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Tuesday, July 24, 2012

Hunt for Tiger intensifies

24 July 2012
Conrad Raj

A sale of Oversea-Chinese Banking Corp (OCBC) group's stakes in Fraser & Neave (F&N) and Asia Pacific Breweries (APB) - now put in play - probably would not have taken place under its former chairman Tan Chin Tuan.

The late Mr Tan, an icon of local banking, hardly sold any of his blue chips - Straits Trading, Robinson & Co, United Engineers, F&N and APB, among others. Most of these assets are now gone, thanks to limits on stakes in non-banking assets imposed on banks by regulators.

Perhaps the S$45 per APB share that Thai Beverage founder and controlling shareholder Charoen Sirivadhanabhakdi - through his son-in-law's Kindest Place - is paying, or the S$50 a share that Dutch brewer Heineken is offering would have enticed Mr Tan to part with his bank's shares, considering his historical cost was only 16 cents a share.

Now, with the maker of Tiger Beer the subject of a bidding war, many Singaporeans are lamenting the possibility of yet another local icon going the way of Raffles Hotel and landing in the hands of a foreign party.

But is that really the case? More than 80 years ago, it was the joint venture between Heineken and Malayan Breweries - the predecessor of APB - that led to the development of Tiger, now one of the best known beer brands in this part of the world. Heineken appears to have retained most of the brands it has bought in recent years, and its chairman and chief executive Jean-Francois van Boxmeer has promised to continue to promote Tiger in Asia.

Mr van Boxmeer said on Friday: "It is time for us to look ahead to the next chapter of our Asian business, in which Singapore will continue to be our regional headquarters and both the Heineken and Tiger brands will spearhead our brand portfolio in Asia."

As for OCBC, it is strange that the banking giant did not seek competing offers for the APB shares it foisted on Thai Beverage. Wouldn't that have been more in the interest of its shareholders?

For sure, it may have wanted another party other than Heineken to have the shares to prevent F&N, which has a near 40-per-cent stake in APB, from losing control of the local brewer.

We do not know if the deal between OCBC and Kindest has been finalised. If it has, Kindest stands to make a quick S$110 million if Heineken's offer to buy up F&N's stake in APB goes through and a mandatory general offer is made.

Some observers are also questioning Thai Beverage's placing of the APB shares with Kindest on the grounds that it does not have the resources to buy both the OCBC group's - including Lee Rubber's - 22-per-cent stake in F&N and the 8.4-per-cent stake in APB.

After all, in stating its rationale for the purchase of the F&N shares, Thai Beverage said: "An investment in F&N is highly complementary to the company's existing capabilities and institutional knowledge in non-alcoholic and alcoholic beverage production and distribution, and will significantly increase the company's profile in the food and beverage sector."

So why place the crown jewel, APB, in a non-listed entity? Is this fair to Singapore-listed Thai Beverage's shareholders?

Singapore investment giant Temasek Holdings had already ruffled Heineken's feathers a couple of years ago when it sold its 14.7-per-cent stake in F&N to Japanese brewer Kirin. Dow Jones Newswires yesterday reported people familiar with the negotiations saying that Kirin was in discussions with bankers for a potential bid for APB in a move that would intensify the battle for control for the local brewer.

And, with Kindest, Heineken has another competitor and one with a direct stake in APB.
Heineken, the world's third-largest beer maker, surely will not want to share with rivals its plans for Asia, which now accounts for only 1.3 per cent of its ?17.1 billion (S$26.1 billion) in revenue but which is rapidly growing. Otherwise, why would it pay a staggering S$7.7 billion to take APB private?

For now, minority shareholders of APB are feeling quite a bit richer. APB shares hit a record high of S$49.50 each, up 17.9 per cent, before closing yesterday at S$48.49, or up 15.5 per cent. Meanwhile, F&N shares rose 4.2 per cent to close at S$7.92 after hitting a high of S$8.07, or up 6.2 per cent.

Conrad Raj is TODAY's Editor-at-Large.

Monday, July 23, 2012

Rebalance to ensure you sell high, buy low

Reducing strong performers locks in their gains and allows you to move funds to restore your original asset allocation

23 Jul 2012 15:13 by AMITAVA NEOGI
Morgan Stanley Private Wealth Management, India

WE all know that the “buy-and-hold” strategy is not always effective. While it is not advisable to time markets, there is merit in monitoring performance. After all, it is your wealth and it pays to be disciplined about your investments.
What is rebalancing?
Your portfolio is constantly changing because you have invested in markets that change daily. Over time, some of your investments are going to outperform others, resulting in their greater weightage in your portfolio. This exposes you to greater risk and losses if such investments underperform. Rebalancing is the process of buying and selling portions of your portfolio to ensure that over time it is not materially different from your risk-return profile.

Stick with your plan: Buy low and sell high
All asset classes go through cycles. Most investors aren’t lucky to invest at the lows and exit at the highs. Investors are consumed by fear when markets fall and become greedy when markets rise. Reducing strong performers to restore balance, forces you to “Buy Low and Sell High”, something all investors say they want to do but rarely implement.

When to consider rebalancing
Many believe that stars will continue to outperform in the future. Past performance is no guarantee of future performance. Towards the end of the dotcom bubble in the late 1990s, those who ignored their portfolios were severely overweight in these sectors. Rebalancing would have locked in gains and protected their portfolios from the sharp fall when the bubble burst in 2000.

Rebalancing is not about timing the market; instead it is about monitoring your investments and making adjustments to ensure that they are in line with your goals. As a rule of thumb, you should not rebalance unless there is 10%+ deviation from your original asset allocation or if your risk profile has changed.

Broadly, there are two ways to rebalance your portfolio:
>Sell overweight categories and use the proceeds to purchase underweight categories.
>Use fresh funds, systematic contributions to purchase underweight categories, thereby achieving desired allocation, growing your portfolio, minimising costs and taxes.

You can rebalance your portfolio either on calendar or weightage basis. Many recommend rebalancing at regular intervals such as annually. Others recommend rebalancing only when the relative weight of an asset class changes more than a certain percentage. Regardless of which trigger you choose, you shouldn’t rebalance too often, or else you may incur higher costs and taxes.

A buy-and-hold strategy would have been ineffective during 2007-2012 period. We learnt to realise profits in 2007 when the markets peaked. 2008’s lesson was capital preservation, while 2009 taught us not to be bearish in the face of massive monetary stimulus. 2010’s lesson was how to handle post-stimulus market swings. 2011 offered limited choice for regular income due to near all-time low interest rates. This year is dominated by market volatility resulting from the European debt crises and slower global recovery.

Let’s consider a simple example. Say your portfolio of $1 million was invested 50 per cent in the S&P 500 and 50 per cent in a bond fund but due to the phenomenal rise in the S&P 500 before the 2008 crash, it had become 70-30. In early 2008, you rebalanced your portfolio back to 50 per cent S&P 500 and 50 per cent the bond fund.

Your rebalanced portfolio would have lost 17.25 per cent by the end of 2008, as the S&P 500 was down 38.5 per cent and the bond fund was up 4 per cent that year (($500,000 x 61.5 per cent + $500,000 x 104 per cent = $827,500)/$1,000,000).

If your strategy was buy and hold and therefore you didn’t rebalance in early 2008, your portfolio would have lost 25.75 per cent (($700,000 x 61.5 per cent + $300,000 x 104 per cent = $742,500)/$1,000,000) by year-end.

At the end of 2009, during which the S&P 500 was up 23.5 per cent and the bond fund was up 3 per cent, your rebalanced 50:50 portfolio would have been valued at $937,144 ($413,750 x 123.5 per cent + $413,750 x 103 per cent).

The buy-and-hold portfolio would, however, have been lower at $853,028 ($700,000 x 61.5 per cent x 123.5 per cent + $300,000 x 104 per cent x 103 per cent).

When you rebalance, you realise profits and sell high and buy low. In the above example, the S&P 500 had significantly outperformed bonds pre-2008 correction, so to rebalance you periodically realised gains in the S&P 500 and invested the proceeds in bonds, thereby locking in some of your profits.

In 2008, when the S&P 500 underperformed, you had lesser exposure to the S&P 500 and more to bonds, resulting in a better overall performance.

Additionally, if your goals change, you need to rebalance. For example, if you are 10 years from retirement, you may consider moving a portion of the portfolio into an income-oriented allocation annually, so that when you retire, your portfolio will reflect your new goals.

To conclude, as with many portfolio-hedging strategies, your upside potential may be limited, but by rebalancing you will adhere to your goals, regardless of what the market does.

Saturday, July 21, 2012

Sir John Templeton's 16 Rules

Saturday, 21 July 2012

1. Invest for maximum total real return
2. Invest. Don’t trade or speculate
3. Remain flexible and open-minded about types of investment
4. Buy low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook.
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers.
8. Do your homework or hire wise experts to help you.
9. Aggressively monitor your investments.
10. Don’t panic.
11. Learn from your mistakes.
12. Begin with a prayer.
13. Outperforming the market is a difficult task.
14. An investor who has all the answers doesn’t even understand all the questions.
15. There’s no free lunch.
16. Do not be fearful or negative too often.

His Performance Result
A sum of $10,000 invested in his Class A portfolio in 1954, when he set up the Templeton Growth Fund, would have grown to $2m by 1992, when he sold his stake. That represented an annualised average return of 14.5% over 38 years or CAGR > 3.7%.

Templeton's Way with Money by Jonathan Davis and Alasdair Nairn

Monday, July 9, 2012

Reits - a look beyond the yields

Business Times
Cai Haoxiang

[SINGAPORE] Since they were launched 10 years ago, real estate investment trusts (Reits) in Singapore have earned a reputation as a defensive asset that pays out regular dividends.

That reputation is well- deserved. Data compiled by BT show that despite market volatility over the years, investors who put their money in Singapore's 22 Reits since day one would have lost money only in four.

How Reits have fared
On average, annual compounded returns for Reits were 8 per cent a year - beating the 10-year returns of the Straits Times Index (5 per cent), property (6 per cent) and government bonds (4 per cent).

Reits are generally divided into three main categories of retail, office and industrial, corresponding to the type of properties they own. A small proportion of Reits also invest in hospitality, healthcare and residential assets.

Reits across all sectors have done well.

The best returns have come from industrial Reits, partly due to the supply shortage over the last few years.

Mapletree Industrial Trust, which listed two years ago, clocked the highest annual return of 25 per cent.

Reits that own malls in Singapore have also done well given the resilience of the retail scene here.

CapitaMall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust all returned around 15 per cent a year and are trading at a premium to their net asset values.

For the office sector, annual returns have also been more than 10 per cent for CapitaCommercial Trust and Suntec Reit.

Reits generate cash from rental payments made by tenants.

After deducting costs, they return most of their income to investors in the form of distributions.
This is because of a rule where distributions enjoy tax-free status as long as 90 per cent of distributable income is paid out.

Moreover, distributions tend to be predictable as lease agreements are signed for several years.
As a result, Reits have been very popular with institutional investors.

But not many retail investors understand the nature of Reits, said Suntec Reit chief executive Yeo See Kiat. "They seem to say it's just another company; they think it's an equity. But we are much more than that because we're all yield driven, and have guidelines to deliver," he said.

Analysts say a key misconception investors hold is that Reits are growth stocks with huge potential capital gains.

Reits are not growth stocks and are yield-generating assets instead, said Mark Ebbinghaus, Standard Chartered's global head of real estate. He was speaking at a Real Estate Investment World Asia 2012 panel discussion late last month.

Mr Ebbinghaus noted that Reits cannot compete with equities in a bull market.

While Reits can grow by acquiring assets, this is more of a "nice to have" factor, he said.

"The problem looking at the Reit market for the last 20-odd years is when . . . everyone gets on the earnings-accretive bandwagon people get a little bit deluded and see Reits as growth stocks . . . You know it's the beginning of the end," he said.

Reits, as assets with predictable cash flows, have their place "in a world which is lacking confidence and lacking leadership", he added.

They are attractive because they are trading just below their net asset values, even as the world is "still underweight Asia".

"When risk is back on, capital will flow back," he said.

Roger Tan, chief executive of SIAS Research, said investors should treat Reits as alternative investments, similar to the category of property, gold and commodities.

So a simple asset allocation model will see an investor putting one-third of his money in equities, one- third in bonds, and one- third in alternative investments, he said.

Reits are in the middle of the risk spectrum as they are not as risky as equities, though they are more risky than bonds, he said.

Analysts believe Reits will continue to outperform the market.

In a report on June 15, Standard Chartered Bank upgraded its outlook on five Reits, and now has an "outperform" rating on 15 Reits under its coverage.

Similarly, OCBC Investment Research head Carmen Lee said in June's BT Wealth magazine that the research team is "currently overweight on the S-Reit sector".

Analysts say that before plonking their money into a Reit, investors need to consider several factors that affect its performance.

Macroeconomic conditions, as well as the demand and supply situation for their properties, will affect rentals and occupancy rates - and in turn income.

Investors also need to evaluate the quality of the assets Reits hold, such as whether they are well-located and thus attractive to tenants.

Given how Reits pay out almost all their income and cannot hold much cash, the skill of the Reit manager in squeezing value out of available assets is also important.

This can be done through asset enhancement initiatives which can generate a positive return on investment if done right.

Investors also need to look at the capital structure of the Reit and how much debt it is holding.

This is critical in a credit crunch situation like the 2008-2009 global financial crisis. Debt was maturing at the heart of the crisis and there was a real risk that several Reits could not refinance them.

One of those was MacarthurCook Industrial Reit, which eventually secured a contentious $430 million rescue deal in November 2009 through a discounted share sale to cornerstone investors, among them AIMS Financial Group and AMP Capital Holdings. The Reit was renamed AIMS AMP Capital Industrial Reit.

Investors who bought in at MacarthurCook's launch saw their holdings severely diluted and still have some way to go before they claw back their original investment - though the Reit has returned 45 per cent since January 2010 and is among the top Reits in terms of price appreciation this year.

Investors should also consider the financial and real estate backers supporting the Reit.

Strong financial backers can offer cheaper financing, and real estate developers can provide a steady pipeline of buildings that Reits can take into their portfolio.

Finally, investors have to be aware that because Reits pay out 90 per cent or more of their income, they cannot hold much cash and might go back to investors for more.

Asset purchases will likely be funded by rights issues, selling discounted placement shares to institutional investors, or adding more debt.

Wednesday, July 4, 2012

Using time to your advantage

4 July 2012
Betty Ng

It must be frustrating and worrying for many investors to watch the markets recently: Problems in the euro zone continue to dominate headlines, United States employment appears to be losing steam after some incremental improvements and China's growth has moderated.

Investors perhaps also feel confused by the contradictory comments offered by analysts: Some argue that equities are dead, while others point out that stocks are at their cheapest compared with bonds in six decades and are therefore good bargains.

Some argue in favour of finding a safe haven in bonds amid these global uncertainties, while others remind us that equities remain the best hedge against inflation, an issue very relevant to Asian investors.

Interestingly, however, we are not witnessing the 3 to 5 per cent daily swings in world stock markets that we saw last summer. Current volatility is relatively subdued and suggests that investors have already digested a lot of the news and events.

Stock and bond indices certainly continue to reflect the presence of uncertainties but their "volatility normalisation" attests to the progress that many countries have made in the past year: The US housing market has stabilised and is showing signs of recovery, Europe has finally recognised the severity of its structural problems and is now facing up to the real issues, and, in China, inflation has levelled off, creating room for the authorities to inject stimulus should the economy need it.

Of course, current developments do not make decisions any easier for investors, who like many professional hedge fund managers, are under pressure to produce short-term absolute returns on a consistent basis. This "short-term" can be as little as a week or even a day.

The questions many investors may wish to ask themselves are therefore: Do I have the luxury of time? Do I really need a positive return every week and every month? Are investment returns my only source of income for now?

If the answers are no, then one can shed some of the pressures and frustration of investing right now while also reflecting on how to put one's money to work.

Many small investors aspire to produce the kind of returns that professional investors can generate.
But the current environment can be challenging even for some of the most experienced professional managers.

And while the average investor focuses only on returns, professional investors also monitor the overall risk incurred in a portfolio.

This is arguably the biggest distinction between the two groups. Risk is measured not only as the volatility or potential downside from each individual security but also from the portfolio as a whole, or how all the securities or asset classes move together in different market conditions. The lower the correlations among asset classes or securities, the lower the risk.

This is the reason why professional investors diversify their portfolios. Historically, bonds, equities, and commodities move in different directions.

Within each asset class, correlations among securities also differ. In the current environment, there is even more reason to argue for diversification.

Market performance is increasingly being driven by policies and politics rather than by pure economics, presenting many possible scenarios that are difficult to predict, let alone be modelled accurately.

It appears, for example, that Greece will likely exit the euro zone. But will it be an orderly exit? How will it exit? Will this signal the demise of the euro, or on the contrary, buttress the currency by facilitating fiscal union among the stronger euro zone countries?

Across the Atlantic, who will become President in the United States? How will major policies change? Will the US Federal Reserve implement a new round of quantitative easing? Questions generate more questions.

The luxury of time

Even if we gradually gain clarity on the answers, we cannot be sure about the timing of the outcomes. Back when we had technology bubbles and real estate fever, some notable commentators pointed out the exuberance and irrationality of the phenomena.

Yet no one could pinpoint the timeframe for the corrections to occur. Timing your investments requires an acumen that few people have. It comes from a particular mix of experience, exclusive information and innate intuition that the average investor may simply not possess.

Rather than be frustrated and anxious about current developments, it is probably smarter for investors to simply recognise and acknowledge their powerlessness amid the current market uncertainties.
Rather than trying to pin their investments on certain outcomes or scenarios, they should maintain a certain level of humility by conceding that even the best analysis and guesses can go wrong, and protect themselves by maintaining a diversified portfolio.

Also, instead of waiting to time the best moment to enter the market, they should recognise that timing the market in any condition has always been tricky. The easier and historically proven method to avoid missing out an opportunity or buying at the wrong time is to simply invest regularly in increments.

If we do not need to produce positive returns every week or every month, use the luxury of time to our advantage. It is one of the few advantages we have over professional investors.

Betty Ng

Betty Ng is the Director of Investment Communications at Fidelity Worldwide Investment