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Monday, December 27, 2010

How much is a Reit worth?

We look at the determining factors and valuation measures for a Reit, but bear in mind that valuing a Reit is far more art than science.

Mon, Dec 27, 2010
The Business Times

By Bobby Jayaraman

DONALD Trump started off in real estate developing residences in Manhattan in the 1970s when New York was on the brink of bankruptcy. Li Ka Shing scooped up property dirt cheap during the 1967 riots in Hong Kong. The late Ng Teng Fong of Far East Organization was the king of Orchard Road in the 1980s.

All these tycoons made fortunes when the value of their investments grew multiple times. However, it is unlikely they invested on the basis of a valuation from a property consultancy! So what is it that drives growth in asset values? And is it possible to value assets accurately?

The noted economist John Maynard Keynes was thought to have observed that it is better to be vaguely right than precisely wrong. Investors would do well to keep this in mind when reading reports by analysts and valuers. Their neat Excel spreadsheets make it appear that valuing a Reit (or real estate investment trust) is a perfect science. In reality, it is far more art than science.

Following are the common measures of valuing a Reit:

Discounted cash flow: A discounted cash flow (DCF) analysis assumes a certain rate of growth in cash flows over a certain period. This is then discounted back to their present value at an appropriate interest rate that reflects the weighted average cost of capital (WACC) of the Reit.
Book value: This method attributes a certain discount or premium to a Reit's book value (book value or revised net asset value is the latest valuation of all the properties owned by the Reit minus its liabilities).
Cap rate or yield: The annual net property income (NPI) is capitalised at a certain yield thought to be appropriate for the Reit.
While all the above methods are intellectually correct, they are not of much use to an investor if the fundamentals behind the assumptions are not clearly understood. I believe it is far more important to understand the factors that drive valuations rather than obsessing about precise values churned out by financial models. The long-term value of a Reit is driven by the following fundamental factors:

Potential for capital value growth
Sustainability and growth of rental income from the properties
Capital structure of the Reit and the calibre of its managers
Let's delve into each of these factors in greater detail.

Capital values

Let's say you bought some units in CapitaMall Trust (CMT) and are wondering whether the asset values will keep appreciating the way they have mostly done since the Reit was listed in 2002. If the Reit's assets appreciate in value, that would increase CMT's book value and thus its unit price. The question then is what factors would make CMT's portfolio of suburban malls worth more in the next 10 years.

There are several factors that need to be in place for the malls to appreciate in value. A key factor is whether the trend of suburban shopping will continue since this is what has driven strong demand from retailers for mall space. It was the high occupancies and rentals at suburban malls that drove up capital values in the past decade.

Is it likely that this trend would diminish in the years to come? No one can answer this with certainty, so the investor needs to form his own opinion.

On the supply side, the investor would need to form a view on the potential for new supply and the government policy regarding releasing land for malls in the suburbs.

This question can be answered with a good degree of conviction if an investor does his homework, ie, studying the potential land marked for commercial development in the suburbs, and history and pattern of commercial land released in the past. Were there cases of over-supply in the suburbs in the past? If so, what led to it? Was the catchment area not large enough? Can this happen in the future?

Another factor is replacement cost. Can a new mall be built in the future at a cheaper rate? Unlike the high-tech industry where new technology has historically led to lower costs for components and gadgets, real estate is a fairly staid industry where construction costs usually trend upwards, driven by the increasing cost of labour and materials. So the cost element is unlikely to lead to big surprises in the future.

This is not an exhaustive list and there might be several other factors depending on the specific Reit. However, the general principle is the same: Understand the factors that lead to capital appreciation and you will gain good insight into the valuation of a Reit.

It also makes sense for an investor to keep tabs on transacted values of properties not only in Singapore but globally at different stages of the economic cycle. When comparing valuations keep in mind that the specific nature of the transaction - whether a competitive bid or a forced sale, etc - will have a major impact on the transacted values.

Rental income

Many investors own property for its ability to generate steady income whatever the economic cycle. The ability of the property to attract tenants is directly linked to its valuation.

The capitalisation rate (or cap rate) is the annual net operating income divided by the capital cost. The cap rate denotes the income-generating ability of the property. It depends on: a) the risk-free rate which, for Singapore, is the 10-year SGD bond; b) the risk premium investors assign to real estate, which is heavily influenced by macro conditions and the prevailing market sentiment; and c) the income growth that investors hope to achieve through real estate.

The cap rate can thus be depicted as (a+b)-c. The trouble with this formula, as you might have already guessed, is that both risk premium for real estate and income growth potential are highly subjective and can change by the day.

In the early 1980s, when the US was suffering from high inflation, the cap rate of 8-8.5 per cent was even lower than the 10-year US government bond rate of 10-12 per cent as investors anticipated strong capital gains due to continued inflation.

In contrast, cap rates in 2009 had moved up to about 10 per cent even in a sub-one per cent interest rate environment reflecting the high risk premium that investors were placing on real estate. This illustrates the highly cyclical nature of cap rates.

The average cap rate in the US historically has been around 7.5 per cent and the average spread over the 10-year bond has been around 250 basis points. In Singapore, the 10-year bond yield over the past decade has been about 3 per cent and cap rates have been in the 5-6 per cent range.

These benchmarks are important to keep in mind. If you are buying a high- quality asset at cap rates of 5-6 per cent it is a fair bet that you are not paying too much. What if you are buying at a 3 per cent yield? In this case, you are banking on income growth which is much riskier.

Calculating cap rates using next year's NPI only works if the rentals are sustainable, so an investor needs to understand the factors that drive the sustainability of rentals. This assessment requires a good sense of supply and demand for the type of property that a Reit owns as well as an understanding of global benchmarks and trends in the particular sector.

For example, office rentals of around $6 per sq ft per month (psf pm) in 2009 made Singapore the 24th most expensive office location globally (as per Colliers second-half 2009 survey of 154 cities globally) while Hong Kong was the most expensive.

Given that Singapore is a major Asian financial centre, this certainly made the city very competitive and one could have made a reasonable assumption that office rentals of $6 psf are sustainable (if not close to bottoming out).

In the case of retail Reits, occupancy costs (rental costs divided by sales turnover) are also a good indicator of sustainability. A good level is around 12-15 per cent, and the lower it is the better.

Similarly in the hotel sector, Singapore's current deluxe hotel rates of US$150-US$170 a night compare well with those in other global cities and a healthy increase from current levels looks to be quite sustainable.

One mistake investors should avoid is to blindly extrapolate current rentals into the future. For example, rentals for Orchard Road malls peaked in 1990 at $60 psf pm. Twenty years on, despite strong GDP growth, rentals today are around the $30-$35 psf level!

The main reasons for this were the emergence of suburban malls and slow growth in tourist spending. This underscores my point: Focus on the fundamentals and trends and not on predicting precise numbers.

Reit capital structure and management

Asset values and rental growth can be quantified and directly impact a Reit's valuation. However, that does not mean one should ignore qualitative factors just because they cannot be put in a financial model.

Keep in mind that a Reit is not just a collection of physical assets but is operated by managers. It is precisely the ability of management to add value to the assets that makes the Reit model attractive.

Three qualitative factors in particular are important in valuing a Reit:

Leverage and interest coverage: We discussed this in an earlier article, so all I will say here is that one should tread carefully if a Reit has low interest coverage as it can easily run into trouble if rentals drop. An investor should be convinced that rents are sustainable before committing to such a Reit.
Ability to raise financing: Reits that can raise financing from a variety of sources deserve a premium, as you can sleep peacefully knowing that banks and investors believe in the Reit.
Management calibre: If the management is able to consistently increase values through asset enhancement, prudently acquire assets, and consistently deliver growth in distribution per unit (DPU) without taking undue risks, then it also deserves a premium.

What about acquisition-led growth? Doesn't that also deserve a premium? Yes, a truly yield-accretive acquisition is a big positive, but my advice to investors is not to pay for this beforehand.

Don't buy a Reit which has already priced in acquisition-driven growth. This is one of the most frequent causes of disappointment as growth through acquisitions is the most risky route and only works during depressed times.

A particularly risky time for acquisitions is the current period where interest rates are abnormally low. This tempts many Reit managers to borrow cheaply to acquire. However, the 'yield accretion' in such cases comes from low interest rates rather than attractively priced assets. As such, the accretion will likely disappear with the next refinancing.

To conclude, there is no single formula or model where you can plug in all the variables and get a precise valuation. One needs to understand a variety of factors to get a sense of a Reit's valuation.

This article was first published in The Business Times.

Monday, December 13, 2010

Sunday, December 5, 2010

Singapore is 'happiest place in Asia'

Dec 5, 2010
By Tracy Quek

US author picks city-state based on factors like tolerance, equality and security

Washington: When American explorer and author Dan Buettner began researching Asia's cheeriest spot for a book on the world's happiest places, he had assumed he would be boarding a plane for spiritual Tibet, exotic Fiji or mysterious Bhutan.

Instead, he found himself in a country some Americans would consider a restrictive nanny state, known more for caning criminals and banning chewing gum than for its sunny disposition.

Singapore is one of four places that Minneapolis-based Mr Buettner profiles in his recently launched book, Thrive, Finding Happiness The Blue Zones Way.

The title references an earlier book, The Blue Zones, the author's 2008 New York Times bestseller about the places where people live the longest and have the highest quality of life in the world.

Mr Buettner bills Thrive, his sixth book, as 'story-driven science that ends with a handbook with how to be happier'.

In it, the 50-year-old single father of three shares lessons on well-being and happiness he gleaned from visiting the happiest places on each of the four continents.

Besides Singapore, he travelled to the Jutland Peninsula in Denmark, Monterrey in Mexico, and San Luis Obispo in California. The book, backed by National Geographic, took five years to research and write.

To identify the happy spots, Mr Buettner relied on data from Gallup, the World Values Survey and the World Database on Happiness which have done comprehensive polls and studies over the past seven decades examining factors that directly impact happiness.

While there are many happiness indices out there, the data from the three organisations are 'by far the most authoritative and authentic', he told The Sunday Times.

Statistics from all three sources pointed to Singapore as the happiest place in Asia, although the city-state may not initially fit in with some people's notion of happiness, he noted.

'Known as a society of workaholics, Singapore has also become famous for its paternalistic government, which strictly enforces laws on the most trivial of infractions, from chewing gum in public to failing to flush a toilet,' he wrote in Thrive.

But Mr Buettner credits one of his chief consultants, sociologist Ruut Veenhoven, who is director of the World Database of Happiness and editor of the Journal of Happiness Studies, for steering him away from the 'usual places'.

Dr Veenhoven advised him that 'the places we imagine as paradises don't measure up when it comes to basic prerequisites for happiness, such as decent food, basic shelter, adequate health care, and mobility', he wrote.

What correlate with happiness on a worldwide level are tolerance, status equality, security, trust, access to recreation and financial security - all of which Singapore has, said Mr Buettner.

In Singapore, people of different ethnicities feel they belong and fit in. Citizens are able to trust their Government and police. Unemployment is low, home ownership is high. The country gives people access to green spaces despite having one of the highest population densities in the world.

As for security, Singapore shows that feeling secure is more important than freedom when it comes to happiness, he said.

'In Singapore, you cannot freely buy pornography, it is harder to start a political party, but if you're a woman, you can walk down the street any time of the day and you can be pretty sure no one is going to bother you.'

For insights on Singapore and the other places he visited, Mr Buettner interviewed a wide range of people, including social scientists, economists, politicians and even comedians, to try to pin down what makes people in each locality so joyful.

He made two trips to Singapore, about a year apart, staying four weeks in all.

In the book's chapter on Singapore, he details interviews with Minister Mentor Lee Kuan Yew as well as experts who have done studies on happiness including sociologist Dr Tan Ern Ser of Singapore's Institute of Policy Studies and Dr Ho Kong Weng, an economist at the Nanyang Technological University.

He also speaks to private investor turned jewellery designer Celina Lin, chairman of the Community Chest Jennie Chua, as well as Sakae Sushi founder Douglas Foo. Mr Ahmad Nizam Abbas, a 39-year-old lawyer and Madam Noridah Yusoh, a 43-year-old housewife, also get a mention.

Of his choice of interviewees, Mr Buettner said he tried to find 'people who were emblems of the characteristics of happiness. They weren't necessarily the happiest people in Singapore, but they illustrated facets of Singaporean happiness'.

In the book, he describes how he went to great lengths to speak with MM Lee, whom he calls Singapore's 'happiness architect' for putting in place policies that became the building blocks for Singaporeans' happiness.

'I wanted to speak to him because I knew that he was a major player in what has made Singapore what it is today. I wanted to know if he accidentally did it or if he was thinking about it,' said the author.

A scheduled 30-minute meeting turned into a 11/2-hour conversation.

'I was incredibly impressed with Mr Lee. That was a man who had a very good idea of what his people's values were and he is a man of integrity. I know that he has made some tough decisions that have been unpopular, but he has a keen instinct of how to create well-being for people,' said Mr Buettner.

There is no question that Singapore shows that happiness can be manufactured or engineered through government policy, he added.

'When it comes to manufactured happiness, I don't know anybody else on the planet who has done a better job than (MM Lee) has, and I know there will be lots of people laughing at me right now but all you have to do is to look at the well-being indices and the data will back me up on that.'

How happy is MM Lee?

Excerpts from Thrive by Mr Dan Buettner, where the author talks about his interview in 2008 with Minister Mentor Lee Kuan Yew.

By now, we had finished our tea. I looked around at Lee's airy office again and was struck by its complete absence of clutter. How suitably his own approach to work captured the very notion he was describing - living out the values he found important. In the course of an afternoon's conversation, he did not mention the pleasures of raising a family, or pride in the fact that his son had succeeded him as prime minister. That might be viewed as a common conceit of the ultra successful, except that my interviews with other Singaporeans progressed along similar lines. It is a culture, for better or worse, where personal and professional identities tend to merge, where careers or businesses become all-consuming.

I rounded off the interview by asking Lee about himself. Did the environment of well-being he created for Singapore work for him? I asked him to rate his happiness on a scale of one to 10.

'Personally,' he said after a moment's reflection, 'when I was prime minister I would say five. Now, I would say six because I don't have that day-to-day fret.'

'And what would it take to get to nine?'

'Nothing would take me to nine,' he said. 'Then I would be complacent, flabby, and walk into the sunset.'

Seven ways to happiness

Mr Dan Buettner, author of Thrive, gives some tips on happiness.

1 Sleep between 71/2 and 81/2 hours every night. Sleeping less than six hours means you are probably 30 per cent less happy than you should be.

2 Working around 37 hours a week appears to be optimal and having at least six weeks of holiday each year is ideal.

3 Eat a plant-based breakfast. If you eat a meaty, saturated fat-laden breakfast, the oxygen that reaches your muscles and brain is diminished. You will feel sluggish.

4 Exercise for at least half an hour every day. Half an hour of physical activity provides a 12-hour increase in well-being. Time your physical activity before noon.

5 Volunteer more. People who volunteered their time reported higher levels of well-being than those who did not.

6 Socialise at least six hours a day. Hanging out with friends and family correlates with feelings of happiness.

7 Money cannot buy happiness but in the United States, people should strive for an annual income of about US$75,000 (S$98,000) for a family of four.

Beyond that, happiness levels plateau. People who are making a lot more money typically have more stressful jobs, spend too much of their day working, and do not pay attention to their families. They are not socialising or volunteering in general.

Monday, November 29, 2010

Six questions to consider before investing

Investors have a natural tendency to lose faith in asset classes or strategies that have not been working.

Mon, Nov 29, 2010
The Business Times

By Teh Hooi Ling

Senior Correspondent

WE ALL tend to form our opinions based on the most recent data. And according to Ben Inker, director of asset allocation at GMO, which has US$150 billion (S$194 billion) under management, in 2000 we were apt to hear quotes like the following from institutional investors:

'Bonds are wasted space in our portfolio, and we want to have as few of them as we can get away with.'

'We are long-term investors, so we should have an equity-dominated portfolio.'

'International diversification is overrated. When you need diversification, correlations go to one.'

In 2010, we are hearing the following:

'Our portfolio should be first and foremost about matching our liabilities, not seeking returns.'

'Equities will play a smaller role in our portfolio going forward.'

'Equities are growth assets. We should put our equity money into faster- growing economies.'

The comments in 2000 were made after the S&P 500 rose 18.2 per cent a year in the preceding 10 years, far outpacing non- US equities, which themselves outpaced bonds, which returned 6.8 per cent a year.

In the decade to 2010, however, the S&P 500 fell 1.3 per cent per year, with bonds giving decent returns of 6.5 per cent per year. Within equities, only emerging markets made any real money for investors, with a return of 9.1 per cent per year.

Investors, said Mr Inker, have a natural tendency to lose faith in asset classes or strategies that have not been working - and gain confidence in those that have. Investment managers and consultants capitalise on this by selling products around themes that are hot.

Investment managers, consultants, and Wall Street are not going to change. So how can investors avoid doing in 2020 what they did in 2000 - and may be doing in 2010?

Mr Inker thinks a crucial part of why investors find themselves swayed so much by the winners and losers of the last cycle is that they lack a strong anchor to their investment beliefs. So to help investors think about their portfolio, Mr Inker came up with a list of six questions in his paper entitled Back to Basics: Six Questions to Consider Before Investing.

The six questions are:

Would investors rationally buy this asset if they did not believe it would give returns above cash?

Where do the returns from this asset come from, and who funds them?

Why would the funder of returns for this asset be willing to offer a return greater than cash in the long run?

Have historical returns been consistent with the risk premium we expected?

Have the sources of the returns been consistent with the returns achieved?

Has something important changed to make us doubt the relevance of the historical returns?

Mr Inker then applied these questions to various asset classes starting with equities, to bonds, to commodities, to private equity and venture capital.

When it comes to equity, any rational investor would not buy it if they believe the return will be below cash - unlike bonds, which can be matched to certain liabilities, or commodity futures, which may offer inflation protection.

Equities are volatile, have no legally mandated cash flow and are the lowest rung in the capital structure in the event a company gets into trouble. Returns from equity come from the cash flow of the issuing companies. The cash flow is in the form of dividends or share buybacks.

Issuing companies are willing to offer a return above cash to shareholders in the long run because equity is safe capital for them. It allows them to make long-term, risky investments with less risk of bankruptcy. There is no refinancing risk. So companies should be willing to pay a premium for equity.

Mr Inker then tested whether the historical returns for US equities have been consistent with the risk premium expected by investors. The average equity risk premium for the rolling 10-year periods since 1930 until now has been 6.4 per cent.

There have been a number of decades in which stocks have lost to cash, but the general level of the risk premium has been high, Mr Inker noted. None of the periods of underperformance have been excessively long - although the 1974-83 period is a bit long for comfort. All in all, the returns have been consistent with the risk premium the market expected.

I tried to test with data from the Singapore market. Using the five-year T-bond rates, which went back the furthest, I generated Chart 1. I used a monthly five-year rolling return for the Datastream-calculated Straits Times Index (STI) and compared them to the five-year T-bond rates.

Between 1988 and now, in 46 per cent of the rolling five-year periods, equities yielded less than cash. But in the periods when equities outperformed cash, they outperformed quite significantly. And that lifted the average and median outperformance of equities over cash sharply.

Meanwhile, holding periods of seven years seem ideal for Singapore equities, as they outperformed cash some 95 per cent of the time. And the outperformance average has been a significant 6.4 per cent.

However, staying in the Singapore market for 10-year stretches doesn't do much for one's portfolio. In fact, one would actually have underperformed cash 62 per cent of the time. And the underperformance averaged -0.1 per cent, with the median at -1.2 per cent. It is said that a financial crisis happens once every seven years.

In Singapore, or Asia, in the brief history that we looked at, it's more like once every 10 years. And one wouldn't want to be holding equities when a crisis hits.

The above returns did not include dividends. Including dividends, returns from equities would be boosted by more than two percentage points.

Mr Inker's next question is: Have the sources of return been consistent with the equity returns achieved? According to Datastream, dividend yields averaged about 2.5 per cent for the STI since 1973. That's about the return above cash that equity investors who held for 10-year periods received.

For the US market, dividend yields averaged 4.3 per cent - lower than the average 6.4 per cent return from equities since 1930. The return came more from earnings yield that averaged 7.1 per cent during that period, Mr Inker noted.

According to Bloomberg, the estimated price-earnings ratio of the S&P 500 is now 14 times, or 16.56 times before extraordinary items. That works out to an earnings yield of between 6 to 7 per cent - within the long-run average.

As for Singapore, the PE ratio and the dividend yield currently approximate the 37-year average. The only difference is that the one-year interbank rate now - at 0.56 per cent - is way below the 25-year average of 3 per cent.

So has something important changed that makes us doubt the relevance of the historical returns to stocks? Well, there may be a bigger backlash against unbridled capitalism following the recent crisis.

That may result in more government regulation and corporate earnings may be crimped as a result. Interest rates, of course, are not likely to stay this low over the long run.

On the other hand, we now have vast new markets that are opening up in China and India and elsewhere. All in all, the return for equities seven years out should still beat cash comfortably.

Tuesday, November 23, 2010

Identify trends to predict asset prices

Investors who understand technical analysis can have more knowledgeable trades.

Tue, Nov 23, 2010
my paper

By Reico Wong

INVESTORS looking to make more knowledgeable trades and reap profits from financial markets will do well to understand technical analysis.

Related stories:
» The 3Rs to investing in uncertain times
» 6 invest themes for 'new normal'
While investment brokers and analysts use this tool to make sense of statistics generated by market activity, one does not have to be an expert to be able to grasp at least the basics.

Simply put, technical analysis is the study of a particular asset's historical prices and volume data represented in a graphical form, with the aim of identifying patterns to forecast future activity and price movements.

Still, experts warn that technical analysis cannot provide absolute predictions and investors should not be reliant on it alone.

Investors need to first note the three underlying assumptions of technical analysis - all information that has or could affect a company is already priced into its stock at any given time; price movements are believed to follow trends; and history tends to repeat itself as investors repeat their behaviour.

Here is a look at identifying certain trends using technical analysis:


The first step is to identify an overall trend. Stock and other asset prices do not move in a straight line but in a series of highs and lows. The pattern of highs and lows constitutes a trend.

The two easiest trends to spot and trade in are the uptrends and downtrends. A formal uptrend occurs when each successive peak and trough is higher than the ones found earlier in the trend. The same logic applies for the downtrend, but in terms of lower successive peaks and troughs.

In the case of a formal uptrend, experts suggest that one considers selling the asset once it fails to create a new peak or trough to avoid the large losses that can result from a reversed trend. If a formal downtrend is noted, one should sell the asset quickly to cut losses.

The market could also trade sideways, defined as a series of ups and downs that do not exceed a certain minimum and maximum price point. These are also known as support and resistance points, respectively.

Also note that the more frequent the series of highs and lows in a trend, the more volatile the market is likely to be and, correspondingly, the more difficult it is to trade in.

"A sideways volatile market is the worst to trade in because it is the least predictable, with no directional bias," said Mr Winston Ng, chief executive of FXDS Learning Group.

"Violent fluctuations will mislead one into thinking that the directional trend of the market has changed, when actually nothing has happened and it is still locked in its range."


After identifying the overall trend, trend lines - also known as support and resistance lines - need to be drawn up. As mentioned earlier, such lines mark the points where asset prices hit a minimum and maximum.

One needs to keep in mind these boundaries to make trading decisions, as these are where orders consolidate and revolve around. It also allows one to identify when a trend is reversing.

A break below an identified support point would be considered bearish, while a break above an identified resistance point would be considered bullish.

Investors are advised not to trade at the two major points, since the surrounding area of the points typically comes with a high level of volatility.

Mr Ng highlighted some rules to drawing up good support and resistance lines for an analysis:

Firstly, find any three points and draw a line as its floor (support line) or its ceiling (resistance line). Then, use parallel lines to draw channels where possible. Leave the lines as they are even if they look like triangles when drawn.

Draw lines which are most obvious and not those difficult to see. Also, it is normal to give and take a little as the lines actually mark narrow bands of area.


There are different types of charts used to reflect market activity, but certain graphical patterns can always be established. The patterns fall into two main categories - trend reversal, and consolidation break-out or continuation. Double tops and double bottoms are the most common trend-reversal patterns found.

The pattern is created when price movements test the support or resistance points twice and is unable to breach them. It signals that the trend is about to change.

Experts say traders should sell on the break of the support line of a double top and buy on the resistance line of a double bottom.

Mr Ng added that, in a double- top situation, traders should protect and cut losses if the price rises above the support line by more than 10 per cent.

Similarly, losses should be cut if the price falls below the resistance line by more than 10 per cent in a double-bottom situation. Another popular trend-reversal pattern is known as heads and shoulders. This is formed when successive peak formations start to deteriorate.

Once again, traders should sell on the break of the support line of a heads-and-shoulders pattern; and buy on the break of the resistance line in the case of such an inverted pattern.

Last but not least is the consolidation pattern known as flags and pennants. As the name suggests, a price pattern reflecting a flagpole and flag (either triangular or rectangular) can be seen.

A sharp price movement (the flagpole) is followed generally by a sideways price movement (the flag). This pattern is then repeated. If the flag pattern is in an uptrend, this means the market is bullish. Traders may then want to look into going into a long-term position, and buy particularly at the break point of the trading range captured by the flag.

If the flag is flipped upside down, a bearish market is likely to follow. Traders would similarly want to sell at the break point of the trading range captured by the flag.

Ultimately, technical analysis does not necessarily have to be complex and can be applied to any security with historical trading data.

Monday, November 15, 2010

Reits look good, for now

Nov 15, 2010

By Goh Eng Yeow, Senior Correspondent

IT IS a time of plenty again for Singapore real estate investment trusts (Reits), as rentals soar and loan servicing costs drop precipitously.

In the past month, Reits have begun to make a big comeback on the local initial pubic offering (IPO) scene.

Mapletree Industrial Trust - a Temasek Holdings-linked Reit which owns factories, business parks and industrial buildings mostly in Singapore - recently raised $1.19 billion.

Another, Sabana Shari'ah Compliant Industrial Reit - backed by locally listed Freight Link Express Holdings - is hoping to muster up to $700 million, if it successfully launches its offering.

And those two may just be teasers. DBS Bank - a market leader in helping Reits with listings and other forms of fund raising - expects a lot more such IPOs here in the coming months.

Its head for asset-backed structured products, Mrs Eng-Kwok Seat Moey, said recently that a number of sponsors had long been keen to launch Reits, but conditions in the past two years were simply not right.

Still, despite the palpable market buzz around Reits, many investors are still ignorant of what they are getting into.

The big draw are the headline-grabbing projected dividend yields of 7 per cent to 8 per cent offered by these Reits. That looks highly tempting when compared with the paltry 0.125 per cent interest typically offered on bank deposits.

But it is instructive to understand what Reits are all about and the potential pitfalls that may arise when times are not quite so rosy.

Reits are 'closed end' funds, which operate in a similar manner to unit trusts. But unlike unit trusts, which raise funds to invest in shares, Reits specialise in income-generating real estate assets, such as shopping malls, offices, industrial buildings, warehouses or hospitals.

Funds raised in a Reit IPO are used to buy a pool of properties which are then leased out to produce rental income - later distributed to investors as dividends or distributions.

A Reit will also appoint a manager - usually its sponsor or major shareholder - to manage its properties.

For the sponsor, the big attraction is the management fee which is paid to it as the Reit manager.

As this fee is charged against any income earned by the Reit, it may be in an investor's interest to find out how it is structured. This is because a hefty management fee may eat into any profit produced by the Reit and result in a lower dividend payout.

For Reits, the best way to enhance returns is to resort to bank borrowings to finance their property purchases. That is why they look their best in a low-interest rate environment.

To give an example, let us suppose a

Reit raises $500,000 from investors and borrows another $500,000 to buy a $1 million property which gives an annual rental income of $40,000.

If the bank charges 1 per cent interest on the loan, this will give the Reit an income of $35,000, after deducting the $5,000 in interest payment.

This works out to a 7 per cent return on the $500,000 put up by investors, even though the rental yield is only 4 per cent.

But here is the rub: If interest rates rise sharply - as they did during the global financial crisis two years ago - investors may suffer a plunge in dividend payout, as the increased debt servicing costs eat into the rental income.

Using the same example, if loan interest shoots up to 4 per cent, this will jack up the interest payment to $20,000, cut the Reit income to only $20,000 and almost halve the investors' return to 4 per cent.

Still, this is not the biggest problem which could confront a Reit if another financial crisis were to erupt.

In late 2008, the global credits market froze up completely after the collapse of investment bank Lehman Brothers, and the global financial system teetered on the edge of collapse as banks trimmed their credit lines to customers sharply.

As most Reits had resorted to short-term borrowings to finance their property purchases, some of them faced difficulties in refinancing their debts as the lending dried up almost completely.

As the global credit crunch hit Singapore, some banks were reluctant to accept the properties offered to them by the Reits as collateral, even though they were still producing healthy rental incomes.

Fortunately for the Reits, the frozen credits market thawed after a few months, as central banks across the globe flooded the financial system with trillions of dollars of fresh money.

But one lesson that should be learnt is not to assume that the eye-catching high yields offered by Reits come risk-free.

Besides assessing the quality of properties in the Reit's portfolio, an investor should also ascertain its sponsor's financial health and willingness, as well as ability, to inject fresh money into the Reit if it is hit by a credit crunch.

One good example is CapitaLand. Early last year when things were at their bleakest, it stood fully behind its retail Reit, CapitaMall Trust, when it made a $1.23 billion cash call.

Three months later, CapitaLand also injected fresh funds into its commercial office Reit, CapitaCommercial Trust, when it made a $828 million cash call.

CapitaLand's move sent an unmistakable message to bankers and investors of the strong backing it was giving to the two Reits.

Looking ahead, as more Reit IPOs look set to come onto the market, investors should ask if other sponsors can offer a similar level of commitment to their Reits - or if their overriding objective is to earn that mouth-watering fee that comes from managing the properties in the Reit when times are good.

Once the champagne is popped and the headline-grabbing dividend yield is forgotten, these are the tough issues which a hard-headed investor must take into consideration before he puts his hard-earned money into a Reit.

Sunday, November 14, 2010

What's your money personality?

All of us have unique personalities - and this extends to how we handle money and investments.

Sun, Nov 14, 2010
The Star/Asia News Network

By Milan Doshi

During my seminars and personal financial consultations, I have come across many people who have different attitudes towards money.

All of us have unique personalities - some characteristics are inborn and some are learnt along life's journey. Likewise, when it comes to money and real estate investments, we too possess various money personalities. They are:

1. Spenders / Shoppers
These personalities derive great emotional satisfaction from spending money. They need instant gratification and can't resist spending money. Spenders often shop to entertain themselves, even if the items they buy go unused. A sale is simply an excuse to spend money on the pretext of getting a good deal on things that they do not need at the moment.

A well-to-do good friend of mine was shocked to discover, during his house moving, that his wife owned more than 100 pairs of shoes and over 30 handbags! Like most guys, he couldn't see the need for his wife to own so many pairs of shoes and handbags. As money was not an issue, he didn't mind his wife buying more new shoes or handbags, provided that she gave her old ones away. He was concerned that his new house was quickly running out of closet space to store the things his wife bought.

Unfortunately, besides being a shopper, his wife was also a hoarder. She didn't have the heart to give away things that are still fairly new and seldom used. This led to frequent quarrels and my friend decided that the only way out was to build more closet space in his current house and to move to a bigger house a few years later to accommodate his wife's impulsive shopping habit. It was a small price that he could afford to pay to keep his wife happy.

Advice for Spenders/ Shoppers: Shop a lot less, save a lot more

If you love to spend, it's very likely that you are going to continue doing it. when shopping, try to seek long term value, not just short -term satisfaction.

Before purchasing, ask yourself how much that purchase is going to mean in a year. If the answer is "not much", then forgo the purchase.

This way, you can limit your spending to things that you'll actually use. If possible, set a monthly budget and stick to it. In case you over-spend in a month, make sure that you have the discipline to cut back the following month.

Another suggestion is to cut up any extra credit cards you may have and lower the credit limit on the ones you use regularly. Give standing instructions to auto-debit your bank account on the due date with the full amount for all your credit cards. This way you will not be tempted to overspend.

2. Debtors
Debtors are similar to Spenders/Shoppers.

The only difference is that they are spending money that they don't have and are living beyond their means. They are deeply in debt and often, are not in a position to do much investing.

Debtors will typically live rich but die poor!

A newly married young couple in their late twenties came to see me for a personal financial consultation. They were keen on investing in properties and stocks.

Their combined gross income was RM15,000 per month but their net worth was less than RM100,000! They had RM20,000 in credit card debts, less than RM5,000 in savings and they both drive brand new Japanese cars worth around RM70,000 each.

Their logic of purchasing new cars was that they didn't want any problems associated with buying cheaper second-hand cars.

In my opinion, both fell into the Debtor personality.

While they were earning well for their age bracket, they were mismanaging their money by accumulating credit card debts and over-spending.

Since both were desk-bound employees, there was no need for them to make a good impression by driving new cars. In fact, they could ill-afford to drive new cars at this stage of their lives, given their current financial situation.

In order to clear up the credit card debts and begin their investment journey, I strongly suggested that they sell off their two cars which were around a year old and downgrade to a three year old Proton or Perodua car which costs around RM35,000 each.

Straight away, they would be able to settle their credit cards debts and have sufficient start-up capital of around RM50,000 to begin investing.

Unfortunately, it was easier said than done.

Towards the end of our consultation, the husband blurted out that they had just placed a deposit for a new car for himself worth RM85,000 to lock-in the low interest rates.

Since both had the Debtor personality, I really had a tough time convincing them to change their spending habits. If one of them had a different money personality, perhaps I would have an easier time to get one spouse to convince and force the other to change his/her ways.

Finally, all I could do was wish them good luck. Personally, there is no way they will go far in life unless they make drastic changes to their behaviour

Advice for Debtors: Start saving, investing & don't spend money that you don't have!

If you are already in debt, you first need to get your debts sorted out before you can begin investing. If you are not able to do it alone, get some professional financial help like what the couple did when they saw me.

Also, analyse what caused you to get into trouble.

If it was easy access to credit cards, then the solution would be to cut up all "temptations" cards and sticks to debit cards. If spending was something that you used to compensate for other areas in your life that you feel were lacking, think about what these might be and work on changing them.

If your house and cars were purchased because of the need to look good, then you may even need to downgrade your lifestyles by moving to a smaller house, drive an older car, etc.

Next, focus your efforts on saving money diligently.

Pay yourself first by setting aside a certain portion of your take-home income that automatically goes into a special bank account that is used for investments. The money in this account can never be spend - it is your golden goose.

Later, when you retire, you can only spend the eggs that your golden goose laid i.e whatever interest, dividend or rental incomethat your investments generated.

3. Savers
Savers are the exact opposite of Spenders/Shoppers and Debtors.

They only shop when absolutely necessary and never accumulate credit cards debts. They generally have no debts and are often viewed as cheapskates.

Savers are not concerned about keeping up with the Joneses or following the latest trends. They are happy with their 20-year-old cars and derive great satisfaction from seeing the interest earned on their bank statements.

Due to their conservative nature, they don't take big risks with their investments. They prefer fixed deposits instead of other riskier investments where there is a possibility of a loss.

Extreme Savers unfortunately will live poor but die rich!

Most of our parents who had lived through the Second World War and experienced hard times, where they didn't have the luxury of three meals a day, will fall into this money personality type.

I met many people who live in old houses that were last renovated 20 years ago and drive well-maintained cars that are more than 15 years old. These people are the ones who have more than RM5 million in fixed deposits!

At the current fixed deposit rate of 2.5% p.a., their interest income alone is over RM10,000 per month which is more than sufficient to fund their no-frills lifestyle.

Advice for Savers: Practice moderation & take a little more investment risk

If you are a Saver, you should not let all the fun parts of life pass by just to save a few cents.

To achieve some sort of balance, it's advisable that you allocate a small sum of "Play Money" where you can nourish your inner child by living like a King/Queen for a few hours every month.

Spending a bit of money on having fun isn't going to make you bankrupt. Once you have tasted the good life, would you want more?

The answer is a definite 'Yes'. In fact, you would be motivated to challenge yourself to make more money so that you can have more of the good life.

Instead of taking little or no investment risk by leaving all your money in fixed deposits, you need to learn to take a little more risk by investing a portion of your capital into higher return investments such as REITs, properties, bond funds, etc.

After all, the key to investing success is to minimise risks while maximising returns. Avoiding investments risks completely will not get you far in the long run.

4. The Avoiders / Money Monks
These people are not comfortable with the subject of money due to their lack of interest or they feel that that are other more important issues.

Often, they will try their level best to avoid the subject completely. Money Monks are happy-go-lucky types who strongly belief that God will take care of them. At the extreme end, they may not even know whether they are rich or broke.

If you are married to an Avoider or a Money Monk, you will have to shoulder the responsibility of managing money and investing for your family. The big advantage is that you will have little or no arguments on any money matters with them.

Advice for Avoiders/Money Monks: Make sure that you do not marry your own kind. Alternatively, find a trusted professional financial planner.

It's a sad fact that people typically will not change even when they know they need to.

Hence, it is extremely tough to suggest to Avoiders and Money Monk that they should have an interest in knowing how money works.

If you are an Avoider or Money Monk, an easier alternative is to make sure you don't marry their own kinds or you should seek professional help when it comes to managing your money.

5. Investors
Investors are consciously aware of how money works.

They know where they are financially today and try to put as much of their money to work.

All investors tend to seek a day when their passive income from their investments will provide sufficient income to cover all their expenses.

Their actions are driven by careful decision making, and they are comfortable with the need to take a certain amount of risk in pursuit of their goals

Advice for Investors: Keep it up!

Congratulations! Financially speaking, you are on the right path and doing great! Keep doing what you are doing, and continue to educate yourself.

It's extremely important to know which money personality you fall into as each has its own strengths and weaknesses.

Understanding your unique money personality will help you shape your approach to spending, saving and investing.

If you are married, it will also help you understand your spouse better as most marriages get into trouble because of money issues.

Friday, November 12, 2010

Are HDB flats affordable?

by Mah Bow Tan 05:55 AM Nov 12, 2010

Recently, the Housing and Development Board was conferred the UN-Habitat Scroll of Honour Award - the most prestigious human settlements award in the world. In recognising Singapore's achievement, the UN-Habitat Chief of Information Services said: "It's really quite impressive for a country to provide adequate shelter and home ownership for so many."

Ask most housing experts and observers, and they will say that HDB flats remain within reach of the majority of Singaporeans. After all, HDB builds and sells flats at heavily-subsidised prices to ensure affordability. This has made it possible for an average of 15,000 young couples every year to join the ranks of homeowners.

Most of these couples buying new flats use just 20 to 25 per cent of their monthly income to pay for their flats. With their CPF contributions, few have to pay any cash for their mortgage payments. In total, more than 80 per cent of Singaporeans live in 900,000 HDB flats today. Yet, people still worry that HDB flats are not affordable. Why are there such sentiments?

Indeed, housing affordability - whether a flat is within financial reach - is not a straightforward issue. Different people have different notions of what is "within reach". Some argue that a 30-year housing loan is too long for a flat to be considered affordable. Others say that flat prices are much higher compared to their parents' time. The debate is further complicated by rising aspirations - whether housing is "within reach" also depends on what we aspire towards.

For a meaningful discussion on affordability, we need objective and commonly accepted yardsticks. So, what are the measures of affordability? How does HDB ensure that flats remain within reach of Singaporeans?


Focus on first-timers. To ensure that first-time buyers have access to affordable housing, we do several things. First, HDB prices its new flats below market value, taking into account the income of homebuyers. Hence, first-timers enjoy a substantial subsidy when they buy new flats from HDB.

Next, for first-timers who cannot wait for a new flat or wish to buy a specific flat in a specific location, HDB provides a CPF Housing Grant of $30,000 (or $40,000 if they stay near their parents) to buy a resale flat. Beyond that, new and resale flat buyers can apply for a concessionary loan. For a $200,000 loan over 30 years, the interest subsidy amounts to about $30,000.

Help according to income. For households earning $5,000 or less a month, an Additional CPF Housing Grant of up to $40,000 is provided for their purchase of new or resale flats. In other words, a family earning $1,500 can get as much as $80,000 in housing grants. Families earning more, between $8,000 and $10,000, can now buy new flats under the Design, Build and Sell Scheme (DBSS), in addition to Executive Condominiums, and enjoy a CPF Housing Grant of $30,000.


I have been discussing affordability in layman's terms. Let me now get into the technical stuff. In particular, how do experts determine housing affordability? There are a few generally accepted benchmarks.

Income affordability. One is the housing price-to-income ratio (or HPI), which compares median house price to annual household income.

In a Straits Times article in February 2010, two NUS professors, Tu Yong and Yu Shi Ming, noted that Singapore's HPI for resale flats in non-mature estates is 5.8, compared to Hong Kong's 19.8 and London's 7.1. That means Singaporeans generally need 5.8 times of their annual household income to buy a resale flat in non-mature estates, whereas a Hong Kong resident needs more than three times that amount.

If we take Department of Statistics 2009 data on the median income of younger households - those aged between 25 and 35 years old - who are likely to be first-timers, their HPI is even lower, at 4.5 for resale flats and 3.8 for new flats. This is because they have higher incomes than average households.

Financing affordability. While the HPI is relatively easy to understand, it does not consider factors like loan availability and financing costs, which are important for many deciding to buy a flat. Therefore, another widely-accepted measure is the debt-service-ratio (DSR), which looks at the proportion of the monthly income used to pay mortgages.

The DSR for new HDB flats in non-mature estates, based on an industry norm of a 30-year loan, averaged 23 per cent this year. This is well within the 30-35 per cent international benchmark for affordable expenditure on housing.

Depending on flat type, the DSR ranged from 11 per cent for standard flats to 29 per cent for premium projects like the Punggol Waterway Terraces, which cater to higher income households.

We must also remember that CPF savings can be used for the initial downpayment and monthly instalments. Hence, more than 80 per cent of new flat buyers pay for their housing loans entirely out of CPF, without having to touch their take-home pay.

Whichever objective measure we choose, it is clear that there are enough HDB flats within reach of today's homebuyers. They range from smaller, no-frills flats in non-mature estates to premium flats in mature estates, catering for different aspirations and budgets (see table above). I hope buyers choose carefully, taking into account their budgets and aspirations. Housing affordability is decided not just by the options offered by HDB but also the choices of homebuyers.


I can understand the anxiety among young couples wanting to buy a flat of their choice, within their budget, and as soon as possible. HDB has ramped up supply significantly and recently introduced more measures to temper excessive exuberance in the market and to moderate prices.

HDB also regularly reviews its subsidies to ensure affordability. But I must caution that there are limits to how much we can increase subsidies, without compromising other interests.

In other words, we must also consider affordability from a national standpoint. If we increase housing subsidies, what would we have to give up? The quality of education for our children? Healthcare services for our parents? Or do we impose a higher tax burden on Singaporeans?

There are no easy answers. Ultimately, we need to balance the interests of affordability for homebuyers and the burden on taxpayers.

The writer is the
Minister for National Development.

Thursday, November 11, 2010

Considering DBS Preference shares

November 11, 2010 Thursday, 10:27 AM

Goh Eng Yeow examines the attractions of preference shares

JUST over two years ago, I wrote a commentary to highlight the unhappiness of small investors being left out of DBS Bank’s $1.5 billion preference shares offering.

Surely, there must be some way to enable them to enjoy the much higher payout offered by the preference shares, rather than the pittance they are getting from their accounts with POSB, which is now part of DBS.

That is about to change. The bank yesterday announced that it is offering up to $800 million worth of new preference shares to retail investors. It has also taken out a full-page advertisement in The Straits Times today about the offering.

It is a big change in mindset for the bank.

As my colleague Gabriel Chen highlighted in his article this morning, DBS did not sell preference shares to the public in 2008 because of misgivings that the product would not be suitable for retail investors.

Indeed, investors who had bought the preference shares offered by OCBC Bank and United Overseas Bank – soon after the DBS offering – suffered paper losses on their investments as they crashed below issue price when Lehman Brothers failed a few months later.

Of course, those who have held on to their investments are now laughing all the way back to the bank, as the preference shares have climbed back to well above par value.

Compared to the DBS preference shares offering which offered a 5.75 per cent dividend payout, the current offering is not as attractive, since its payout is only 4.7 per cent.

But real interest rates have sunk into negative territory, as the US central bank’s printing presses go into over-drive. Getting the yield from the preference shares will at least help to preserve the value of the savings.

I got a few calls this morning asking me about the risks involved.

Let me stress that unlike a bond, there are risks associated with a preference share.

The issuer is not obliged to pay the dividend on the preference shares, if he suffers a loss and does not have money to declare any dividend payout to his shareholders.

Considering that our lenders are financially prudent and are consistently profitable, this is a scenario which is unlikely to occur here.

But the recent global financial crisis has shown that nothing is impossible, even for institutions which are believed to be too big to fail.

The best examples are the US-government backed mortgage giants Freddie Mac and Fannie Mae, whose preference shareholders were completely wiped out when the two companies were put under "conservatorship" – whose nearest equivalent here would be judicial management.

What happened was that both firms were unable to pay the dividend on their preference shares because of their heavy losses, forcing the many funds holding them to write their value down to zero. The logic is ruthlessly simple: If it doesn't offer a payout, it is effectively a worthless piece of paper. 

It must have come as a big shock to these investors, that the two firms holding a big chunk of the US mortgages, could collapse in such a spectacular fashion.

But the local lenders are strongly supported by their shareholders.

Last year, when the financial storm was raging at its peak, DBS boldly came out with a rights issue to strengthen its capital base and it  was oversubscribed. OCBC revived its scrip dividend scheme and persuaded the majority of its shareholders to opt for shares, rather than cash, for their dividend payout.  

So, those planning to invest in preference shares should know what they are in for.

It is not simply about getting that attractive coupon in the preference shares offered by the issuer. You also have to carefully study the business it is in, and how well it is being supported by its shareholders. Then again, isn't that true of all investments?

Happy investing.

Monday, October 25, 2010

Seeking high dividend stocks in Asian markets

This is not just a short-term tactical strategy but one which can also pay off in the long run.

Mon, Oct 25, 2010
The Business Times

By Eric Sandlund

INVESTORS probably don't need reminding of how low deposit rates are.

In Singapore, the average savings rate is 0.14 per cent while 12-month fixed deposits are offering only 0.47 per cent. And it is likely that interest rates will stay at these low levels for a while longer.

A lot depends on what happens in the US. The US economic recovery has been a wobbly one and the US Federal Reserve has signalled that it may embark on more 'quantitative easing' to support the economy.

Quantitative easing encompasses a range of possible policy actions but its main objective is to push down interest rates.

Singapore interest rates are influenced by the actions of the Fed and very low interest rates in the US mean very low interest rates here.

If investors take the current 3 per cent inflation into account, real interest rates are not just low but in fact negative. Not surprisingly, holding cash is unattractive and investors want alternatives.

Related stories:
» 5 things to consider with today's low interest rates
» 3 ways to avoid investing with the herd
An environment flushed with so much liquidity should in theory benefit equity markets but investing in equities this year has been challenging.

Investors have had to cope with large gyrations in the market as sentiment has been switching between 'Risk On' and 'Risk Off'.

Range bound

UBS is not in the 'double-dip' camp but we expect equity markets to be range bound until there are clear signs that the US economy is not entering another recession.

We remain positive on Asia's economic prospects and believe that the region's superior growth and earnings will in due course be reflected in equity prices.

However, until investors are ready to reward growth, we have tactically adopted a defensive strategy of seeking high dividend stocks in our Asian equity positioning.

Dividends are not traditionally a focus of investors in Asia. After all, investors buy Asian equities for growth.

During bull markets, the capital gains are sizeable and dividends are dwarfed.

In a trendless market, dividends are, however, attracting more attention from investors.

As at the end of September this year, the MSCI Singapore index was up 7.2 per cent , with a capital return of 4.5 per cent and dividends contributing 2.7 per cent.

Investing in stocks for their dividends is in fact not just a short-term tactical strategy but one which can also pay off in the long run.

What many investors probably don't realise is how much dividends have contributed to total equity returns over time.

Take the last 10 years. For Singapore, dividends have contributed a 66 per cent of total equity returns while in Hong Kong, the number was even higher, over 80 per cent. For the region as a whole, dividends have accounted for over 40 per cent of total returns in the last 10 years.

Dividends matter so much in Asia because of the high level of volatility of Asian equity markets. Market declines, when they occur, can be so deep that large portions of previous capital gains are often wiped out.

Any investment strategy comes with risk. Buying a stock for its expected dividend payout means taking a risk that the dividends do indeed materialise and cash is actually paid back to shareholders. Dividends are a function of earnings. If earnings decline, dividends will decline.

A company can also choose to do a number of things with its cash. It can reduce its debt level, it can embark on capital spending, it can engage in mergers & acquisitions, or it can pay dividends. A company which cuts its dividends will not infrequently see its share price punished by the market.

A successful dividend strategy really requires two sets of capabilities.

First, for efficiency, you need a quantitative tool to screen for high dividend stocks from the rapidly expanding Asian equity universe.

Equally important is the ability to select the companies which will not disappoint in their dividend payouts. That's the qualitative aspect - experience, skill and hard work.


An added risk with a dividend strategy is that high dividend stocks tend to be concentrated in certain markets and certain sectors. These would typically be the more developed Asian markets of Singapore, Hong Kong and Taiwan and the more defensive sectors such as telecoms and utilities. Like any other portfolio, a dividend focused portfolio should be sufficiently diversified, to balance risk with reward.

Although a dividend strategy is primarily seen as a defensive strategy, it is nevertheless possible for skilled managers to generate alpha over the course of the full cycle and outperform the broader market.

This is because high dividends and growth are not mutually exclusive in Asia. A company can offer both sustainable dividends and capital gains if it does not blindly pursue growth but adopts business strategies which are sustainable. These, you could say, are the true blue chips in Asia.

The writer is head of UBS Investment Management APAC

Gold - The Worst Form Of Investment Over The Last 30 Years

Gold - The Worst Form Of Investment Over The Last 30 Years

By : Charlie Lau Suan Liat

September 2010 saw gold hit an all-time high of over US$1,300 an ounce. Many reasons, ranging from the quantitative easing of debts in US, UK & Japan to expand their central banks’ balance sheets, to the “currency warfare” between the US$ and major Asian currencies, have prompted investments in equities and gold to lock-in weaknesses in currencies. This resulted in gold price being chased up to the all-time high.

For investors looking at short-term gains or speculating in gold, there are reasons to be bullish on this “feel-good metal”. Banks & commodity brokers here in Singapore are already bracing themselves for heavy trading in the bullion futures. As reported by The Straits Times on 30 September 2010, Chief Executive Thomas McMahon of the Singapore Mercantile Exchange mentioned that “BNP Paribas, Citigroup, Credit Suisse, JPMorgan and Standard Chartered are currently expanding their bullion trading desks.”

With JPMorgan’s gold vault being completed at the Freeport near Changi Airport, gold trading wannabes can expect more countries to trade gold in Singapore. The advantages are plenty. More gold are mined in the Australasia regions than in America or Europe. So, keeping the gold safely in nearby Singapore makes sense. Gold futures trades have to be settled in physical gold on due date. Hence, it also makes sense keeping the gold in Singapore than keeping it in London or in New York for the futures settlements.

For the longer term, would gold continue to appreciate in value? To answer this question, we have to qualify how long is long? Then, we have to decide whether or not the rise in gold price would be offset by the depreciation of one’s lock-in currency in the metal.

To start off, let us look at gold’s price 30 years ago in US$ that is locked in S$. In 1979, gold’s high was US$880 an ounce. Now, it is US$1,300. For the last 30 years, gold appreciated US$420 per ounce or 48%. 30 years ago, US$ to S$ was about US$1 to S$2.40. Now, it is US$1 to S$1.31 or minus 45%.

One ounce gold in 1979 @ US$880 @ the rate of S$2.40 cost S$2,112.

One ounce gold in Sep-10 @ US$1,300 @ the rate of S$1.31 cost S$1,703.

After 30 years, net loss in gold would be S$409 or -19%.

One year from now, would gold appreciate in price? Most would agree that with inflation and the weakness of the US$, gold would most likely appreciate in price. As one ounce of gold now is US$1,300, a Singaporean investor would have to pay S$1,703, at the exchange rate of US$1 to S$1.31.

Assuming one year from now, gold price appreciates 10% to US$1,430 (a one-year view from the London Bullion Market Association - The Straits Times, 30 September 2010). Assuming also, one year from now, the US$ versus S$ rate drops 10% - US$1 to S$1.18. One year from now, one ounce of gold would then cost S$1,687, representing a loss of S$16 (the 10% drop in US$/S$ rate and the 10% rise in gold one year from now are subjective and for the purpose of illustration only).

This illustration shows that although gold may appreciate in price, an investor may not necessary make money if the US$ is weak against the lock-in currency.

The cheapest way to invest in gold (in terms of transaction cost) is to open a Gold Passbook Account with United Overseas Bank (hitherto no other bank provides this service). The buy/sell spread is narrowest compared to the gold futures quote. No commission is levied (for details, please check with UOB).

Speculating gold futures or any futures is high-risk gambling with a deposit of as little as 5% collateral or less. Any slight movement in the metal price against the speculator would cause his position to be automatically closed by his broker resulting in the loss of all his collateral.

Friday, October 22, 2010

Risk Comes From Not Knowing What You Are Doing

22 October 2010
By : Chiang Kian Seng

“I heard from my friends that Forex trading is risky”

“Investing in stocks is risky, better to leave my money in fixed deposits”

“I know of someone that got burnt trading in the stock market, better not take the risk”

“Isn’t Forex trading riskier than trading stocks?”, etc.

These are some of the many comments and questions we often get from our students and members of the public who attend our free seminars. The word “risk” always seems to be mentioned in the same breath with the words “investing” or “trading”.

So, let us get a handle on this word, “Risk”. What does it really mean?

Looking up the word in a dictionary, “Risk” is generally defined with regards to investing as follows:

“The quantifiable likelihood of loss or less-than-expected returns”.

In most cases, people associate risk of investing with uncertainty and volatility of the instrument that they are trading or investing in. I think the keyword here is uncertainty. It is often the lack of knowledge and skill that makes trading and investing risky and not the instrument itself.

The Risk Is Not In The Car; It Is The Driver Behind The Wheel

Take driving a car as an example, the car being analogous to the trading or investing instrument. It would be a risky situation if a person decides to drive a car without having undergone any form of training. It is the person’s lack of knowledge and skill that makes the situation risky and not the car. Similarly, if someone wants to trade or invest in a particular instrument but has not undergone any form of training, this person would be assuming a higher risk, and it has nothing to do with the instrument.

To be a good investor and trader, one must first seek knowledge about the instrument that one is going to trade or invest in. It is similar to taking on a new job. First, you must learn what your new role is all about, what kind of tools are there to help you in your everyday routines, what are the skill sets needed to perform your new job properly, etc. After that, once you have acquired the knowledge and learnt the skills required, you still need a period of constant practice to apply your newly acquired knowledge and hone your new skills. It is only after having practised for a sustained period of time before one is able to get the “feel” of the job and perhaps do it with ease and confidence.

Risk Can Be Alleviated With Proper Education & Experience

This is the same process that you must commit to undertake when you decide to invest in any market. First and foremost, you must get yourself educated. It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree. However, when it comes to paying for financial education, where there is a chance they can lose all of the kids’ education funds, many people shy away because of the price. Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.

Most people are attracted by the myth of quick, easy money from investing or trading but fail to understand that it takes a lot of hard work to be successful. Everyone equates being a doctor or lawyer to earning lots of money. But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful. Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm. How then can it be different for investing and trading?

“Risk Comes From Not Knowing What You Are Doing” - the title of this article, is also a famous quote from arguably the most prolific investor in history, Warren Buffett. It sounds simplistic, but it epitomises the real meaning of the word “Risk”. Any instrument, be it stocks or forex will be dangerous if you don’t know what you are doing. It is not the instrument but the level of the investor’s understanding of the instrument and the market that determines his risk level. So, do yourself a favour, invest in your financial education before you invest in the markets. I leave you with another quote from Mr. Buffett: “The most important investment you can make is in yourself”.

Chiang Kian Seng, Trainer at FXDS Learning Group Pte Ltd, has more than 3000 hours of experience in trading and investing in Stocks, Forex and CFDs. To learn more about FXDS Learning Group and the financial education courses they offer, please go to

Tuesday, October 12, 2010

Don't follow your heart in the market

Following the market is one of the worst ways to make investment decisions, experts say.

Tue, Oct 12, 2010
my paper

IT'S A well-known fact that investors love "hot" stocks.

They're always interested in learning about the latest market sentiments, which companies other investors are putting their money on, and chasing stocks that are on the upswing.

But following the market is one of the worst ways to make investment decisions, experts say. Investors miss prime buying opportunities and lose out on good returns, especially if they focus only on the short term.

"Value in the long run is determined by (company) fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding," Georgetown University accounting and finance professor Prem Jain wrote in his latest book, Buffett Beyond Value: Why Warren Buffett Looks To Growth And Management When Investing.

"Knowledge is the best antidote to making wrong decisions," he said.

Such knowledge applies on a variety of fronts: understanding market psychology, examining the intrinsic value of a stock, and identifying your own buying and selling patterns.

Know what drives the market

Prof Jain may have highlighted the importance of fundamentals, but he and other experts would add that fundamentals alone do not drive stock prices - investors' emotions also play a role.

Stock prices often move in wild swings, particularly in the short run, because they are driven to a large extent by emotions and human behaviour.

Fear, greed, attachment, overconfidence, denial and optimism drive the market, often without much basis. Most investors also don't have the self-discipline to overcome these emotions.

Market trends leading to booms and busts do not last forever and will eventually reverse. As historical data shows, there are few warning signs for investors to take heed of before the market moves in the opposite direction.

Investors thus need to learn how to spot when emotions and human behaviour are driving stock prices.

They need to look beyond what others are buying and think of a winning strategy instead.

Commit to a strategy

As investors may well point out, it's easy to talk about behaving rationally, but it's immensely difficult to walk the talk

Essentially, investors need to prepare and pre-commit, argued Mr James Montier, author of The Little Book Of Behavioural Investing: How Not To Be Your Own Worst Enemy.

He pointed out that investors can and do control the process by which they invest: They simply need to remove the drivers of forced decisions from their portfolios.

To do that, they need to do their research in a cold, rational state. They must seek out the intrinsic value of a stock, and then pre-commit to following their own analysis and prepared steps of action.

Firstly, an investor might want to evaluate the fundamentals on a combination of fronts, such as the price-to-earnings ratio of the stock, its track record, how conservatively the company is financed, and what makes the stock likely to be worth more in the future.

Mr Montier also pointed out in his book that it's useful to have a "wish list" of companies you believe to be well-run and have sustainable potential, but are priced too high.

Standing orders can be placed with brokers to buy these stocks if, for some reason, the market brings their prices down to bargain levels.

Still, it might be also a good idea to follow Mr Buffett's core investment principle of investing only within your circle of competence, buying stocks of companies whose businesses you truly understand.

Understand your own investment behaviour

Another notable point highlighted by experts is that investors should focus more on the process of investing, rather than on just the outcome, as there are no magical short cuts to being a good investor.

Investors need to understand their own investment habits, particularly where their weaknesses lie.

And this is best done by putting it all down on paper, said Prof Jain.

He encouraged investors to write down the various investment decisions they made, what types of stocks they bought, pinpoint the reasons behind the decision, and separate all the months the market went up from the months it went down.

This would enable an investor to establish if he is a net buyer or net seller during the various months, and whether he may have a herd mentality.

"Systematic thinking will help you determine what you know or do not know, and help to overcome your psychological biases," said Prof Jain.

"Ultimately, everyone has to make judgment calls, but following a systematic approach will help you know when you are making a judgment call."

Local tycoon blows $100m at the tables

by Conrad Raj 05:55 AM Oct 12, 2010 SINGAPORE

Sources have told Today that a local businessman, who appeared on the latest Forbes list of Singapore's 40 richest people, recently lost a total of $100 million at the two casinos here.

While significant, this is a fraction of his estimated net worth. But he's not the only high-roller to discover that "the house always wins".

Around the same time, sources said, another tycoon from the timber-rich East Malaysian state of Sabah lost $50 million here.

"These guys can well afford the losses," said one high-roller who is a regular at Singapore's two casinos - at Resorts World Sentosa and Marina Bay Sands.

However, while gamblers losing $10 million to $20 million over a few sessions in the rooms reserved for high-rollers are no longer a rare breed, the source said that whispers of these two businessmen parting with a total of $150 million have raised more than a few eyebrows, even among the regulars.

News of these two multi-million-dollar casino losers comes amid an update that local businessman Henry Quek, who lost $26 million during a three-day gambling spree, is said to have settled his debts.

Mr Quek, the managing director of Far Ocean Sea Products, a seafood processing and trading company operating out of Fishery Port Road in Jurong, had initially considered legal action against Resorts World Sentosa for granting him credit too easily.

It is understood that the casino had shaved $6 million off his debt initially and another $3 million after the media reports about the case.

Mr Quek is said to have settled the rest of the outstanding debt. Unlike Mr Quek, the two latest multi-million-dollar losers, who are believed to have put their money at gaming tables of both Resorts World Sentosa and Marina Bay Sands, are said to have absorbed their losses without any complaints.

Against the backdrop of such mega-losses by individual high-rollers, analysts say it is not surprising Mr Sheldon Adelson, chairman of Las Vegas Sands, parent of Marina Bay Sands, predicted that Singapore could, in a few years, overtake Las Vegas as the world's second-largest gaming centre behind Macau.

Monday, September 20, 2010

Forex trading fast gaining currency

20 September 10 The Strait Times
by Goh Eng Yeow, Senior Correspondent

WHEN it comes to high-roller betting, the integrated resorts have generated all the buzz this year.

But there is another potentially far more lucrative realm of high stakes betting in which Singapore is well poised to grab a winning role in Asia: foreign exchange trading. And for the 'house', in this case the banks, the risks are low.

Business at the currency trading desks of global lenders has grown at a rapid pace of late, despite the financial crisis which threatened to cripple the international banking system two years ago.

A recent survey by the Bank of International Settlements (BIS), dubbed the central bankers' central bank, found that an average of US$4 trillion (S$5.4 trillion) worth of currencies is being traded worldwide daily, up from from US$3.3 trillion in 2007 - in the three-year period straddling the financial crisis.

Better still, bankers believe that even brighter days lie ahead for this part of their business, as they search for less risky sources of profits.

This follows fresh guidelines - known as the Basel III Accord - last week which may force banks to lend less, as they have to set aside more capital as a cushion against possible losses.

With eight of 10 global banks in forex trading having trading desks here, the future of this sector in Singapore - already the fourth largest forex centre in the world after London, New York and Tokyo - looks excellent too.

Still, before considering the prospects of forex trading here in greater detail, it is worth taking a look at the global picture.

The BIS estimates that the US$4 trillion worth of currencies traded a day works out to be 70 times the value of goods and services that change hands.

What is more attention-grabbing is the 48 per cent jump in 'spot forex trades' to US$1.5 trillion a day over the past three years.

For banks, there is the salivating prospect of earning a handsome trading commission booking these forex trades for their clients - at almost no risk to themselves - as the trades continue to grow.

Forex trading originally started when banks responded to their clients' need to convert any foreign currencies, earned from their overseas operations, back into their home currencies.

It then expanded, 40 years ago, as companies approached banks for help to 'hedge' against any wild swings in currencies in order to protect their businesses from suffering any forex losses.

But nowadays, most forex trading has little to do with trading or investments. Instead, it has become a great market for wealthy individuals and hedge funds to take huge bets in.

One popular trading strategy is 'pairing' of currencies - using your own wealth to borrow even more money in a currency like the United States dollar at almost zero interest costs to invest in a currency offering higher interest rates.
If the bet turns out to be well-advised, these big-time punters stand to reap huge gains from any nosedive in the greenback, as well as the higher interest offered by the currency they invest in.

The liquidity in the forex market created by these players has, in turn, attracted another powerful group of global traders - the 'algos', or high-frequency traders.
These are highly sophisticated investors who use lightning-quick computers to issue and then cancel orders almost simultaneously to make huge bets based on tiny movements in the currencies.

The end-result - among all these wealthy individuals, hedge funds, banks, and algos - is an exciting game for both winners and losers. The thrill of the chase lures them back into making more bets.

For any financial centre with the pulling power to draw all these players into its fold, the spin-offs can be enormous.

As a well-established financial centre, Singapore trades about US$266 billion worth of currencies a day, or 5 per cent of total global forex trades.

Some bankers tip that the Republic may unseat Tokyo to become the biggest forex trading centre in Asia in the years to come.

The Monetary Authority of Singapore is only too aware of how forex trading is shaping up here.

'There is a critical mass of forex players in Singapore with eight of the top 10 global banks (by forex trading volumes) having forex sales and trading desks in Singapore,' it said recently.

One chief executive notes that Singapore enjoys the advantage of world-class infrastructure with an international airport that is only minutes away by car from the main business district.

'Over time, Hong Kong will become more Chinese, as it serves the mainland Chinese market, while Tokyo's foreign exchange market will be largely domestic-driven. Singapore has the chance to be the truly Asian hub,' he said.

The enforcement of the Volcker rule to curtail proprietary trading by giant lenders in the United States may also be inadvertently adding to Singapore's attractions.
As these lenders' proprietary trading desks disband, they are increasingly looking to regroup in Asia, where they believe a more congenial financial climate beckons - and this makes cities like Singapore attractive.

And as they uproot and head east, they are likely to attract other players - the hedge funds and the algo traders - to join them here.

For the cities serving as their hubs, there is likely to be a quantum leap in the quality of their lives - as the cultural and entertainment scene also brightens up.
In the 1970s, Singapore's then budding financial centre got a big boost from petro-dollars, following a huge surge in oil prices.

This time, the remaking of the global financial landscape is likely to provide the backdrop for another transformational change.

Thursday, September 16, 2010

The 7 deadly investment myths

Believing in such false notions can cause investors to either lose money or miss out on opportunities.

Thu, Sep 16, 2010
The Business Times

By Vasu Menon
Vice-President, Wealth Management
Singapore, OCBC Bank

SUBSCRIBING to investment myths can cause investors to either lose money or miss out on opportunities. Understanding some of these myths and their pitfalls can result in better investment decisions.

Here are seven investment myths to be wary about.

Myth #1: Investing is exciting.

It is important to draw a distinction between investing and trading and speculating. Trading and speculating can give you the adrenaline rush and even make you fast money, but they can also cause you heartaches and leave you disillusioned if your bets go the wrong way.

Investing may be unexciting in the short term and may not yield you quick profits, but if you do your homework to identify good opportunities and invest prudently and set reasonable targets, it can provide you with decent returns over a three to five year period.

So investing requires patience but it carries less risk than trading or speculating, as it allows a greater time for your money to grow.

Myth #2: Good brand names make good investments.

Companies with established brands do not necessarily equate sound investments that assure good returns.

Take established US companies like Enron and WorldCom for example. They collapsed after being embroiled in accounting scandals and fraud. The former oil giant Enron filed for bankruptcy in December 2001 while WorldCom which was a telecom giant did the same in July 2002.

A more recent example is oil major, British Petroleum, which saw its share price plunge after its oil well in the Gulf of Mexico ruptured, resulting in the worst disaster in maritime history. No matter how established a company is, there are no guarantees it will not pull unpleasant surprises.

So, irrespective of how strong a company's brand name is, do not fall in love with it and over invest in its shares.

Myth #3 : The best way to make fast money is to invest in what's 'hot'.

Related story:
» Where best to park your money
» Making sense of financial jargon
Do not be a mere follower and purchase a popular stock or investment just because its 'hot' and everyone else is buying.

It's dangerous to adopt the herd mentality and take comfort in numbers.

Do your own research and analysis before taking the plunge.

Buy only if you fully understand what you are buying into and have the appetite to stomach the risk. If not, stay away.

Myth #4: Stay clear of investing when the outlook is uncertain.

In times of uncertainty, jittery investors tend to steer clear of markets or even sell off their investments, even if it means suffering losses.

While it makes sense to be cautious when the outlook is uncertain, there is also an opportunity cost to being too cautious, especially if markets suddenly turn around and surprise on the upside. For example, many nervous and panicky investors bailed out on their investments when markets were close to the bottom in the first quarter of last year.

As a result, they suffered losses and missed the subsequent strong market recovery which resulted in gains of more than 100 per cent in some instances.

Similarly, many overly cautious investors who were sitting on cash missed the boat, failing to buy when valuations were extremely low and attractive.

Looking ahead, uncertainty and volatility looks set to remain a fixture for several months. Instead of staying clear of markets completely and risk missing the boat, it makes more sense for investors to buy gradually and systematically over several months to mitigate the downside risk.

Myth #5: Always invest in the best performers.

Often, investors make decisions based on historical performance because of the mistaken believe that an investment which has done well in the past will continue to do well in the future.

However the strong historical performance may not recur if it was due to exceptional factors or because of undue risks taken by the fund manager.

So when buying into a unit trust for example, you should go beyond its past performance.

Other factors to look at include the risk adjusted returns of the unit trust, the kind of stocks or investments the fund manager buys into, the robustness of investment process and the experience of the investment team.

If you're not sure how to get this information, seek help from a financial adviser.

Myth #6: You have to be super smart to invest.

Related story:
» Where best to park your money
» Making sense of financial jargon
You don't need to be a financial wizard to invest.

Don't let the lack of knowledge or fear of financial jargon turn you off.

You can always start by attending basic courses on investments, reading books and online articles, consulting the right people and asking questions to address your discomforts or fears.

Also, check out investment seminars to pick up useful tips.

Myth #7: You need to be rich to start investing.

Wealth management and investments are not just for the wealthy. It's for everyone, no matter how much wealth you may have.

In case you are not aware, you can begin investing with just $100 each month through a regular investment plan. Such plans offer the additional benefit of dollar-cost-averaging.

Also, when you start investing early, you benefit from the power of compounding as well.

OCBC shall not be responsible for any loss or damage whatsoever arising directly or indirectly howsoever as a result of any person acting on any information provided herein.

This article was first published in The Business Times.