-the-cos-balance-sheet/

https://atans1.wordpress.com/2010/06/30/buying-for-dividends-diversify-too/

Primer on Yields of Reits & Biz Trusts

In Investments, Reits on 12/12/2011 at 5:57 am

The u/m is an extract from a BT article written by Teh Hooi Ling. Senior Correspondent and CFAer, published on 3 December 2011. It gives some very interesting insights on the yields offered by the various types of Reits, shipping trusts and other business trusts*. (Note some bad news for shipping trusts) 

Thanks BT,  Ms Teh and the unnamed fund manager, “Merry Christmas and a Happy New Year”.

For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.

Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.

‘Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can ‘disappear’ with the ship, but not the industrial building tenant.

‘Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it’s easier to lease out retail units).

‘In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).

‘Hospitality Reits should trade at lower yields to shipping.

‘But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.

‘As for Hutchison Port Holding Trust and SP Ausnet, I would value them as companies rather than Reits, as usually the rates they charge are prone to fluctuations – unlike Reits and shipping trusts which usually lock customers up for years.

‘SP Ausnet is not structured even as a business trust and pays its dividends out of net profit rather than cash profit. I think every year, it pays out the same dividend per share even though its earnings fluctuate. I would value it the same way I value SingPost.’

Note that unlike a company, a Reit cannot maintain payouts if it hits a bad patch because, at least, 90% of net income has to be paid out. While this is not true of biz trusts, their attraction is that they promise to pay out most of their free cashflow. Companies usually pay out only a portion of their net income, hence there is something in reserve, if they hit a bad patch, and dividends can be maintained for a while more. Hence the importance to investors of what analysts call “dividend cover” which shows how many times over the net income could have paid the dividend. For example, if the dividend cover was 2, this means that the firm’s profit attributable to shareholders was two times the amount of dividend paid out. Not true of Reits, and biz trusts. Got problems, payouts get cut.

*Related post: https://atans1.wordpress.com/2011/12/10/reits-and-business-trusts-similarities-differences/

Equities: Sluggish Recovery?

In Economy, Investments on 09/12/2011 at 5:52 am

Jeremy Grantham, chief investment strategist of GMO, writes in his latest quarterly letter that the bursting of the two most recent equity bubbles was historically unusual in that stock prices soon recovered to their trend. The next bust, he writes, may not be as forgiving.

http://www.gmo.com/websitecontent/JGLetter_ShortestLetterEver_3Q11.pdf

Another way of looking at the situation is that these two recoveries were bear traps.

Note he called the 2008 crisis before it was fashionable, and he was never someone who was forever and a day prophesying the end is nigh.

Fifty / Fifty Approach in Investing

In Financial competency, Investments on 08/12/2011 at 5:13 am

 Some research from America, and how it can tried out here.

Vanguard created a model portfolio divided equally between stocks and bonds, and compared the returns in periods of economic expansion and recession. It found that “the average real returns of such a portfolio since 1926 have been statistically equivalent regardless of whether the U.S. economy was in or out of recession.”

Vanguard’s founder, John C. Bogle, popularized index funds, and the study tracked the stock and bond markets using indexes that mirror the broad markets. Individual stock and bond selection wasn’t involved at all.

http://www.nytimes.com/2011/11/27/your-money/half-stocks-half-bonds-a-solution-for-turbulent-times.html?src=me&ref=business

What accounts for these results? Put simply, bonds tend to outperform stocks when a recession is on the horizon, while stocks tend to rally when an economic expansion is in the offing. “The financial markets themselves tend to move in advance of the economy,” Mr. Davis said.

Predicting the economy’s direction is famously difficult. So unless you have substantial bond holdings in your portfolio well before a recessions begin, you’ll miss upturns in the bond market. And unless you’re holding stocks before an economic recovery has started, you’ll miss those big rallies.

By holding stocks and bonds in equal proportion — a portfolio that’s easy to construct by using index funds — you won’t need to be prescient; you can stick to your portfolio and ride out the storms.

Of course, a 50-50 stock-bond division is relatively conservative. Alter those proportions and the results will shift significantly. During recessions, for example, a portfolio containing 60 percent stocks and 40 percent bonds fared worse than the 50-50 portfolio, with an average real return of 4.9 percent annually. In expansions it did better, with an average real return of 6.8 percent, according to Vanguard’s calculations.

That points out the allure of market timing. In an ideal world, if you knew in advance where the economy was heading, you’d be a market wizard. You would shift your entire portfolio into stocks during expansions, for example, and put all of it into bonds in recessions. If you could actually do this, the results would be impressive. In expansions, Vanguard found, stocks have gained an average of 11.9 percent annually, after inflation, while the comparable figure for bonds in recessions is 7. 2 percent That kind of timing is ideal.

BUT it’s easy to shoot yourself in the foot. Get the timing wrong and hold only stocks in recessions, for example, and you’d have an annual average gain in those periods of 3.3 percent, after inflation. And if you hold bonds in expansions, you’d lose an average annual 0.7 percent, also after inflation.

 Want to try this here? http://www.nikkoam.com.sg/files/documents/funds/phs/phs_homebalanced.pdf

 The term sheet says, among many other things:

WHAT ARE YOU INVESTING IN?

You are investing in a unit trust constituted in Singapore that passively invests its

assets primarily in S$ denominated fixed income securities and Singapore-listed

equities in the proportion of approximately 50:50 respectively (proportionate

allocations are subject to a 5% variance).

The Managers intend to invest all or substantially all of the Fund’s assets in the

following exchange traded funds (“ETFs”), namely the ABF Singapore Bond Index

Fund and the Nikko AM Singapore STI ETF (the “Underlying Funds”).

Both of the Underlying Funds are managed by the Managers.

The base currency of the Fund is S$.

This is for yr further study. I’m not recommending either the 50/50 strategy or the product.

Diagram to remember

In Financial competency, Investments on 07/12/2011 at 8:45 am

Too many Black Swans

In Investments on 07/11/2011 at 7:00 am

Gd piece explaining that the term “Black Swan” is often misused, even by the coiner of the term.

http://www.bloomberg.com/news/2011-10-23/many-black-swans-make-metaphor-meaningless-commentary-by-alice-schroeder.html

S’poreans get justice in US?

In Investments on 04/11/2011 at 7:37 am

A US court has decided that it would hear a lawsuit brought by Pinnacle Notes’ investors (see below for extract of BT report).  It ruled that “generalised warnings of risk and of the possibility of adverse interests” between Morgan Stanley and the Pinnacle Notes investors were not sufficient to protect Morgan Stanleyagainst all allegations of fraud.

Meanwhile the S’pore court of appeal has told DBS High Notes 5 investors to bugger-off: “In view of our decision in this appeal, we think it apposite and timely to remind the general public that, under the law of contract, a person who signs a contract which is set out in a language he is not familiar with or whose terms he may not understand is nonetheless bound by the terms of that contract … The principle of caveat emptor applies equally to literates and illiterates.”

Wonder why the investors never alleged fraud by DBS? The S’porean legal system (like that of the English) requires a very high standard of proof if the plantiffs’ allege fraud. And if they fail to prove fraud, the consequences for the plaintiffs can be very serious in monetary terms. The US system is a lot more lax.

Poor DBS HN5 investors: their Hongkie cousins were treated better by DBS https://atans1.wordpress.com/2010/08/06/what-abt-high-notes-sm-goh/

Read the rest of this entry »

The next bubble

In Investments on 02/11/2011 at 7:44 am

Farmland

http://www.project-syndicate.org/commentary/shiller76/English

Bond funds are not BONDS

In Investments on 01/11/2011 at 6:43 am

There is an ad from a very reputable fund manager advertising its Asian bond fund. If you find the idea of buying into a bond fund attractive, read u/m which I posted some time ago on the difference between buying a bond fund and a bond.

————————————————————–

In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

What if there is stagnation?

In Commodities, Economy, Investments, Property on 21/10/2011 at 6:49 am

A few days ago, I blogged that were three scenarios for the developed world. Growth — buy equities; inflation — buy property and commodities; and recession — buy government bonds.

Thinking about it again, there is a  fourth scenario: stagnation. There will be shallow recoveries and recessions in quick succession.

In that scenario, one should be looking at buying equities for their dividend yields, and the corporate bonds of super blue chips.

Where be the next winner?

In Commodities, Economy, Investments, Property on 17/10/2011 at 7:00 am

Depending on where the developed world heads, equities, commodities and property, or government bonds could be the investment.

There are three scenarios for the developed world (remember the BRIC and Indonesia etc still are dependent on the developed world to drive their economies). It can

— grow out of its debt burden,

—  inflate the debt away, or

—  fall back into recession, marked by the occasional default.

Each of those outcomes leads to a different portfolio.

Renewed growth would favour equities, but at the moment, this looks too hard to achieve. An attempt to inflate would be good for commodities and property but would be disastrous for government bonds. Selected equities might do well: those that can pass on the cost rises to customers. Those bonds would do best if the developed world goes into a  recession.

Hope this explains the extreme volatility of markets.

Investing in the noughties: matter of timing?

In Investments on 06/10/2011 at 1:51 pm

Over the past 10 years, investors have experienced a stark divergence of fortunes, with some making substantial amounts of money whilst others have suffered losses.

Timing, picking the right investments and employing the right strategy have determined their fate.

http://www.bbc.co.uk/news/business-14853222

He bot preferreds, stupid

In Investments on 01/10/2011 at 6:57 am

Or the perils of trying to copy Buffett by buying ordinary GE and Goldman Sachs shares. http://dealbook.nytimes.com/2011/09/14/buffetts-not-so-golden-touch/?nl=business&emc=dlbkpma21

Goldman is worth breaking up?

In Financial competency, Investments, Uncategorized on 13/09/2011 at 8:10 am

Masterclass in back of envelope calculations.

http://www.nytimes.com/2011/09/08/business/breaking-up-could-be-good-for-goldman.html?nl=business&emc=dlbka23

Haw Par: Rediscovered yet again

In Investments on 05/09/2011 at 2:00 pm

So another investor and blogger discovered last yr that Haw Par is undervalued and blogged abt it recently. Welcome to the Haw Par Tan Kuku club brudder.

If you read the latest annual report, you will know that Cundill and Eagle Investments are substantial shareholders. Both are value investors. Cundill has held the shares for over 10 yrs. Yes, the valuation gap has existed for at least that long.

I bot the shares more than 10 yrs ago and the gap has has narrowed, widened, going round and round. Some brokers recommend buying it when the gap is historically wide and selling it when the gap narrows.

But I don’t mind holding onto the shares. I looked at it, and still do, as buying into a listed investment trust that invests in the Wees’ financial empire (UOB, UOL and UIC). The operating businesses I get for almost free, and the dividends are decent. True there is a big gap between the share price and valuation but so what? No such thing as a free lunch.

And who knows? If the Wees’ empire is broken up, the valuation gap closes.

Another way for the gap to narrow, is if one or more of the operating businesses hits a winner, and the market recognises the value of the business or businesses. Actually 20 over yrs ago, people bot Haw Par because of its operating businesses.

My 2009 post https://atans1.wordpress.com/2009/12/11/hidden-tiger/

Masterclass in analysis: Buffett’s BOA deal

In Banks, Financial competency, Investments on 28/08/2011 at 8:08 am

When Warren E. Buffett invests in a troubled company, he gets a good deal. Dealbreaker’s Matt Levine crunched the numbers on Mr. Buffett’s Bank of America investment and estimates that the bank’s implied stock price in the $5 billion deal was $5.28 per share, more than $2 lower than where it currently trades. Note the way he uses less than precise assumptions to avoid getting into complications.

http://dealbreaker.com/2011/08/how-much-did-warren-buffett-pay-for-bofa-anyway/

Why MU is listing here

In Investments on 19/08/2011 at 1:49 pm

Unlike in HK, a loss-making co can list here.

Uniquely S’porean.

A broker who almost got it right

In Economy, Investments on 12/08/2011 at 9:21 am

In late January 2011, I posted this giving the views of UOB Kay Hian. It argued investors will be best served by having a balanced portfolio comprising firstly of counters that promise high and sustainable dividend yields.

S’pore equities: Can’t argue with this safety first approach

In Economy, Investments on 20/01/2011 at 5:31 am

UOB Kay Hian says that with the prospect of slowing economic growth and reasonable stock market valuations in 2011, investors should balance their portfolio with a combination of high-yielding large-cap and mid-cap counters that offer a higher margin for growth.

Despite the moderate earnings [8%} outlook for Singapore compared with its regional peers, we think Singapore’s safe haven status will continue to attract selective investor interest amid the uncertain external outlook.

Investors will be best served by having a balanced portfolio comprising firstly of counters that promise high and sustainable dividend yields.

These would be local telcos StarHub and M1, along with real-estate investment trusts K-Reit, Sabana Reit and CapitaCommercial Trust.

And’laggard’ large-cap stocks that offer good growth prospects eg. the banks. Its top pick in this segment is OCBC, followed by DBS. (I prefer Haw Par because of its stake in UOB).

Investors should also be on the lookout for the so-called Garp (growth at a reasonable price) stocks in both the mid-cap, like  Ezra and Ezion, CDL Hospitality Trusts, First Resources and Super Group, and large-cap space.

Its ‘sell’ calls include Keppel Corporation, SingTel, Tiger Airways and CapitaLand. Surprised abt Keppel call because the offshore marine sector is looking gd, what with firm oil prices and offshore projects in Brazilian waters.

Losing serious money is easy

In Financial competency, Investments on 07/06/2011 at 8:12 am

In Minding the Markets, the author argues that contemporary economics, with its neat mathematical models and fully rational robot-like decision-makers, fatally under-estimates the importance of emotions.

Tuckett’s insight, based on in-depth interviews with more than 50 investors, each managing more than $1bn, is that stocks, shares and derivatives are a special kind of asset, and decisions about whether to buy and sell them are particularly subject to stories and emotions.

— the value of financial assets is prone to extreme uncertainty: thousands of unpredictable events can affect the profitability of a company, for example, from the collapse of a key supplier to a sudden change in the cost of commodities to a natural disaster many thousands of miles away.

— the owner has nothing they can eat, drink, live in, or even hold in their hands: they have to weave a story, a narrative, even to understand why it’s worth buying the asset in the first place, let alone hanging onto it when its value has soared to once-unthinkable heights.

Given these special characteristics, Tuckett argues, financial assets tend to become what he calls “phantastic objects”, which their owners invest with extraordinary powers and think about in ways that are unavoidably emotional.

Guardian article

Stop worrying, start buying

In China, Investments on 15/05/2011 at 9:45 am

Jim O’Neill, chairman of Goldman Sachs Asset Management, said investors should shed their pessimism and stop hoarding cash amid prospects for a global stock rally that could start in China.

Bloomberg story. Note Goldman is setting up a yuan-denominated fund to invest in China.

Q&A with Warren Buffett

In Investments on 26/04/2011 at 11:54 am

He answers questions from MBA students. Worth a read. Some gd questions.

http://blogs.rhsmith.umd.edu/davidkass/uncategorized/warren-buffetts-qa-with-university-of-maryland-mba-students-march-11-2011/

Helping retail investors: the HK way and the S’pore way

In Investments on 01/04/2011 at 9:39 am

The speculation in the MSM that MAS’s MD had resigned  so that he could join MAS board members GCT, Tharman and Hng Kiang in the cabinet reminded me of the different ways HK and S’pore helped retail investors affected by the default of structured products connected with Lehman Brothers .

Sixteen banks in HK have recently agreed to buy back the minibonds that they sold to 31,000 (out of 43,000 investors) for up to 96.5% of their face value. Bloomberg  An estimated 4 percent of note holders would get at least 90 percent of their investments back, and 65 percent of those eligible would get 80 percent to 90 percent.

In S’pore, 1088 investors  (12.2% of minibonders) received the face value of their minibonds. So percentage-wise, the government here did better in getting the distributors to be more compassionate: to the elderly and those with only a primary six education.   Read the rest of this entry »

Another dangerous year

In Investments on 30/03/2011 at 7:48 am

As the Economist said, This was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.

The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy.

The flight to Western stock markets from developing markets is not looking so smart because higher oil prices could lead to a recession in the West. Investing in developing markets remains problemtic because higher inoil prices will make it more imperative for the governments in the developing countries to fight inflation,

Bonds don’t look the safe havens because there is the belief that whether they like it or not, developed countries have to raise interest rates.

Time to go go into cash? Err what currency? S$ is a safe currency but interest rates are “peanuts”.

Heck, I’ll leave with the CPF the funds I can withdraw (I’m past 55). Juz hope that the rules don’t change, and these funds become “frozen” to provide me with more old-age protection.

Whoever said investing is easy?

Protection against Black Swan events

In Insurance, Investments on 28/03/2011 at 7:07 am

Financial institutions that were peddling subprime loans and derivatives thereof have moved on. They are now peddling products that will lose you money each yr (say 15%), but which they claim will make it up and more when a Black Swan happens.  And BTW, they use derivatives.

But there are people in this business that have gd track records. Nassim Taleb, author of “The Black Swan”, has a fund which has grown from uS$300m in 2007 to around US$6 billion today.

And, bond funds, PIMCO and BlackRock (who largely avoided subprimes) have similar funds. They also advise clients on this issue.

The worth of a financial adviser

In Investments on 14/03/2011 at 7:00 am

The study … found that the value of investment advisers was not in the stocks or mutual funds they recommended but in their ability to restrain investors from impulsively trading at the wrong time … data showing that aggressive orders by individuals can cost them about four percentage points a year.

“Enlightened behavioral investors ought to be more willing to pay on the order of one percentage point to an investment manager who will prohibit or at least impede aggressive orders than to pay nearly four times as much for the privilege of excessively and detrimentally trading their own account,” …

BUT

… advisers can be subject to the same myopia as the investors they advise. … an article called “The Third Rail” … that questioned the whole notion of advisers being the rational counterweight to investors’ more irrational behavioral tendencies.

NYT article

Watch this blog. I intend to explore this issue further.

S’pore equities: Can’t argue with this safety first approach

In Economy, Investments on 20/01/2011 at 5:31 am

UOB Kay Hian says that with the prospect of slowing economic growth and reasonable stock market valuations in 2011, investors should balance their portfolio with a combination of high-yielding large-cap and mid-cap counters that offer a higher margin for growth.

Despite the moderate earnings [8%} outlook for Singapore compared with its regional peers, we think Singapore’s safe haven status will continue to attract selective investor interest amid the uncertain external outlook.

Investors will be best served by having a balanced portfolio comprising firstly of counters that promise high and sustainable dividend yields.

These would be local telcos StarHub and M1, along with real-estate investment trusts K-Reit, Sabana Reit and CapitaCommercial Trust.

And’laggard’ large-cap stocks that offer good growth prospects eg. the banks. Its top pick in this segment is OCBC, followed by DBS. (I prefer Haw Par because of its stake in UOB).

Investors should also be on the lookout for the so-called Garp (growth at a reasonable price) stocks in both the mid-cap, like  Ezra and Ezion, CDL Hospitality Trusts, First Resources and Super Group, and large-cap space.

Its ‘sell’ calls include Keppel Corporation, SingTel, Tiger Airways and CapitaLand. Surprised abt Keppel call because the offshore marine sector is looking gd, what with firm oil prices and offshore projects in Brazilian waters.

Forecasts are rubbish? What to do?

In Financial competency, Investments on 16/01/2011 at 8:29 am

It’s the time of yr when forecasts are a dime a dozen. What shld be our attitude towards them? Treat them to way many netizens treat MM Lee’s pearls of wisd0m?

Byron R. Wien, the veteran strategist who has been issuing market forecasts for decades … says the quick answer is this: Don’t take these forecasts too seriously, and don’t view them as the literal truth.

“Few people get forecasts right very often,” he says. “I certainly don’t. I don’t even attempt to make a literal forecast. I try to come up with some ideas that are provocative, and worth thinking about.”

Benjamin Graham, the late Columbia professor and path-breaking value investor, gave some thought to market forecasts. He didn’t dismiss them entirely, but he didn’t place much store in them, either. In his classic Read the rest of this entry »

Investing: Five easy steps

In Investments on 06/01/2011 at 6:38 am

One of the authors  of “The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future” was a top bond trader but after he retired, he found out that he knew little up until that point about basic asset allocation among stocks and bonds and other investments or the failings of active portfolio management is shocking, until you consider the self-regard that his master-of-the-universe colleagues taught him. “It’s American to think that if you’re smart or work hard, then you can beat the markets,” he said.

The book asks readers to make just five decisions.

First, will you go it alone? The two authors suggest hiring an adviser who earns fees only from you and not from mutual funds or insurance companies …

Second, divide your money among stocks and bonds, big and small, and value and growth. The pair notes that a less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” …

Then, further subdivide between foreign and domestic. Keep in mind that putting anything less than about half of your stock money in foreign securities is a bet in and of itself, given that American stocks’ share of the overall global equities market keeps falling.

Fourth, decide whether you will be investing in active or passively managed mutual funds. No one can predict the future with any regularity, the pair note, so why would you think that active managers can beat their respective indexes over time?

Finally, rebalance, by selling your winners and buying more of the losers. Most people can’t bring themselves to do this, even though it improves returns over the long run.

NYT article

Whatever you do attend Fisca’s talks

Investing in Reits

In Investments, Property on 02/01/2011 at 5:29 pm

BT published a long piece that could serve as a primer on how to invest in Reits. Reit Primer.

Two complaints abt piece.

One is that it doesn’t talk abt buying Reits that trade at big discounts to latest reported RNAV. True there may be gd reasons why some Reits trade way below RNAV. But savvy investors can make $ buying Reits that they think shld not trade way below RNAV and holding them until they trade above or juz below RNAV, while getting good payouts while waiting. Useful Reit table for yields and RNAVs.

Those who bot Ascendas India Trust (trumpets pls) when it was trading way below its RNAV have made gd capital gains. I should have sold  out but the yield is pretty decent.  And India is now hot and RNAV could rise.

The other complaint abt the piece is that Reits can use the low interest environment to refinance their debts at lower rates and for longer tenures. Analysts from DBS and OCBC are saying this is happening.

BTW, high-yielding Reits  courtesy of ST scan0004. Declaration of interest: I own units in three of them. (Update on ^ January 2010: Now own four of them.)

Update on 4 January 2010

Must read — a summary of Soro’s piece (many yrs ago) on the danger of buying a Reit trading above RNAV (and attraction).

Another gd Reit table.

Key signs of mkt top

In Investments on 01/01/2011 at 7:18 am

Interesting reminder of what to watch out for.

Gd fortune in 2011.

Kenny Rogers & investing

In Investments on 29/12/2010 at 6:58 am

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

The full song

Bond funds are not BONDS

In Investments on 30/08/2010 at 5:43 am

In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

One Big Thing We Don’t Know About Stocks

In ETFs, Investments on 08/08/2010 at 6:54 am

Sumething to think about if you are investing in equities for the long term, esp if you are doing it via ETFs or other low-cost index funds.

The only reason we invest in stocks is to earn more than we would get from cash or bonds. The amount you are supposed to earn by taking the additional risk of owning stocks is called the risk premium. If you don’t get paid more for taking the risk, you should put your money in bonds.

Over the last 207 years you got paid 2.5 percentage points more each year (on average) to invest in stocks than you did in bonds.

But you know what they say about statistics, right? In the real world, we have to deal with the fact that, like all averages, this one has some serious problems. Sometimes the risk premium is higher than 2.5 percent, and sometimes it goes away or is hugely negative (say, in a bear market).

Until recently, most of us thought of bear markets as those three- to five-year periods where you grit you teeth and hang on. But recent experience is more painful than that. Read the rest of this entry »

Buying for dividends: diversify too

In Investments on 30/06/2010 at 5:25 am

Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable.

Again and again, we’ve seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specializes in dividends?

The moral of the story, as always, is to diversify within each asset class you own, whether it’s dividend-paying stocks or municipal bonds or the emerging-market countries where you’re rolling the dice for big gains. Then, diversify your retirement income, too. The more sources the better, whether it’s dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.

Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP.

NYT article

Value investing: Ask the right question stupid

In Investments on 07/05/2010 at 5:16 am

Those who consult Kwan Im and other deities, know that asking the right question is the key to a successful consultation.

Likewise in business, asking the correct question is the key to success. Google did, Yahoo didn’t.

In the mid-nineties, Yahoo! tried to figure this [what web search is] out by asking of every website “where does this belong?” They created categories, then had an actual live human look at each site and make a judgment, like a librarian. … But the web grew exponentially, and there weren’t exponentially more librarians for hire. Google beat Yahoo! by asking a different question: instead of “where does this belong”, they asked “who linked here?” A link became a proxy for a human decision; to link to something is to decide that it’s in some way relevant. Google reads links as human intent i.e. web search is an attempt to figure out what people want, not what librarians say where something belongs.

So in investing prior to and during the recent crisis, Buffett (“Is there value?”), Paulson (“Is sub-prime over-valued”) asked the right questions, GIC, Temasek and many others didn’t.

SWFs’ big equities bets underperform

In GIC, Investments, Temasek, Uncategorized on 01/05/2010 at 6:16 am

Companies do badly after foreign sovereign wealth funds buy their shares, according to”Sovereign Wealth Fund Investment Patterns and Performance” by Bernardo Bortolotti, Veljko Fotak and William Megginson, reports the FT.

When an SWF invests, the target company’s share price often jumps in the days surrounding the investment, the research found, but over the following year or two, the share price significantly underperforms its peer group.

SWFs usually take significant stakes in companies – the median stake, according to the research, is 8%, the average 14% – and frequently buy the shares directly from the companies rather than on the open market. After two years, the average investment had lagged its peers by 10%.

“They’re giving cash to the companies and taking a large passive stake. All the literature shows this is a bad idea,” said Prof Megginson. The exception that proves the rule is the Norwegian Government Pension Fund, which makes small scale investments in publicly traded shares.

When its results are stripped out of the data, the negative impact of SWF investment looks worse, with an average underperformance of 13.55%.

The findings support the academics’ “Constrained Foreign Investor Hypothesis”, which predicts that foreign investors, particularly SWFs, will find it difficult to hold directors of companies to account because political considerations make them reluctant to antagonise management.

Political concerns may also deter them from selling shares in companies that are not performing according to expectations, removing another possible feedback mechanism that might improve the management of a company.

The underperformance that follows such passive ownership is a problem for other shareholders as well, said MrPeter Butler, chief executive of Governance for Owners.

“It’s the free-rider problem. SWFs are relying on other shareholders [being engaged owners] and holding directors to account. Either they get something for nothing, or nobody does it and the shareholders suffer,” Mr Butler said.

The new research will likely cause some debate, particularly as it flatly contradicts other studies that showed companies benefiting from SWF investment. Nuno Fernandes, professor of finance at IMD and a Lamfalussy research fellow of the European Central Bank, recently published a paper showing SWF investments led to a significant outperformance by the company. Prof Fernandes reported that further research led him to conclude SWFs were actually very good at monitoring companies where they had invested, as well as opening up new markets for the companies and helping them lower the cost of capital.

So Temasek and GIC be warned.

Our SWFs: What our MPs are not asking II

In GIC, Investments, Temasek on 30/04/2010 at 9:52 am

Do they even know that, Norway’s finance ministry will tighten risk controls over the country’s sovereign wealth fund but has rejected calls for an end to active management?

The scope for active management of the NKr2,757bn US$456bn) oil fund will be limited  after criticism of its performance during the financial crisis.

Norway has been reviewing its investment strategy since the fund lost 23 per cent of its value in 2008, doing worse than the decline in the benchmark portfolio against which it is measured. Initial calls for a shift to passive management have become more muted as the fund recovered most of the previous year’s losses in 2009 and outperformed the benchmark by 4.1 percentage points.

However, the report proposed the scope for active management, measured in terms of expected tracking error from the benchmark, should be reduced from its upper limit of 1.5 percentage points to 1 point.

Other proposals included limits to leverage and tighter regulation of risk concentration.

The fund, officially known as the government pension fund, recorded a return on investment of 25.6 per cent in 2009, the best in its 13-year history, on the back of its worst performance the year before.

As the Norway Fund went into the crisis underweiged equities, it used the opportunity to load up on equities last yr.

Our MPs should be asking ministers why S’pore is not following the Norwegians?

Fat chance as they never asked these the questions in this posting.

m/2010/03/15/our-swfs-what-our-mps-are-not-asking/

FYI

In Marchm Carl Heinz Daube, the head of Germany’s formidable debt management agency, travelled to China and Singapore for a meeting with two of the world’s biggest investors – as part of an attempt to tap a new pool of investors, such as sovereign wealth funds – who might be willing to buy German government bonds.

Sumething that the FT said “that would have seemed almost unimaginable – or unnecessary – five years ago.”

Great excuse for telco to buy bank stake

In China, Investments, Telecoms, Temasek on 10/04/2010 at 5:07 am

Some time back, China Mobile agreed to buy 20%  of Shanghai Pudong Development Bank for 39.8 billion renminbi (US$5.8 billion) to expand its electronic payment business.

The reason for the telco to buy such a big stake in a bank:  China Mobile and Pudong Bank will form a strategic alliance to offer wireless finance services including mobile bank cards and payment services, according to a statement  filed with the HKSx.

Wonder if  the corporate communications departments of TLCs, M1, SingTel and Starhub have filed away this excuse. Their company might need to adapt it if it ever has to buy a stake in a bank in the Temasek stable.

Why?

In late March according to a Reuters report, Bank of China, China’s fourth largest bank, said it was in talks with Temasek, to set up a rural business bank in China. The bank under discussion would have 40-60 branches, President Li Lihui told reporters at a media briefing to discuss Bank of China’s 2009 results

Now wouldn’t such a bank need wireless expertise and don’t StarHub and SingTel love to do dumb things? Fooie fans still don’t know if we will get World Cup coverage.

Value in China stocks: Indexation guru

In ETFs, Investments on 03/04/2010 at 3:53 am

Princeton University economist Burton Malkiel, the author of  “A Random Walk Down Wall Street”, a book that introduced many to the idea of investing via indexed-linked funds, sees value in Chinese shares, he tells the FT.

The FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares) is different [from the Shanghai “A” shares which he thinks overvalued], he says. This year, while the Shanghai has gained 53.8 per cent, the FTSE Xinhua is up 6.8 per cent – less than the S&P 500.

A “matched pair” study – comparing oil company CNOOC with ExxonMobil, its equivalent in the S&P, and so on – shows that FTSE-Xinhua price/earnings multiples are higher than in the S&P. But their rate of earnings growth is also higher. Crucially, their “PEG ratio” (the earnings multiple divided by the growth rate) is actually lower. So, Malkiel says, Chinese “H” shares are “moderately priced” compared to the S&P.

That is why he is buying China. But Malkiel is not selling his principles. He recommends investing in “H” shares via exchange-traded funds tied to the index – and not backing anyone who says they can beat the market. (Note there is an ETF traded here that tracks  the FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares): DBXT FTChina25.)

Bubble or collapse in China?

He would not be surprised if China took a near-term hit. But long term, he believes it is the place to be … He is concerned about asset bubbles forming in real estate, banking, and in the stock market. “This is bound to occur wherever economies grow fast, and China’s expansion over the past decade has been unprecedented in the history of industrialisation.”

But will the economy collapse if any of these asset bubbles burst? “Absolutely not,” says Mr Malkiel. “They will correct, and restart because of the strength of the underlying story and the country’s extraordinary balance sheet.”

He does not think the country can continue to rely on export-led growth for both geopolitical and economic reasons.

“China potentially has the largest consumer market in the world, but its consumption is less than 40 per cent of GDP, a ratio that has not changed over the past decade. In the US, the ratio is about 70 per cent.”

But key reasons for low consumption remain extant: people need to save because there are virtually no government safety nets; and the one-child policy makes it difficult for children to adequately care for their parents.

The divide between the Haves and the Have Nots is what most worries Mr Malkiel. “There are seismic gaps in China between rich and poor, especially seen in the affluent east versus the impoverished central and western regions.”

This has already led to some unrest. Potential instability is a great danger. “But that’s why the government is developing infrastructure, education and a nascent social safety net,” he says.

He contends that a purchasing power-adjusted gross domestic product weighting, which adjusts for the renminbi’s significant undervaluation by this measure, suggests equity exposure of between 6 and 12 per cent.

So how does he (and his clients) invest in China?

As chief investment officer of China-focused AlphaShares, he is certainly helping investors find their way into the mainland. He has crafted a series of indices, some of which are trading as ETFs, that provide specific sector exposure (infrastructure, consumer, technology and real estate) and market exposure (all cap and small cap).

But his firm has also developed a set of private actively managed funds. These include a China-linked fund, which invests in non-Chinese companies that are directly benefiting from China’s growth, and an enhanced index fund – a broad-market fund with an enhanced weighting of small and value stocks. A buy-write fund aims to exploit Chinese market equity volatility by going long the highly liquid FTSE Xinhua 25 Index and writing options against it to pick up premium income. AlphaShares may take these funds public.

Mr Malkiel squares this active management with his long-term embrace of passive investing by citing the inherent inefficiencies in the way the Chinese market functions and is tracked. He believes unprecedented growth, trifurcated shares [mainland, Hong Kong and foreign classes], and volatility present special opportunities that cannot be captured through traditional indices.

Finally, it should be no surprise, he is a bull on emerging markets, and equities in general.

For a 40-something US investor with a family, he is recommending a portfolio with 80 per cent equity exposure. And he thinks half of that should be foreign stocks. He believes long-term investors will be best served with half of this international exposure being in emerging markets such as Brazil, India, and China.

He remains a believer that passive exchange traded funds are the most efficient means of gaining market exposure around the globe. His recommended 50 per cent US exposure is close to the MSCI All-Country World Index weighting of 44 per cent. However, he deviates significantly in his exposure to so-called EAFE countries, the developed world ex-US and Canada. He recommends 25 per cent EAFE exposure versus the global weighting of almost 41 per cent, in the belief that Europe and Japan will not experience significant growth in the coming years.

He departs from market-cap benchmarking even more materially in recommending 25 per cent equity exposure to emerging markets, twice the All-World Index’s weighting.

Mr Malkiel justifies this by citing a perceived fundamental shift in growth away from developed to emerging markets. “My portfolio strategy remains passive, I’m not picking stocks,” he says. “I’m adjusting for economic realities. And we see the need for such investment modification in China where a low free float [on which most indices are based] undercounts China by at least a factor of four.”

Connected post

https://atans1.wordpress.com/2009/12/08/bull-in-a-china-shop-but-will-he-find-value-in-s-chips/




Value in Japan?

In Investments on 02/04/2010 at 5:58 am

Been reading that quiet a few reputable strategists and fund mgrs are saying that Japan’s the place to be.They include Byron Wien of Blackstone Advisory Services and Edinburgh-based Martin Currie.

Two related reasons are the  large sums of cash held in Japanese bank deposits and the changing attitudes of depositors towards equity investments. This cash could set the stage for a domestic stock rally.  True these are old arguments, but they could finally happen this time. After all the Japanese have elected a non-LDP government. The LDP had been in power since the late 1950s except for a few months in the 1980s.

Another reason is managements’ new focus improving corporate governance and return on equity.  The focus used to be on market share and everybody except shareholders.

Then there are  the strong balance sheets of companies. Japan is also exporting more to China and the rest of Asia, and less to the US.

Finally there is issue of relative valuations. FT reports,”Michael Katz of Glenrock Global Capital Partners says he likes Japan on a relative basis. The market is priced for “every known calamity” and clearly is not a momentum play for those looking to make a quick buck.

‘For those seeking value, if not Japan, what?” he asks. “Look around the world today and you’d find countries that depend on government largesse to keep themselves going. Stock markets are in their own little world. ””

Err last bull point puts me off: when someone talks of relative values, I tend to rush to the toilet.

Good Easter break.

Perils of buying on NTA III

In Corporate governance, Investments on 01/04/2010 at 5:20 am

Today, five companies no longer are listed after posting losses for five straight years: General Magnetics, Chuan Soon Huat Industrial, ASA Group, Fastech Synergy and Ionics EMS.

These delistings show yet again the danger of buying on NTA.

One, even if a firm has the cash for a buyout, most shareholders will not benefit. Ionics EMS’s exit offer of 1.5 cents per share, for example, was a 23.86 per cent discount to the 12-month volume-weighted average price (VWAP).

And as BT reported on tuesday, “With most of the companies experiencing drastic sell-offs since the de-listing notice was issued on March 2, their counters’ last-traded prices have fallen significantly below net asset value (NAV). General Magnetics’ case is the most vivid, with a $0.19 NAV per share against its last-traded price of $0.085.”

And as BT pointed out,  “Should VWAP feature more prominently than NAV in determining the exit offer, the price may end up being ridiculously low and shareholders of the five companies that face de-listing may find the options to stay or to go are not really options at all.”

But some gd news for value investors:  the investors in Lion Asiapac have gotten something — 15 cents a share via special dividend. Gd for them and great that they stood up and shouted for the money. And all without that self-proclaimed small shareholders’ champ.SIAS

https://atans1.wordpress.com/2010/03/18/perils-of-buying-on-nta-ii/

Perils of buying on NTA II

In Investments on 18/03/2010 at 5:33 am

It was reported in Today that ” Minority shareholders of Lion Asiapac are making another push for the company to pay out special dividends. Previous calls for such distribution were ignored.”

‘Mr Mano Sabnani, a Lion Asiapac shareholder, said: “The company has got more money than it needs. It can easily pay out 20 cents a share and still have a big cash hoard for new businesses.

‘Shareholders had previously petitioned Lion Asiapac’s chairman Othman Wok, calling for the distribution of special dividends to boost the stock price, which is trading at a heavily-discounted 33 cents to its cash value of 47 cents.”

The problem is that the company is a subsidiary of Lion Group, a M’sian listco, which means that Lion Group has the votes to block any such resolution.

Buying on a deep discount to NTA only works if the value investor can see some catalyst that will unlock value. Where there is a controlling shareholder or shareholders, this catalyst often does not exist. Witness Haw Par https://atans1.wordpress.com/2009/12/11/hidden-tiger/,

Chemoil https://atans1.wordpress.com/2009/12/16/when-a-controlling-stake-goes-at-a-massive-discount/ and

UE https://atans1.wordpress.com/2009/12/17/the-perils-of-buying-on-nta-calculations/

And bear in mind that such a discount could also be a sign that investors are concerned that the cash or assets  could be used up in unprofitable businesses, rather than given back to shareholders. Again where there is a controlling shareholder or shareholders, this is more likely to happen.  Not because the shareholder wants to screw the others but often because his time horizon is very, very long.  And he has other reasons for his holdings say sentimentality.

Chinese dot.com companies listed on Nasdaq were trading below their net cash positions after the dot.com bust. Investors rightly assumed that they would not see the cash.The cash would be used to fund internet ventures etc. Anything else except be returned to shareholders. They were right.

OCBC: Value to be unlocked, cash returned to shareholders

In Investments on 08/03/2010 at 5:41 am

[Note on 26 April 2010 11.30 am, this piece was updated as the 2009 annual report was made available on website]

If OCBC mgt wants to unlock value and return cash to shareholders, this is how to do it.

First by reading the FT. “Prudential, trading at roughly 1 times embedded value, appears to be overpaying by offering 1.7 times EV for a business [AIG]with lower-quality profits. The valuation appears less outlandish, however, when compared with prevailing multiples in Asian markets of about 1.7-1.8 times”. EV means embedded value.

At its present share price (S$15.90), OCBC’s GE Life is trading 21% above its 2009 embedded value because GE LIfe’s free float is tiny: OCBC has 87% of GE Life.

At 1.7 X EV share price shld be 22.35 or 41% up.

And in 2009, AIA had 5% growth at operating level. Based on GE’s annced results, GE’ s is several times that. So given GE life’s smallish size and profitability, 2 X EV would be fair (even taking into account its very weakish presence in China: but then it is building up mkt share in Indonesia) .   At 2 X embedded value, share price is almost $26.30 — 65% up.

OCBC mgt:  Time to call, Allianz or Aviva? Or Temasek? That bull on Asian financial stocks.

After all, OCBC  can keep the bankassurance model (OCBC retains exclusivity in branch selling insurance where it has a decent branch network) ), and can buy shares in an insurance co that is buying GE Life (to participate in growth of insc biz). And remember OCBC has no access to GE Life’s cash flow. It can only equity account GE Life.

The sale would bring in around S$10.5 billion in cash to OCBC or $3.15 a share.

But I doubt whether mgt or the controlling shareholder would want to do this deal. The downside is that OCBC would shrink and be smaller than DBS once shorn of GE Life. Its engine of growth would be gone and it would be a takeover target. So long term, one could argue that deal would be bad for OCBC.

Still if I were the OCBC Lees, $2.8 billion(assuming all the proceeds are paid out)  is not to be sneered at.

Wondering why writing abt this fantasy deal? Showing off that my CF skills as gd as my writing skills. Hoping that sumeone will contact me offering me some freelance analytical work instead of word spinning work. Here’s hoping!

Why my “obsession” with TLCs in China

In China, Investments, Temasek on 09/02/2010 at 5:12 am

No, I’m not a member or covert supporter of Dr Chee’s SDP, always looking to run-down S’pore.

I try to be a “special situations” investor: looking for situations where the conventional wisdom is wrong. At present, the conventional wisdom on China is “Short-term bear, long-term bull”. So CapitaLand is punished by the market for their US$2.2 billion deal while, the seller, OOIL’s share price is stable in a weak market.

But CapitaLand and DBS already big in China, want to be bigger: and KepLand are rumoured to be thinking of doing a big( S$186 million) property deal. Temasek have big direct investments too. They are big investors in several private equity funds and have big holdings in two Chinese banks: 4% of Bank of China and 6% of China Construction Bank*.

They are going against the consensus view that the least one can do is to be cautious in China.

If the listed TLCs get China right, they could be 20-baggers.  Hence my interest in whether they are right. As for Temasek getting it right, Temasek, as its CEO says, belongs to us S’poreans.

——————————————————

Additional tots — 15 Feb 2010

But what are the odds of them getting it right?

Adam Smith (the economist. not the great US financial commentator of the 80s) wrote, “the chance of gain is by every man more or less overvalued”.

This more or less explains why great investors (defined here to include traders) like Buffett, Soros, Paul Johnson, Jim Rogers, Peter Lynch, Anthony Bolton and the old Kuwait Investment Office are so rare. They are better at judging the odds of getting things right.

And why the smart people in Temasek and GIC make mistakes. They are just like the other ordinary smart people managing money in SWFs, endowments, collective funds, pension funds, insurance companies and other institutional investors.

And why the smart people in CapLand and KepLand could be wrong. They could be like the smart managers in Time Warner that decided to merge Time Warner with AOL, or the managers at Sembcorp when they decided to go into property and Delifrance.

———————————————

Incidentally, a BBC Online article examines what is driving the  Chinese property market:

Demand for housing

Louis Kuijs, an economist at the World Bank in Beijing, says China still needed more houses, despite several years of fast-paced building, “In a rapidly growing country like China that still has a low stock of housing, there is a fundamental demand for new homes.”

Developers looking for sites

“In Beijing the search is still on for new sites for development.”

People still buying hses as an investment

One man  says he has accepted an offer to relocate. He already has two apartments in Beijing and he is going to use the compensation to buy a third.

Full BBC online article

CapLand (and KeplLand?) could be right abt China.

*’We work really closely with Sasac, the state-owned enterprise regulator in China, and there are literally trillions and trillions of renminbi of frankly defaulting loans already in China that no one is doing anything about,’

Neil McDonald, a Hong Kong-based business restructuring and insolvency partner with Lovells LLP, said at an Asia-Pacific Loan Market Association conference last week. ‘At some point, there’s going to be a reckoning for that.’ — quote from BT.


Three risks

In Investments on 02/02/2010 at 10:36 am

These three risks apply here too especially the earnings and valuation risks. Note  that they are not the same.

As to political risk, the risk here is not in Singapore but in Malaysia and Indonesia.

If religious tensions escalate; or the Malaysian government cracks down on dissidents or is seen as weak, then foreigners will sell their Malaysian shares, and S’pore will be caught in the backwash.

In Indonesia the issues are the corruption and the unhappiness about it. Thousands of demonstrators have taken part in anti-government protests. Protesters say President Susilo Bambang Yudhoyono has not delivered on his promise to eradicate corruption during the first 100 days of his second term.

These issues could affect the perception of investors about Indonesia (a darling of emerging market investors), again causing spillover effects here.

SingTel: Did you know?

In Investments, Temasek on 26/01/2010 at 5:53 am

SingTel is in the news because of reports that its successful bid for EPL rights made FIFA up the price for the World Cup rights for S’pore.  Great screw-up: sabo Starhub, end up saboing S’poreans?

But S’poreans might want to know (not reported in MSM) that its 32% owned associate in India has just issued a set of bad results. Dominant operator Bharti Airtel announced a 2% (‘peanuts’ Mrs Goh Chok Tong would say) year-on-year increase in earnings in the fourth quarter.  Bharti’s average revenue per user dropped 30% over the past year to US$7 per month.

Twelve companies all with big ambitions and plenty of cash are fighting a price war. Worse more players are coming.

So while the value of its Indian investment is in peril, it is focusing in S’pore on the entertainment biz.  No wonder it is trying to sell a 25% stake in Optus at a highish valuation. It got to look gd somewhere.

Low Growth Era thesis

In Investments on 22/01/2010 at 5:18 am

Two of Fidelity’s top fund managers subscribe to this theory.

One is Adrian Brass the manager of  Fidelity American Special Situations fund. He is optimistic the rally will continue in the short term. He points out that corporate America has taken a bigger “knife to costs” than at any time in its history.

But longer term he is less bullish, gradually rotating his portfolio into stocks in sectors such as healthcare and IT services that can grow even as consumers and governments retrench, and out of cyclical stocks.

His colleague Anthony Bolton has said that the cyclical recovery would “run out of steam” in the first half of this year as investors came to terms with the subdued economic reality. This is the guy who is relocating to China because he is a China bull.

NOL: Don’t buy it for the wrong reasons

In Economy, Investments, Temasek on 21/01/2010 at 5:27 am

NOL’s and other container lines’ shares are in demand, with the recovery in world trade expected to lift freight rates despite the surplus of ships. “[M]ore than a tenth of the vessels that transport the world’s manufactured goods in containers are idle. For most, orders to sail will not come for some time.”

(Aside, NOL tried not order new ships when David Lim returned to NOL, after a stint as an acting minister. He tot the other liners were crazy to order new ships despite a surplus. But in the end, NOL too joined in because the ordering frenzy continued. Sadly, it did so  juz before the market turned, but didn’t order as many ships as its bigger competitors, though as it ordered late, it paid higher prices.)

Buy into NOL because of its operational gearing into a recovery, not because it is a highly geared financial play into shipping (it isn’t) or because it can buy cheapish assets and gear up (it’s not a buccaneer).

Short of plans to buy assets, NOL did not need the S$1.4b in raised last year. NOL, which had then S$400m in cash reserves, would have almost less than 2% net debt (45% of equity at the end of 1Q of 2009) against container sector average between 60 and 6 then

NOL intended to use about S$700m  for investments and working capital, the remainder to repay debt.

So NOL was in a good position to buy ships at bargain prices from highly leveraged shippers in distress, and shipyards. And increasingly its gearing again in the process.

Imagine going into the next cycle with cheaply acquired ships and a gearing of 45%. Wow Bam. This didn’t happen. NOL is one of the most conservative container lines and took a higher proportion of its ships out of service than other lines to tackle over-capacity.

Moral of story –.

And one hopes it doesn’t try to fly by buying ships in a rising market.

There are the Greeks and Chinese buccaneers out there too on the prowl for ships. The only problem is they are geared above the safety lines on the sides of their ships. But in a rising market, they can borrow more. And a rising market means ship-owners and shipyards will be reluctant to sell.

(Writer has some NOL shares in his CPF portfolio.)

Global diversification via one blue chip

In China, India, Investments on 20/01/2010 at 6:14 am

Tony Tan, deputy chairman of GIC is optimistic about Asia’s prospects and expects it to enter a ‘Golden Age’ in the next decade.

So if you believe him (remember MM Lee, GIC’s chairman, talked of something similar just before the global credit crunch and subsequent global recession), what to buy leh?

Just as CapitaLand is a “no-brainer” China play, maybe  this is “no brainer” for dummies to get global exposure?

“[W]ill continue to outgrow America over the coming years. Already 60% of its sales are overseas, and its bridgehead into China and India looks more robust than most.”

Of course you could buy an ETF that invests in a global index.

A week is a long time

In China, Investments on 14/01/2010 at 5:41 am

The “future’s bright” buying we saw  in the S’pore mkt in the first week of 2010 has turned to “no future” selling, since Tuesday. Looks like the penny-stock syndicates may have got their timing wrong.  Watch out for forced selling as punters ignore margin calls.

Blame the Chinese government for spooking global mkts.

To recap:

— China increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom.

— The central bank also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week.

Trumpets pls for my 2010 strategy: ” Look for strong balance sheets and dividends that will compensate if brokers’ optimism turn to be wrong.” https://atans1.wordpress.com/2009/12/31/investment-strategy-for-2010/

We could be going back to the future. In 1993, America discovered emerging Asian mkts. Come Jan 1994, these mkts were expected to continue flying. Then Greenspan started raising US rates.

Funds started selling and mkts went down and quiet. This time it could the emerging hegemon that causes investors and brokers to  reassess their bullishness.

Genting S’pore — Did you know?

In Investments on 08/01/2010 at 5:19 am

The junket rules that the authorities are likely to introduce will mean a slow start for VIP (high roller) volumes at Genting Singapore, at least in the short term. The Genting gp, I understand, has always believed junket operators are the key to its VIP segment.

So the VIP gaming volumes at Sentosa will take time build up. Note that the preference for using junket operators for the VIP segment reflects the more conservative nature of the Genting gp. Bad debts are the responsibility of the operators, not the casino. In return, the operators get a bigger share of the gamblers’ spending.

Bank of America Merrill Lynch analyst Melvyn Boey estimates VIP clients will account for about 50% of the business at the Singapore casinos. But of these VIP clients, only about 30% might be expected to be brought in by junket operators with most being ‘in-house VIP clients’. Now 30% of 50% sounds a lot to me, though he says it is “insignificant”.

I suspect he must be thinking of Sands rather than Genting S. Sands has said that it will rely on its in-hse VIP gamblers for Sands S’pore.

Funnily, Genting S has an advantage versus SS because the Genting gp stronger financials mean that it can more easily finance in-hse VIP clients. Sands gp isn’t exactly cash rich.

With a recent rally in its share price, Genting S now trades at over 17x 2011e EV/EBITDA. Sands China and Wynn Macau, with existing cashflows in the largest gaming. market in the world, trade below 11x. Even if EBITDA were 50% higher than consensus forecast, valuations are stretched. The recent selling in heavy volume could be a reflection that the institutional investors are realising this. Foreign brokers are calling a “Sell” at these levels.

Or the selling could simply reflect that falls in HK of Winn Macau and Sands China.

SATS — More Dividends or a Rights Issue?

In Investments, Temasek on 06/01/2010 at 5:20 am

Who will be right?

“Now that SIA has divested SATS, the company’s true value is more likely to be appreciated by the market. We estimate a surplus of $0.20/share that can be paid as dividends to shareholders if properties held at cost are sold and leased back,” writes Kim Eng Securities.

In mid-June 2009, I analysed SATs as follows:

Why new SAT shareholders should be grumpy

On May 14, SIA announced that it was going to distribute to its shareholders its 81% stake in SATS by way of a dividend in specie. Since then share price is up 5%.

This comes after SATS has become cash poor.

In January 2009, SATS launched a takeover bid for its Temask stable-mate SFI. According to the takeover documents, the pro-forma balance sheet as at September 2008 would have shown that the net cash position of the SATS (including SFI) group deteriorated to minus S$21 from S$528. In particular, cash in fixed deposits would have fallen from S$573 million to S$64 million.

But SATS needs cash because “SATS is committed to growing its 2 core businesses of airport and food services”. It could borrow big-time, pro forma net gearing is 0.04% from (0.35)%. But in Singapore, where debt is a dirty word in GLCs (NOL comes to mind), a rights issue is reasonably probable.

Temasek as the new controlling shareholder of SATS has $356 million from its sale of SFI shares to fund any rights issue. But do other new SATS shareholders have the cash?

Finally, looks like MM Lee gets his way. In 2004, he said SIA should divest itself of SATS and SIAEC. SIA’s management demurred. Will SAEC be divested despite SIA mgt saying last night that the SAEC holding is strategic? Stay tuned.

——-

Or will be both wrong, and CIMB prove correct? It doesn’t have any expectations of corporate activities, being underwhelmed by SATS.

Minibonds Revisited

In Investment banking, Investments on 02/01/2010 at 5:44 am

I nearly bought minibonds in 2007, and since the failure of Lehman Brothers last year, I’ve been trying to understand why I nearly bought them. It is important to me as it could help me avoid a future disaster.

I always knew why I didn’t buy — greed. Dr Money sums this greed up nicely when he wrote, “Your money gets invested in risky bonds and derivatives. It means total returns are much higher, like 13 per cent or more. But all you see is your safe-looking 5 per cent return.

‘The difference of 13 – 5 = 8 per cent goes to the deal-maker while you must take all the risks. If the bonds default, you lose.”

Then there is the issue that if interest rates collapsed, the arranger could recall the note, while if inflation went to 10% (remember the price of oil then), I’d be stuck with 5%.

But I didn’t know why I nearly bought i.e. think it was a safe product, despite being “aware” of the risk premium. This is worrying. I could misanalyse again.

I’ve very recently come to the conclusion that my mind (without me being conscious of it — mindlessness in Zen) divided the risk element into two bits.

Risk 1

I “knew” (I was relying on the ads and a BT newspaper article) that

— I was (with many others) insuring someone against the failure of one of the six entities

— the product was highly leveraged

— derivatives were being used

— the combination of the last two meant that it was likely that if one entity got into trouble I would lose my money.

(Having read the prospectus last yr, the above points were confirmed.)

Risk 2

The probability of a default by Lehman or one of the entities.

My conscious mind came to the conclusion that the probability of default by Lehman or one of the six entities was very, very low (so far none of the six entities are in trouble). Dr Money had a great take on the improbability of an LB failure. I can do no better.

The very low probability of failure must have made me conclude that it was a safe product, and that LB had found investors who had mispriced risk — willing to pay the 13% mentioned by Dr Money. Not surprising as my experience as an arbitrageur (risk and straight) had taught me that risk is usually mispriced (investors are too cautious — Yes if I were still arbitraging, my employer would have lost big time in 2008 )

What has all this to do with forcing a settlement that Tan Kin Lian and others wanted? That the MAS refused to even think about.  It told them to bugger off.

Supposing there was no mis-selling: investors in minibonds and DBS HN5 notes were told everything and I mean everything. Would investors still have bought?

I think that most would have. Of course they would deny this today. “They would, wouldn’t they?”

They would have been advised, and rightly so (at the time), that the very low probability of failure, meant that their principal was safe.

The lessons of the story- better to be lucky than smart and going for yield is dangerous.

Good 2010 and decade.

The Perils of Indexation (Revised and Updated)

In Investments on 01/01/2010 at 5:36 am

(Been thinking more about this since I blogged on this topic a few weeks ago. This is an expanded and revised version.)

This writer agrees with Warren Buffett that buying low-cost index funds  is the best way for most people to invest in equities.  http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But he is not blind to the problems with index investing.

Even over 10 years, things can go wrong

— The return of the Dow to 10,000 (10428 on NY’s eve) serves as a reminder that US stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before reaching a high of 14,164 two years ago and falling to a low of 6,547 in March 2009.

— In 10 years the FTSE is only 25% lower. A lot better than the Dow but it too has been very volatile.

And longer term : “For those seeking solace in the conventional wisdom that stocks rise in the long run, consider this: 20 years after Japan’s stock market peaked, share prices are still less than 25 percent of their top values, ” from NYT article in March 2009.

All the above means is that buying index funds is fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds. (I hope to blog something on rebalancing in early 2010). In the meantime, an example of rebalancing http://www.fisca.sg/product_reviews?mode=PostView&bmi=210476

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter (you may need to draw on yr capital). Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demoralise you.

“It’s sadly ironic that the boom in tracker [index] funds at the end of the 1990s came at the most inappropriate moment possible,” says a BBC writer.

But the article implicitly points out that the alternative could have been a lot more worse. Read about the stocks that lost value and have little chance to recover.

At least an index fund can bounce back.  Look at STI: STI started 2000 at around 2000. Went to a high of just below 4000 and on 31 Dec was at 2897. Just in March 2009, it was at 1455.

The moral of this piece: index but rebalance periodically. As I said, I will blog on rebalancing soon.

Investment Strategy for 2010?

In Economy, Investments on 31/12/2009 at 10:59 am

Look for strong balance sheets and dividends that will compensate if brokers’ optimism turn to be wrong. If past form is any guide, the brokers will get it wrong again. If my fortune teller’s track record is as bad, he would have starved to death for lack of clients.

Remember in late 2008, they were pessimistic for 2009 (and they were nearly right: remember March 2009?). Now the brokers are bullish for 2010, predicting STI will break 3000. As this is only 3% away, this should be a no-brainer. But what then? I’ve not seen a negative outlok for the whole of 2010.

STI tracks the US market closely. The 10-year price-to-earnings ratio of the S.& P. 500, a measure of how expensive stocks are relative to profits, was more than 20.3 in late December, up from 13.3 in March. The average for the last 130 years is 16.4, according to calculations by Robert J. Shiller, the Yale economist. So there are reasons for being cautious again.

In mid-2009, the FT carried an intervieww with a strategist from CLSA  who said we are in the midst of a bear market rally. Nothing new here. But unlike other pundits, he said this rally could run for another two years before collapsing. He cited what happened after the dotcom bubble bust in 2000/ 2001.

He said, with hindsight, it was clear that the recovery from 2003 to 2007 was a bear market rally.

Bottom line: A bull run or bear market rally can only be predicted in hindsight. So a little caution is again called for.

As this NYT blogger wrote:

“Travel back in time to the dark days of last March, when the Dow was flirting with 6,500 and pundits were predicting the end of capitalism as we know it. As a result, stocks were dirt cheap — as they always are in a panic. Should you double up with your last cash reserves or slowly feed in more limited amounts of cash?

‘The conservative approach turned out to be wrong: although you did just fine, you could have made a bundle by going all in. But suppose the economy, and the markets with it, had indeed fallen off a cliff. Those who went all in would have been wiped out, while those who kept some dry powder would still at least be paying the bills. Which just might be how it turns out the next time.” Italics are mine.

Full posting

M-Reit — Last chance to buy?

In Investments, Property on 28/12/2009 at 7:03 am

Later today, the new shares of MI-Reit start trading.  MI-Reit closed on X’mas eve at 21 cents.

Note AMP’s and other core shareholders have an average cost of just under 20 cents a share. And the rights was done at 15.9 cents a new share. There could be a lot of sellers out there at 20-21 cents.

Might not take much for the shares to trade below AMP’s cost e.g. the completion of the deal to buy four industrial buildings from AMP will now be delayed to Jan 11, 2010.

So might it be time to buy? A few weeks ago, BT reported, “The new co-sponsor of MacarthurCook Industrial Reit (MI-Reit) yesterday said that it [AMP] will focus on regaining unitholders’ trust before embarking on new acquisitions, likely industrial properties in Singapore and Japan.”

There is more incentive now for AMP (assuming the deal to sell the buildings go thru) to do what it said it would do: what with shares near or below its cost price.

Finally AMP has its name on the Reit which is now AIMS-AMP Capital Industrial Reit. The name change comes after AMP acquired 50 per cent of the Reit manager’s total share capital. The delay in deal completion is likely to be technical, given AMP’s name is on brass plate.

The Perils of Indexation

In Investments on 25/12/2009 at 9:34 am

This writer believes that indexation is the way to go when investing in equities. http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But I think  this is going too far: “What can retirees do? They have to invest in equities to earn a higher return. Although equities have a higher level of risk, it can be mitigated by investing in a low cost fund, such as an exchange traded fund. The return on equities is likely to be around 5% to 7%, which is much better than 2% on government bonds.”

Err what about the principal? Remember oldies may need their capital sums in a hurry.

The return of the Dow to 10,000 (10520 on X’mas eve) serves as a sad reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.

Likewise the STI. The STI started 2000 at around 2000. Went to a high of just below 4000 and on 24 Dec was at 2837 Just in March 2009, it was at  1455.

Fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds.

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter.  Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demotalise you.

Sumething worth remembering

In Investments, Property on 25/12/2009 at 5:29 am

“You often find when your property is being sold that the agent tells you that the property is a mediocre one, but if you are on the buyer side, it’s suddenly the world’s best.”

Speaker was head of the Rey/Nouvion family office in Monaco, Laurent Nouvion, quoted in a recent Barclays Wealth report. Thanks to Today for this quote.

Sino-Environment Cont’d

In China, Corporate governance, Investments on 20/12/2009 at 12:08 pm

SIAS has said that the share register of Sino-Environment is open, with no controlling shareholder; correcting my presumption that the EDs and connections could still control the company.

SIAS goes on to urge “minority shareholders to turn up in force at the EGM to support the Independent Directors (IDs) as their combined votes are important to ensure that the proposal to remove the EDs wins shareholder approval.” (A quibble here: If there is no-one or group with a controlling interest, how can there be “minority shareholders”? SIAS must mean “small shareholders”. Sorry it’s the lawyer in me.)

On a very serious note: What are the implications, if at the EGM, there is a majority who vote against the removal of the EDs?

What happens when shareholder democracy clashes with possible corporate misdeeds? Remember, unlike directors (who have to act in the best interests of the company), shareholders can act in their selfish interests. Shareholders who find themselves “at the wrong end of the stick” as the English expression goes, have to go to court to protect their interests. How will everything then play out?

When general Cornwallis surrendered to George Washington in 1781 (effectively ending the American Revolution), the surrendering British army’s band is reputed to have played “World Turned Upset Down”. If the EDS remain in office after the EGM, some assumptions of company law and the listing manual, may be founding wanting.

As someone interested in the intricacies of company law and the listing manual and how they interact, I selfishly hope that the EDs win.

I know, I know. No a charitable tot at Christmas, especially towards many of the shareholders of the company. But they have to live with the consequences of their actions or inactions. No-one forced them to buy this particular S-Chip.

Whither Wall Street, STI Follows

In Economy, Investments on 19/12/2009 at 6:10 am

Poll of Wall Streeters.

Let’s hope their bullishness is correct though if we go by their views in Dec 2008 and 2009, and March  2009 …

Are they just extrapolating current trends?

The perils of buying on NTA calculations

In Corporate governance, Investment banking, Investments on 17/12/2009 at 7:36 am

Recently I read a report on United Engineers by CIMB.  “We maintain our Outperform rating and target price of S$2.15, still based on a 20% discount to our end-CY10 RNAV estimate of S$2.68. Our positive view remains founded on its attractive valuations against underlying assets backed by improving operating indicators and an improving net gearing. We see stock catalysts from further stabilising of commercial rents. UE trades at a depressed 0.5x P/BV”

No-one I know ever got rich buying UE. And this reminds me of what I wrote in June 2009.

——

The perils of buying NTA

The share price of United Engineers is falling after its high of S$2.37 on 29 May. This illustrates that buying a counter at a deep discount to its NTA can be problematic, if there is no catalyst to unlock value. To recap. As part of an asset rationalising swap, Straits Trading and its controlling privately-owned shareholder swapped assets.

12% of UE was sold to Tecity at around S$1.52 a share, and 7% of WBL Corp was sold to ST as part of the asset swap. ST ended up with 19% of WBL. BTW WBL has another 10% of UE.

There was speculation that Tecity had immediate designs on UE. UE’s shares are at a deep discount to its published NTA of S$3.43. They remembered Tecity’s bid for ST which ended with Tecity paying S$6.70 for assets (revalued) worth S$6.52 a share. What is forgotten is that Tecity busy coping with the consequences of having spent S$1.1bn to own 82% of ST; is not likely to want to reward other UE shareholders at Tecity’s expense.

Assuming it bids at published NTA, it would have to spend S$679m. And if, the other major shareholder, GE Life starts a bidding war, the cost could escalate, like in ST. In early 2008, there were estimates that UE’s NTA could be S$6. And if it did bid at NTA or more, any time soon, ST’s minority shareholders would rightly cry foul.

TeCity’s founder, the deceased Tan Chin Tuan, would spin in his grave hearing his heirs being accused of being unfair to minorities.

Incidentally the cost of selling UE’s assets are likely to be very high.

Maybe future UE annual reports should give an estimate of the costs of selling these assets to unlock the published NTA. And maybe advisers to the independent directors of a target company; and the acquirer should subtract the costs of liquidating the assets when toying with NTA values in their reports.

If this had been done in ST, Tecity could have got away with a lower bid.

 

When a controlling stake goes at a massive discount

In Energy, Investments on 16/12/2009 at 9:10 am

Glencore International, the world’s biggest commodity trader, has bought a 51% stake in  Chemoil Energy for US$233 million ($325 million) from the Chandran Family Trust.

It paid 35.52 US cents a share: 21.1% discount to the  closing price of 45 US cents, on Friday.

In late May this year, just before rumours of Glencore buying a stake appeared, Chemoil was trading at around the 30 US cents level. The rumours pushed it to as high as 56.5 US cents.

Moral of the story: buyer of a controlling block may not need to pay a premium to market. It all depends on its bargaining power vis-a-vis the seller. And whether there is another major shareholder willing to deal:  Itochu Corporation, a Japanese conglomerate, with a 37.5%  stake in Chemoil, was apparently contented with its stake.

What happens if S-Chips can’t get IDs?

In Corporate governance, Investments on 11/12/2009 at 12:24 pm

I wonder if the SGX has thought thru its proposals on imposing more duties on independent directors of S-Chips (OK the proposals apply to all companies with major overseas units: but it seems reasonable to conclude that S-Chips were the intended targets of these measures.)

Will the S-Chips find IDs prepared to serve on their boards, if the proposals become the “law”? Already the chairman of the Singapore Institute of Directors has expressed concern that existing IDs may resign to avoid these additional duties? What happens if IDs resign and the S-Chips cannot find replacements?

What will SGX do? Suspend these companies, or delist them? And wouldn’t the losers be the retail gamblers , opps, investors?

If the S-Chips pay a lot of money, I’m sure they can get IDs. The issue is whether they got the cash to pat them. Many of them are SMEs; the bigger companies prefer HKSE.

Finally is there a problem? The president of SIAS was quoted recently as saying  that it would be unfair to view  “the 154 S-Chips” as being especially vulnerable to problems arising from weak corporate governance, only  a few were “problematic”.

He should know, shouldn’t he?

Hidden Tiger?

In Investments on 11/12/2009 at 5:13 am

Haw Par historically trades at a big discount to its assets and businesses. The discount has got even bigger. Its 4% stake in UOB is now worth more than Haw Par’s market capitalisation — by about 4%.

UOB closed yesterday at S$19.84. This works out to S$6.05 a Haw Par share. Haw Par closed at S$5.83.

And Haw Par has a rat-bag of businesses and assets  ranging from healthcare products (‘Tiger Balm’), oceanriums, an aquarium (there seems to be some legal trouble here),  properties, and 5.2% of UOL (an SGX-listed property company where the UOB Wees have a controlling interest (29.13); like in Haw Par (30.6%). OK rat-bag is unfail,  its businesses are usually profitable, and the assets have value.

So at the these prices of Haw Par and UOB, one gets UOB shares at a 4% discount if one buys Haw Par shares. And the other businesses and assets are thrown in for “free”.

And who knows, one day the  value of Haw Par’s UOB shares; and its other assets, and businesses may be unlocked. Two long-term value investors have been around for years: MacKenzie Cundill Investment Management has 11.67% and Arnhold and S.Bleichroeder has 14.74%.

Meantime, we long-term investors get decent dividends: present yield is 4%.

 

Buying for dividend yields can be dangerous

In Investments on 10/12/2009 at 11:41 am

Just ask the investors in Global Investments ( GIL, the former Babcock & Brown Structured Finance Fund) and Macquarie International Infrastructure Fund Limited (MIIF)

At the IPO price of S$1.06 in late 2006, GIL was offering a yield of 9%, while MIIF’s prospectus in May 2005 stated “forecast dividends delivering an annualised yield of between 7.1% to 9.0% on the Offering Price for the period ending 31 December 2005 (see ‘‘Financial Forecasts — Assumptions’’)”. Its listing price was S$1.

Well GIL (with lots of CDOs in its portfolio) is now around 24 cents, while MIIF is around 43.5 cents.

The saving grace is that both are trading below their latest available NAV calculations. MIIF’s NAV as at Sept is 80 cents down from June’s 86 cents. GIL’s is 36 cents as at September, up from June’s 35 cents.

The moral of these two stocks is that high yields could be a sign that investors need to be compensated for the risk that the dividends are not sustainable and that the stock price would fall. Of course, if one is lucky, it could simply mean that the market got it wrong — the dividends are sustainable and the stock price undervalues the company.

You place yr bets, and leave it to the cards.

Bull in a China Shop — but will he find value in S-Chips?

In China, Investments on 08/12/2009 at 4:32 pm

Anthony Bolton is not as well-known here as Warren Buffett or Jim Rogers

But one thousand pounds invested in his Fidelity Special Situations Fund at launch would have grown in value to £146,700 in 28 yrs.

He is relocating to HK (from London). Writing in FT.com he said, ‘that a recent tour of China had rekindled his desire to manage money. “The [investment] opportunity is simply too great to pass up. My retirement can wait a little while yet.”’

Brushing aside growing concerns that Chinese-related equities were overvalued, “The bargain stage for Chinese stocks is over but it is too early to talk about real bubbles just one year after the crisis”.

His forte is stock-picking, and it will be interesting to see if he finds value in S-Chips.

Too clever by half?

In Investments, Property on 03/12/2009 at 9:57 am

The new-cosponsor MacarthurCook Industrial Reit (MI-Reit), AMP, and the new investors looked like they got a great deal when the recapitalisation of MI-Reit was annced in early November. Their entry price was 19.9 cents (taking into acct the entry price of 28 cents and the  rights issue of 2 for 1 at 15.9 cents). In the case of AMP,  it didn’t pay any cash for its initial investment. It sold properties and got shares valued at 28 cents. Ask Cambridge Reit about this.

There was a bun fight as Cambridge Reit said the deals destroyed value.

At the time the deal was done, the share price was 30 something cents. Having gone ex everything, it is now hovering at 20 cents.

So an investor coming in at 20 cents comes in almost at price that AMP etc entered. Now if I were AMP or one of the other 28-cents investors, I’d not be pleased at the engineers who planned and executed the deal.

So it is no surprise to read in today’s BT: “The new co-sponsor of MacarthurCook Industrial Reit (MI-Reit) yesterday said that it will focus on regaining unitholders’ trust before embarking on new acquisitions, likely industrial properties in Singapore and Japan.”

Cheapos (sorry value investors) like me will wait to see if it mkt price can come closer to rights issue price. All it needs is for Dubai to scare the markets one more time or another bad set of US economic numbers.

What price income protection? Or the cost of an annuity

In Investments on 02/12/2009 at 11:09 am

I was reading an article describing how much a 21-year old and  a 40-year-old man or woman would require to set aside to get an annual income equivalent to the median annual earnings in the UK. (“If you line up all the workers in the UK, from the highest earners and one end to the lowest at the other, and pick the person exactly in the middle – that is the median.”)

Data was provided by an insurer and a fund manager. The insurer calculated on the basis of the lump sum needed to buy a annuity; while the fund manager calculated on the assumption of expected investment returns if a lump sum was invested.

I tabulated the numbers in a table and in the last column calculated the differential in percentage terms using “Investment Cost” as the denominator.

DESCRIPTION EARLY RETIREMENT COST (using Annuity) INVESTMENT COST PERCENTAGE DIFFERENCE
Man aged 21 £2,019,117 £807,245 149
Man aged 40 £1,268,780 £659,248 92
Woman aged 21 £1,658,201 £666,076 148
Woman aged 40 £1,069,225 £554,676 95
Assumptions An estimated inflation rate of 3% a year. Take into account tax that would have to be paid. An average annual growth rate of 5% in these investments and inflation of 3%.  
Source Canada Life Fidelity International  

The differential surprised me. I know, I know: the annuity payments are assured, annual investment returns are not, and can be volatile. The investment principal could be depleted. And yields on long-term government paper, that the insurer would invest in to pay the annuities, are pathetic. But still ….  And BTW an annuity stops paying on death. Investments can be inherited.

And this in a country where the annuity market is very developed. Imagine the premium in Singapore where the annuity market is not as developed as that of the UK.  By any measure, the annuity market here is third world.

FYI, a friend is trying to provide me with local data so that I can localise the comparison. (Update on 14/1/2010, no gd local data to work on.)

Still the above table shows that the price of an assured life-time income is very high.

Dividends — Chk Oz out

In Investments on 29/11/2009 at 7:02 am

Dear Mr Cynical Investor

I thought I would add my two bits worth after reading your piece on “New thinking on Asian Stocks”. If you think that dividend yields of 2.8% for Asian markets is exciting may I tickle you with dividend yields of 6% plus for Australian banks (the major 4 being among the world’s top ten triple A rated banks) and as much as 9% for the nation’s Telecom company, Telstra. With 100% franking (tax credits), FY10 gross yield jumps up to 8-9% for the banks and 13% for Telstra. Using the simple Rule of 72, an investment in Telstra (ceteris paribus of cos) at the gross yield of 13% would double your money in 5 1/2 years.

No wonder the A$ is so strong ;-)

From someone who thinks Albert Einstein, Jesus Christ, Ussan Bolt are not a patch on her son — but at least the boy got letter from Kevin Rudd contragulating him that among he the top 1%  A-level students.

New thinking on Asian stocks

In China, Economy, Investments on 25/11/2009 at 6:26 pm

This appeared in today’s BT.

Writer, Lee King Fui, a fund mgr from Schroder, advocates buying Asian stocks that pay good dividends regularly. Investors in Asian stocks used to consider this kiddie stuff. You bought Asian shares because they gave spectatcular capital gains. You wanted dividends,  you bought into wimps in the  US, UK, European.  Asia was for he-men, not girlie-men

Can’t say much abt other markets, but such a strategy would have worked here esp as there were tax credits to be used up. Now gone alas.

“To participate in … long-term economic growth of Asia, investors may wish to look at an investment strategy that focuses on the dividends of companies. While not intuitive, capital return has rarely been a dominant component of total return nor has it a strong relation to economic performance. Other studies on the US and the rest of the world have reached a similar conclusion. In fact, our empirical investigation into the historical make-up of total return for Asia from 1994 to 2008 shows that dividend return is by far the largest component of total return, and bears a much stronger correlation to economic growth.

‘The reason why dividends closely track economic growth is not hard to comprehend; dividend payouts are driven by company fundamentals such as earnings and cashflow which are directly impacted by prevailing economic conditions. Stockmarket appreciation, however, can sometimes be driven by less fundamental factors such as sentiment, momentum and liquidity. Therefore, investors looking to invest in Asian markets because they want to participate in the region’s strong economic growth are more likely to achieve their objectives in the long-term by focusing on capturing the dividend return of Asian companies, than by targeting the capital return of stocks. In essence, they should be owning assets that pay shareholders to own them over time.

‘Focusing on dividends also helps one identify fundamentally strong firms. Because managers have better inside knowledge of their companies, dividends are often used by them to signal superior information about their firms’ future earnings and growth prospects. In our study of dividend payouts in Asia, we have found a positive relation between the dividend payout of companies and their future real earnings growth, thus supporting the existence of dividend signaling in the region.

‘However, investing in companies paying high dividends goes beyond investing in companies that are signaling high expected earnings growth. Often, companies that have high payout ratios have tended to be companies with good corporate governance standards as well. Because the disbursement of free cashflow as dividends helps to limit the potential for inefficient managerial investment or insider expropriation, agency costs are alleviated and the interests of managers and shareholders are aligned.

‘Indeed, in a region like Asia where corporate governance is improving but not necessarily always strong, picking companies which share their earnings growth with minority shareholders via dividends actually helps investors pick companies that have credible management.

‘The financial scandal at a leading Indian IT outsourcing company earlier this year is a case in point. The admission by the chairman then that he had been falsifying company accounts and inflating assets for several years had rocked the corporate community. A dividend-focused strategy would have helped one avoid this investment pitfall as the company had been paying no dividends for many years. Certainly, a company that was reporting double-digit earnings growth and sitting on a reported huge cash pile but paying no dividends would have pointed any dividend-focused investor to either poor capital management, weak corporate governance or, in this instance, fraudulent accounting.

‘[B]esides some of the more conventional dividend hunting grounds such as Australia, Hong Kong and Singapore, we are increasingly seeing opportunities in some of the developing markets. In particular, we like markets like China and India, as we believe these countries have much scope to grow their dividend payout ratios going forward, from current low levels of 38 per cent and 22 per cent to the Asian average of 47 per cent. The growth in their dividend payments will also be underpinned by the huge economic growth potential of these emerging giants.

‘We also see vast dividend potential in the smaller developing markets, like Thailand and Indonesia. For Indonesia in particular, the dividend paying culture has been continually improving over the last few years, with payout ratios rising from 31 per cent last year to 42 per cent this year. This trend of higher dividends will be further supported by the stronger and more stable political environment, which should lessen the need of Indonesian companies to retain excessive cash on their balance sheets to offset macroeconomic uncertainty.

‘Overall, we continue to believe that the long-term case for investing in the region remains compelling. Not only do regional markets offer good opportunities for investors focused on dividend yield, they offer the scope for greater participation in the region’s strong economic growth as well. Asia is now one of the highest dividend payout regions in the world, and this trend of improvement is set to continue. Indeed, the dividend yield available from Asian markets stands at 2.8 per cent which compares favourably to the yield in global markets of 2.6 per cent. [BTW STI index yields about 3.3% as at Sept]

‘[T]he dividend growth that we have seen in Asian equity markets has not been at the expense of dividend cover, which is at a relatively good level. Sources of dividend yield across the region have also become more diverse with many of the regions’ markets trading on attractive yields. Indeed, the improvement that we have seen in Asian dividends is a structural – rather than just a cyclical – development, helping to lay the foundation for more sustainable dividend payments, and justification for a longer-term re-rating of Asian markets in general.”

Where value investing can go wrong

In GIC, Investment banking, Investments, Temasek on 24/11/2009 at 8:25 am

“A study by Standard & Poor’s, one of the world’s leading credit rating agencies, has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

‘The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.”: an excerpt from the FT.

No the purpose is not to show that highly paid managers at GIC goffed, or how smart I am. I have been a shareholder of HSBC since the 1980s. Even during Green’s (Christian + McKinsey, a lethal combination that always leads to problems) tenure as CEO, I kept the faith.

Now that the CEO is a man who joined the bank as an International Officer from a minor public school with I think A-levels, and he is basing himself in HK, one can only expect the return to the values that made HSBC great during the tenures of Sandberg, Purvis and Bond. Oh Purvis won the Military Cross in Korea, when he disobeyed orders to withdraw. He claimed he couldn’t hear the radio messge.

Sorry I am digressing. When Temasek bought into Merrill Lynch and Barclays and  GIC into UBS and Citi, I realised that they were buying into highly efficient banking machines. There was just enough capital for regulatory reasons and to provide a buffer for some things going wrong.  They needed a bit more cushion and GIC, Temasek were providing it.  Risky but history was on their side.

When the world recovered from the credit crunch of 2006, 2007, GIC and Temasek would reap the rewards of these finely tuned cash machines. They were the equivalent of the best of the best F1 cars.  I thought we had smart boys and gals. And that the risk would pay off.

But then came Bear Sterns, Lehman Brothers and AIG, and the rules changed. The winners were the better capitalised banks. If HSBC had as little capital as Citi, I’d be a poor man. The amounts it had to write-off on US sub prime would have shmed Citi. But it had capital.

So value investing doesn’t always pay off.

What a bunch of clowns

In Investments, Property on 23/11/2009 at 2:01 pm

I wonder if Cambridge University or its local alumni association will sue Cambridge Reit for bring the name  “Cambridge” into ridicule.

Early last week, righteously angry (and who can blame them), the manager of Cambridge Reit, complained that they were being diluted. It said  that “it was in the process of finalising refinancing arrangements” to offer an alternative. By friday this had become  “it does not have any financing arrangements in place yet for MI-Reit and discussions on alternative options are “only preliminary and exploratory in nature””. The quotes are from MediaCorp’s free sheet.

How did “finalising refinancing arrangements” turn into “discussions on alternative options are “only preliminary and exploratory in nature””?

As an ex-commercial lawyer, the former comments are misrepresentations, if the latter are correct.

That no financing deal was concluded it not surprising. These take time. But for “finalising refinancing arrangements” to morph into” discussions on alternative options are “only preliminary and exploratory in nature”” is not acceptable.

I hope the SGX, MAS, ACRA etc investigate this matter as the first announcement may have led to an ill-informed market.

I wonder how many votes Cambridge will garner today?

Judging SPH’s mall bid — CEO gives a hostage to Fortune

In Investments, Property on 23/11/2009 at 5:00 am

Last Wednesday, BT carried an article in which the CEO of SPH (its parent) explained the thinking behind an SPH-led consortium winning bid to build a mall in Clementi. Its partners with 20% each were NTUC Fair Price and NTUC Income.

BT giving the background said, “Its winning bid of $541.898 million was the highest of six offers that HDB received for the mall. The winning bid is nearly 42 per cent more than the next highest offer of $382 million.” Analysts were amazed at the price paid.

“Winning bidders looking ahead at rentals upon lease renewal” was the screaming headline. BT went on quoting SPH’s CEO, “‘[W]hen we do our calculations, we are not using the rentals when we start operations. We are actually using after rental renewal cycle, whether it is after three years or six years,’ said SPH chief executive officer Alan Chan.”

“Had SPH used the typical strategy of real estate investment trusts (Reits), which assume say a 5-6 per cent return based on rents when the mall starts operating, it would have led to bids in the $300 million range – where four of the six bids came in for the mall at the close of HDB’s tender last Tuesday,” BT continued.

What I liked about the CEO’s comments is that he gave analysts a time frame on which he can be judged. I’m surprised that the PR/ IR spin doctors allowed him to make these hostage to fortune statements. I hope he will continue making such statements, that help anlaysts.

The usual practice when the winning bid is way above the next bid (known as “winner’s curse”)  is for mangement to mumble something about corporate long term values without going into details.

Long-termism is often used as an excuse for avoiding tough but necessary short-term decisions, or for covering up mistakes.  Remember Temasek’s Merrill Lynch investment was “long term”

So it is refreshing to see a CEO give a time frame of 3-6 years on which analysts like me can judge the bid.

If you are wondering why this piece took so long to appear — I wanted to ensure that the article reflected correctly the CEO’s views: there would be no retraction, correction or clarification.

Remember the AWARE bun fight (where “Anal sex is normal” feminists fought “Crucify the weirdos” X’ians. OK I exaggerate wildly the positions)? There were a lot of ponticating nabobs in the MSM and online who rushed into “print” talking of the implications on civil society of the government’s non-intervention, allowing the analists to retake control of  AWARE  from the “family values” X’ians.

Well a few days later, the government stepped in and said that AWARE’s sex manual did not conform to society’s standards on anal sex and homosexualism, giving the X’ians a famous victory and making the pontificating nabobs who rushed to judgement looking decidely stupid.

Free Option on Revival of a Swiss Bank

In GIC, Investment banking, Investments on 21/11/2009 at 9:39 am

“Analysts at Credit Suisse reckon that even though UBS will not be able to pay any dividends for the next few years, its shares are so cheap relative to the aggressive profit-targets that it has announced that they are a “free option” on a revival of the investment bank.” : Economist.

The issue is will the Swiss regulators allow the bank to expand as aggressively as it wants t,o especially as Switzerland had to rescue the bank.  Albeit the Swiss government made a good profit.

Readers may remember that GIC first bought into UBS in December 2007 and has been sitting on a loss ever since then.

Wepco — Latest Incarnation

In Energy, Investments on 18/11/2009 at 6:12 am

China-based Brian Chang (he was born in South Africa) was in the 70s and 80s one of Singapore’s most famous entrepreneurs, building a major offshore marine business. He ran into a spot of bother and relocated to China where he rebuilt his fortune again and again in the offshore marine sector.

So in late 2007, when his son, Malcolm, took a 29.5% stake in very thinly traded and capitalised Wepco, there was speculation that the Changs would use Wepco to list some offshore marine assets. Nothing happened until Monday

Wepco announced that it iwas acquiring real estate firm HSR in a reverse takeover.  Patrick Liew and Kellie Lim, who own 100 per cent of HSR, will sell their entire stakeholding to Catalist-listed Wepco Ltd for S$40 million. Wepco will issue some 80 million consideration shares at a price of 50 cents per share.Mr Liew and Ms Lim will own 83%  of Wepco’s enlarged share capital.

Malcolm Chang bought into Wepco at around 60 cents, so he must be hoping that the new Wepco will attract investor interest.

GIL: Worth Analysing?

In Investments on 16/11/2009 at 1:31 am

(GIL) surely must be worth further analysis as a special situation. Published NTA is 35 cents a share as at June while it is now trading at 25 cents (up 2 cents).

But I’ll give detailed analysis a miss as there will be a change of manager. The present manager is part of the defunct Babcock & Brown group (in fact GIL was once Babcock & Brown Global Infrastructure Fund). The directors want to appoint as manager a ST Gp company, while a shareholder with about 20% wants a relatively unknown Australian fund manager.

So better to wait to see who becomes the manager (there is EGM later in November). And in the meantime,  I will try to find out more abt both managers.

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