Thursday, November 29, 2012
S’poreans achieving more but are less happy: Survey
Andrea Ong 29/11/2012
SINGAPOREANS feel a stronger sense of achievement today than six years ago, but they are not any happier.
They are also enjoying life less, according to a survey by two dons from the National University of Singapore Business School.
The findings suggest that money does not necessarily buy happiness, with economic growth - measured by gross domestic product (GDP) - and happiness seeming to have moved in opposite directions since 2006.
"A reasonable level of GDP is necessary but it's not a sufficient condition for good standard of living," said Dr Siok Kuan Tambyah, who co-wrote a book on the survey findings with Associate Professor Tan Soo Jiuan.
Last year, they engaged a research firm to survey 1,500 Singaporeans on areas ranging from perceptions of their well-being to the values they find important and political rights.
The results showed Singaporeans' sense of achievement last year rose by 13.7 percentage points from the figure in 2006, when the professors did a similar study.
But happiness levels dipped by 3.5 percentage points while enjoyment levels slipped 1.3 points.
Dr Tambyah said this could be a sign of a phenomenon - seen in other developed countries as well - where happiness levels tend to stagnate after a point, even as national wealth continues to rise.
Said Prof Tan: "Very often, you are so busy paying off your mortgage; you can have a very nice home, but how much time do you spend in it to enjoy the landscaping?"
The widening income gap could be another factor as some citizens may feel overlooked, said Dr Tambyah.
Singaporeans aged 25 to 34 were the most unhappy. That is when people are stressed by their careers and the struggle to start a family without being able to afford a car or a house, said the professors.
And what makes Singaporeans happy? The survey holds some answers: ties with family and friends.
Prof Tan highlighted a paradox where respondents were more satisfied with life in general but less satisfied with life in Singapore than they were in 2001.
Generally, people were most satisfied with their relationships with their children and parents.
But in a separate question on life in Singapore, people were least satisfied about cost-of-living issues such as the affordability of cars, property and health care.
A "bright spot" is that "family relationships and social networks are holding up very well", said Dr Tambyah. "People feel it's so important to them."
The findings indicate a need for Singapore's economic goals to be balanced with social and communal goals, said the dons.
Dr Tambyah is glad questions on happiness, values and the kind of society Singaporeans want have been raised in the ongoing national conversation.
She said: "That's what contributes to a better society and nation, apart from GDP."
Monday, November 26, 2012
Living with risks in a random world
26 Nov 2012 08:40 TEH HOOI LING
“Life cannot be calculated. That’s the big mistake our civilisation made. We never accepted that randomness is not a mistake in the equation – it is part of the equation,” says British writer Jeanette Winterson.
Nassim Taleb is another one of my favourite authors. I was struck by how many truths there were in Fooled By Randomness: The Hidden Role Of Chance In Life And In The Markets when I first read it a few years ago.
He followed that up with The Black Swan: The Impact Of The Highly Improbable, which presciently was published in 2007 – just before the global financial crisis erupted. His latest book, Antifragile: Things That Gain From Disorder, is about how stability engenders a false sense of security – one of the things we talked about last week.
Yes, there are loads of randomness and hence risks out there.
Goldman Sachs’ latest shrewd investment was in sandbags and back-up electricity generators. As Hurricane Sandy approached New York, the bags were stacked around its headquarters. It was one of the few offices in downtown Manhattan to remain dry and well-illuminated as the “Frankenstorm” battered the city, reported The Economist.
In contrast, a block farther down West Street, the headquarters of Verizon was awash with salty flood water, soaking cables delivering phone and Internet services to millions of customers. The firm was able to re-route much of the traffic through other parts of its network, but local service was disrupted.
Last year’s Japanese tsunami reminded many companies that moving to “just-in-time” manufacturing through global supply chains can bring new risks. American carmakers found that they could not get essential parts made in Japan. Floods in Thailand last year caused a global shortage of hard-disk drives. It turns out, a large proportion of global supply comes from a rather small area near Bangkok.
The takeaway from the quote, the books and the examples in The Economist article is: We shouldn’t cut things too finely. We shouldn’t bank on things to work perfectly all the time. There should always be a buffer for things to go wrong. And there are always unforeseen things that can happen to mess up our best thought-out plans.
So in this random world, how do we manage our risks?
First, always work with a margin of safety. Yes, it means some wastage. But it’s a necessary cost. Margin of safety is a big concept in value investing. A value fund manager draws this analogy: “It’s like driving on the highway. You keep a safe distance behind the car in front of you. So if anything happens, you have the buffer. You have time to react. That’s margin of safety.” We will talk more about this in a future article.
Two, be prepared for the unexpected. It is a natural human tendency to underestimate the probability of bad things happening to ourselves. Yes, there are precautions we can take. Don’t put oneself in harm’s way. Take good care of one’s health. Still, one can never predict when accidents can happen, or when illness will strike.
Insurance is one way we can protect ourselves financially against such unexpected but “high-impact” events that can result in losing one’s capacity to work and needing to pay significant amounts for medical expenses and so on. So insurance policies are must-haves.
Another form of insurance is what I call social insurance. That is, to build relationships and share our surplus – for we never know when we may fall on hard times and may need the generosity and goodwill of others.
For philosopher Immanuel Kant, this is not a good motivation for sharing. To him, we should do something because we think it is the right thing to do, and not because we want something in return. But hey, we are all so used to incentives. So if anyone needs a reason for sharing his good fortune, this is one way to rationalise it.
Third, don’t put all your eggs in one basket. United States energy giant Enron was a model corporation and darling stock in the 1990s. Many of its employees worked for decades in the company, had their pensions there and invested their savings in its stock. When Enron collapsed in 2001, these employees lost their jobs, their pensions and their savings.
Note that one basket doesn’t just mean one stock or one asset. It could mean a group of baskets that generally suffer the same fate. If you work in the financial sector and invest the bulk of your money in financial stocks even though they are not your own company’s, you are, in a sense, putting many of your eggs in one basket as well.
So to recap, some of the ways to mitigate risks in this highly unpredictable world of ours are: cut yourself some slack, buy yourself some insurance and do not put all your eggs in one basket.
Next week, we will talk about whether high risks necessarily mean high returns.
hooiling@sph.com.sg
One basket doesn’t just mean one stock or one asset. It could mean a group of baskets that generally suffer the same fate. If you work in the financial sector and invest the bulk of your money in financial stocks even though they are not your own company’s, you are, in a sense, putting many of your eggs in one basket as well.
The writer is editor of Executive Money, a weekly section in The Business Times. Her column is also available in BTInvest (www.btinvest.com.sg), a free personal finance and investment site of The Business Times covering five main categories: Personal Finance, Wealth, Markets, Insurance and Property.
Go to BTInvest for expert views on the latest market developments and tips on how to better manage your dollars and cents.
Friday, November 23, 2012
Singapore "the most emotionless society"?
Emotions not taking over?
23 November 2012
Neo Chai Chin chaichin@mediacorp.com.sg
SINGAPORE - Yes, the Government has a role to play in the emotional well-being of its people and Singaporeans could, perhaps, express more emotion.
This was the general consensus among academics and Members of Parliament whom TODAY spoke to yesterday, a day after the Republic had the ignominy of being dubbed the "most emotionless society" in the world - or among more than 150 countries and areas, to be more specific - following a poll by research and analytics firm Gallup.
And while there were some criticisms about Gallup's methodology, they agreed that the Government could do more in this area, as Gallup called on the Singapore leadership "to include well-being in its overall strategies if it is going to further improve the lives of its citizenry".
A Bloomberg report on the survey results went viral on Wednesday, and became a talking point among Singaporeans.
Gallup published its findings and methodology, as well as an article on the survey's implications late on Wednesday night. Noting that Singapore has one of the lowest unemployment rates and highest gross domestic product per capita rates in the world, Gallup partner Jon Clifton said that the research "shows that the solutions to improve positive emotions or decrease negative emotions do not necessarily go beyond higher incomes".
The survey was done from 2009 to 2011, with about 1,000 individuals from each country polled each year. The respondents were asked if they had experienced five positive and five negative emotions a lot the previous day.
To measure the presence or absence of emotions, Gallup took the average of the percentage of residents in each country who said they experienced each of the 10 positive and negative emotions.
Singapore scored 36 per cent, with countries such as Lithuania, Russia and Nepal also among the lowest scorers; the Philippines was the most emotional with a score of 60 per cent, with countries such as Oman, Colombia and Canada following closely behind.
The implications for an emotionless society are "significant", Mr Clifton said. "Well-being and daily emotion correlate with some of the most important societal outcomes, such as community attachment and brain gain (acquiring and retaining top talent)," he added.
Findings useful but flawed
Academics said the findings are useful and thought-provoking, but not without flaws. Each country's scores "actually represent the averaged intensity of emotions experienced without regard to the positive or negative valence of the emotions", noted Professor David Chan, Director of the Singapore Management University's Behavioural Sciences Institute.
"So when we distinguish positive and negative emotions and consider them jointly, as we should, Singapore will have a moderate ranking ? on emotional well-being," he pointed out.
National University of Singapore sociologist Tan Ern Ser said he would have obtained separate scores on positive and negative emotions felt, and tried to find out if respondents' emotions were due to personality or contextual factors. But he noted that Singapore has ranked well in recent happiness surveys - in Gallup's 2012 World Happiness Report, for instance, Singapore was third in the Asia-Pacific after Australia and New Zealand.
Associate Professor Tan suggested several ways that the Government could indirectly increase emotional well-being. These include creating quality jobs, providing good education, housing, healthcare and transport, as well as reducing social inequality.
Prof Chan also proposed other ways such as building trust and social capital, treating economic growth as means rather than ends, and implementing integrative policies that ensure growth is translated into outcomes that benefit citizens and contribute to well-being.
The Government could leave more room for "compassionate considerations" when applying policies, suggested Member of Parliament Baey Yam Keng. In communicating its decisions to stakeholders, more can be done to show their interests have been taken into account, he said.
But residents too can improve their emotional well-being by showing more neighbourliness and reaching out more to one another, said Mr Baey and fellow MP David Ong.
Mr Ong disagreed with the survey results. He said it could be a Singaporean trait to opt for "less risky" answers in surveys, and that they could be more expressive in certain settings, such as with friends, but not during public events such as concerts. "Maybe it's the culture of not wanting to stand out too much," he said.
23 November 2012
Neo Chai Chin chaichin@mediacorp.com.sg
SINGAPORE - Yes, the Government has a role to play in the emotional well-being of its people and Singaporeans could, perhaps, express more emotion.
This was the general consensus among academics and Members of Parliament whom TODAY spoke to yesterday, a day after the Republic had the ignominy of being dubbed the "most emotionless society" in the world - or among more than 150 countries and areas, to be more specific - following a poll by research and analytics firm Gallup.
And while there were some criticisms about Gallup's methodology, they agreed that the Government could do more in this area, as Gallup called on the Singapore leadership "to include well-being in its overall strategies if it is going to further improve the lives of its citizenry".
A Bloomberg report on the survey results went viral on Wednesday, and became a talking point among Singaporeans.
Gallup published its findings and methodology, as well as an article on the survey's implications late on Wednesday night. Noting that Singapore has one of the lowest unemployment rates and highest gross domestic product per capita rates in the world, Gallup partner Jon Clifton said that the research "shows that the solutions to improve positive emotions or decrease negative emotions do not necessarily go beyond higher incomes".
The survey was done from 2009 to 2011, with about 1,000 individuals from each country polled each year. The respondents were asked if they had experienced five positive and five negative emotions a lot the previous day.
To measure the presence or absence of emotions, Gallup took the average of the percentage of residents in each country who said they experienced each of the 10 positive and negative emotions.
Singapore scored 36 per cent, with countries such as Lithuania, Russia and Nepal also among the lowest scorers; the Philippines was the most emotional with a score of 60 per cent, with countries such as Oman, Colombia and Canada following closely behind.
The implications for an emotionless society are "significant", Mr Clifton said. "Well-being and daily emotion correlate with some of the most important societal outcomes, such as community attachment and brain gain (acquiring and retaining top talent)," he added.
Findings useful but flawed
Academics said the findings are useful and thought-provoking, but not without flaws. Each country's scores "actually represent the averaged intensity of emotions experienced without regard to the positive or negative valence of the emotions", noted Professor David Chan, Director of the Singapore Management University's Behavioural Sciences Institute.
"So when we distinguish positive and negative emotions and consider them jointly, as we should, Singapore will have a moderate ranking ? on emotional well-being," he pointed out.
National University of Singapore sociologist Tan Ern Ser said he would have obtained separate scores on positive and negative emotions felt, and tried to find out if respondents' emotions were due to personality or contextual factors. But he noted that Singapore has ranked well in recent happiness surveys - in Gallup's 2012 World Happiness Report, for instance, Singapore was third in the Asia-Pacific after Australia and New Zealand.
Associate Professor Tan suggested several ways that the Government could indirectly increase emotional well-being. These include creating quality jobs, providing good education, housing, healthcare and transport, as well as reducing social inequality.
Prof Chan also proposed other ways such as building trust and social capital, treating economic growth as means rather than ends, and implementing integrative policies that ensure growth is translated into outcomes that benefit citizens and contribute to well-being.
The Government could leave more room for "compassionate considerations" when applying policies, suggested Member of Parliament Baey Yam Keng. In communicating its decisions to stakeholders, more can be done to show their interests have been taken into account, he said.
But residents too can improve their emotional well-being by showing more neighbourliness and reaching out more to one another, said Mr Baey and fellow MP David Ong.
Mr Ong disagreed with the survey results. He said it could be a Singaporean trait to opt for "less risky" answers in surveys, and that they could be more expressive in certain settings, such as with friends, but not during public events such as concerts. "Maybe it's the culture of not wanting to stand out too much," he said.
Time to tighten rules for business trusts?
Of the 11 business trusts, only two made money for their unitholders who got in at the initial public offering stage. -BT
Teh Hooi Ling
Fri, Nov 23, 2012
The Business Times
SINGAPORE - Eleven business trusts had been launched on the Singapore Exchange since the first one - Pacific Shipping Trust - hit the market in May 2006.
That maiden business trust on SGX has since been taken private.
And then there are 10.
How has this asset class done so far? Not good at all.
Of the 11 business trusts, only two - Pacific Shipping Trust and K-Green Trust - made money for their unitholders who got in at the initial public offering stage.
But even for these two trusts, unitholders would have done better just investing in the Straits Times Index.
Pacific Shipping underperformed the STI by 3.8 per cent a year, and K-Green by 4.8 per cent.
The worst performer is Indiabulls Property Trust, followed by the two remaining shipping trusts - First Ship Lease and Rickmers Maritime.
Overall, on average, a unitholder who bought into these trusts at IPO price would have lost an average of 23.4 per cent.
This is after taking into consideration the distributions if any.
The average underperformance relative to the STI is a whopping 11.5 per cent a year.
Hence the indisputable conclusion: business trusts have not been a rewarding asset class for investors so far.
Compare them with another type of trusts - real estate investment trusts (Reits) - and the performance of the two cannot be more different than night and day.
What could cause the vast difference in the performance of these two types of business structures?
Is there something inherent in the rules of business trusts that favours the sponsors over investors?
Well, yes.
Business trusts are managed by trustee-managers.
Under the Singapore Business Trusts Act, the trustee-manager can be removed only if 75 per cent of unitholders vote in favour.
At a discussion organised by CFA Institute's Standards and Financial Market Integrity committee last week, numerous participants noted that for sponsors, business trust is "a ready structure to exercise their control disproportionate to their cashflow rights".
Sponsors can sell off 74 per cent of the value of the assets, and still retain full control via the trustee-manager.
In Reits, the manager can be removed by a simple majority of unitholders' vote at a general meeting.
Business trusts also have fewer restrictions which allow them to do a lot more things and hence make them riskier.
They can hold various types of assets, like real estate, infrastructure assets or ships.
Some, like ships, may not have any meaningful terminal value. For real estate, they can undertake development as well.
On the other hand, Reits can only hold income yielding real estate.
On the borrowing front, there are no limits for business trusts.
The gearing for Reits, meanwhile, is capped at 35 per cent, or up to 60 per cent if it obtains, discloses, and maintains a credit rating from rating agencies.
In terms of distribution, business trusts are not required to distribute any dividends. They may pledge to distribute a certain percentage of income as dividends, but this can change.
As for Reits, they must distribute at least 90 per cent of income to enjoy tax transparency under Income Tax Act.
The less rigorous regime of the business trusts allows sponsors to exercise their boundless creativity.
Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors.
In Singapore, the average investor is far from being sophisticated.
Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts.
Teh Hooi Ling
Fri, Nov 23, 2012
The Business Times
SINGAPORE - Eleven business trusts had been launched on the Singapore Exchange since the first one - Pacific Shipping Trust - hit the market in May 2006.
That maiden business trust on SGX has since been taken private.
And then there are 10.
How has this asset class done so far? Not good at all.
Of the 11 business trusts, only two - Pacific Shipping Trust and K-Green Trust - made money for their unitholders who got in at the initial public offering stage.
But even for these two trusts, unitholders would have done better just investing in the Straits Times Index.
Pacific Shipping underperformed the STI by 3.8 per cent a year, and K-Green by 4.8 per cent.
The worst performer is Indiabulls Property Trust, followed by the two remaining shipping trusts - First Ship Lease and Rickmers Maritime.
Overall, on average, a unitholder who bought into these trusts at IPO price would have lost an average of 23.4 per cent.
This is after taking into consideration the distributions if any.
The average underperformance relative to the STI is a whopping 11.5 per cent a year.
Hence the indisputable conclusion: business trusts have not been a rewarding asset class for investors so far.
Compare them with another type of trusts - real estate investment trusts (Reits) - and the performance of the two cannot be more different than night and day.
What could cause the vast difference in the performance of these two types of business structures?
Is there something inherent in the rules of business trusts that favours the sponsors over investors?
Well, yes.
Business trusts are managed by trustee-managers.
Under the Singapore Business Trusts Act, the trustee-manager can be removed only if 75 per cent of unitholders vote in favour.
At a discussion organised by CFA Institute's Standards and Financial Market Integrity committee last week, numerous participants noted that for sponsors, business trust is "a ready structure to exercise their control disproportionate to their cashflow rights".
Sponsors can sell off 74 per cent of the value of the assets, and still retain full control via the trustee-manager.
In Reits, the manager can be removed by a simple majority of unitholders' vote at a general meeting.
Business trusts also have fewer restrictions which allow them to do a lot more things and hence make them riskier.
They can hold various types of assets, like real estate, infrastructure assets or ships.
Some, like ships, may not have any meaningful terminal value. For real estate, they can undertake development as well.
On the other hand, Reits can only hold income yielding real estate.
On the borrowing front, there are no limits for business trusts.
The gearing for Reits, meanwhile, is capped at 35 per cent, or up to 60 per cent if it obtains, discloses, and maintains a credit rating from rating agencies.
In terms of distribution, business trusts are not required to distribute any dividends. They may pledge to distribute a certain percentage of income as dividends, but this can change.
As for Reits, they must distribute at least 90 per cent of income to enjoy tax transparency under Income Tax Act.
The less rigorous regime of the business trusts allows sponsors to exercise their boundless creativity.
Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors.
In Singapore, the average investor is far from being sophisticated.
Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts.
Thursday, November 22, 2012
Managing risk in a time of deleveraging
22 Nov 2012 08:00
By David Hollis
Vice President & Multi-Asset Portfolio Manager
Allianz Global Investors
When the credit bubble burst in late 2008, it was evident the next economic phase would be a period of deleveraging. It brings with it a completely different economic backdrop, entirely changing the manner in which returns can be generated within financial markets. Many developed markets are facing a debt overhang on four fronts; private, public, household and pension. In the “Golden Age”, developed market credit growth was allowed to persist way beyond sustainable levels as interest rates were set too low on the premise inflation had been eradicated, hence the cost of credit was artificially cheap. In reality, emerging markets were exporting deflation via low goods prices produced with inexpensive labour, and developed countries were funding purchases of these goods via cheap credit.
In a recent working paper, the economists Reinhart & Rogoff identified 26 episodes of public debt overhang, specified as periods when debt to GDP exceeds 90%, since 1800. In 23 out of the 26 episodes countries experienced growth rates that were lower than the average during other periods, proving that deleveraging results in sub-trend growth[1]. Alarmingly, the average period of a debt overhang episode was 23 years, implying that some countries may not achieve a sustainable debt level until 2031, during which they will experience sluggish growth[2]. In just under half of the 26 episodes of debt overhang, real interest rates were lower, or the same, than other periods and at the same time growth was lower.
We can extend this empirical evidence and use simple mathematics to conclude that real (nominal) interest rates must be below real (nominal) GDP during a deleveraging cycle, otherwise the debt to GDP ratio of a country cannot fall. As a result, those securities such as sovereign bonds, inflation-linked bonds, and corporate bonds are likely to outperform. In fact, corporate bonds have empirically out-performed sovereign equivalents during low growth.
Methods of Public Sector Deleveraging – Financial Repression
The preferred method of deleveraging is through a combination of austerity and growth measures, as in Ireland, Denmark, Sweden and Belgium from mid 90’s to mid 2000. However, these episodes occurred when the global economy was expanding, allowing them to depreciate their currency and export themselves out of debt. Today, simultaneous developed market deleveraging results in competitive currency devaluation, and even then export demand from other highly indebted developed countries is depressed. This can only really be overcome by opening up new trading channels with emerging markets.
Financial repression, the means by which governments indirectly or directly compel investors to purchase debt, is the most likely deleveraging route that will be adopted in coming years. It is already evident in extremely low bond yields, which reflect superior demand for sovereign debt, and ultra-stimulative central bank rates. Having exhausted traditional methods of monetary policy central banks have turned to “non-standard measures” such as Quantitative Easing, which involves government bond purchases, to further improve liquidity and lower real interest rates.
There has been widespread pressure on banks to purchase government bonds. For example, peripheral Eurozone banks have been encouraged by their national central banks to exchange non-domestic bonds with the ECB for money that can be invested in domestic bonds. This self-funding of deficits on a national scale is another example of financial repression.
Banking regulation, such as the Basel III and Solvency II Acts, although primarily designed to improve the quality of collateral on bank balance sheets to prevent another Lehman style scenario, invariably involves an increase in low risk assets, such as government bonds, on balance sheets.
Investing During Deleveraging
Under financial repression, yields on low risk investments will remain depressed and capital will flow to the highest yielding risk-adjusted asset. Unfortunately, with free flowing global capital, this will depress asset class return autocorrelation, hence a more dynamic asset allocation process is preferable to a buy-hold strategy.
Moreover, a greater proportion of return will come from income, rather than capital. For example, earnings growth in equity markets is likely to be muted as growth has been empiricially proven to be lower during periods of deleveraging, as a result the capital return on equities will be lower relative to income.
The focus on investing in high yielding and high income assets may result in the mis-allocation of resources, hence investment in traditional growth industries may be deficient and represents a headwind to capital returns.
Low yields in developed countries will prompt investors to seek income opportunities elsewhere; this is best achieved through asset class diversification. However, we would caution that price momentum may drive illiquid markets to excessively high valuations, at which point capital outflow can lead to an abrupt reversal of the positive return trend. Therefore, a dynamic asset allocation process is preferable.
Rising asset class correlation since since 2008 suggest that returns are more easily generated through beta strategies. Alpha generation has become distorted by macro-economic factors such as country risk premia impacting individual stocks.
The key to generating returns and managing risk during deleveraging is to maximise diversification beyond traditional asset classes. This is best executed in the context of a dynamic investment strategy conbined with a proven risk management approach.
Wednesday, November 21, 2012
The year of betting conservatively
21 November 2012
Nouriel Roubini
The upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: With no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs. If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months.
Starting with the advanced countries, the euro zone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe).
Economic growth in the United States has remained anaemic, at 1.5-2 per cent for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the euro zone, has already endured a double-dip recession and now, even strong commodity exporters - Canada, the Nordic countries, and Australia - are slowing in the face of headwinds from the US, Europe, and China.
Meanwhile, emerging-market economies - including all of the BRICs (Brazil, Russia, India and China) and other major players like Argentina, Turkey and South Africa - also slowed this year. China's slowdown may be stabilised for a few quarters, given the government's latest fiscal, monetary and credit injection; but this stimulus will only perpetuate the country's unsustainable growth model, one based on too much fixed investment and savings and too little private consumption.
LIQUIDITY HOSES TURNED ON
Next year, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the euro zone periphery and the UK. But now it is permeating the euro zone's core.
And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming "fiscal cliff", spending cuts and tax increases will invariably lead to some drag on growth next year - at least 1 per cent of GDP. In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.
The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronised fiscal austerity in most advanced economies will dim global growth prospects next year. So, what explains the recent rally in US and global asset markets?
The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets.
The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). The European Central Bank's announcement of its "outright market transactions" programme has reduced the risk of a sovereign-debt crisis in the euro zone periphery and a break-up of the monetary union. The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.
Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well. And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the euro zone periphery, where sovereign risk remains relatively high).
It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies.
GLOBAL market CORRECTION UNDERWAY
But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook. At the same time, the euro zone crisis remains unresolved, despite the ECB's bold actions and talk of a banking, fiscal, economic and political union. Specifically, Greece, Portugal, Spain, and Italy are still at risk, while bailout fatigue pervades the euro zone core.
Moreover, political and policy uncertainties - on the fiscal, debt, taxation and regulatory fronts - abound. In the US, the fiscal worries are threefold: The risk of a "cliff" next year, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity.
In many other countries or regions - for example, China, Korea, Japan, Israel, Germany, Italy and Catalonia - coming elections or political transitions have similarly increased policy uncertainty.
Yet, another reason for the correction is that valuations in stock markets are stretched: Price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low. With uncertainty, volatility and tail risks on the rise again, the correction could accelerate quickly.
Indeed, there are now greater geopolitical uncertainties as well: The risk of an Iran-Israel military confrontation remains high as negotiations and sanctions may not deter Iran from developing nuclear-weapons capacity; a new war between Israel and Hamas in Gaza is likely; the Arab Spring is turning into a grim winter of economic, social and political instability; and territorial disputes in Asia between China, Korea, Japan, Taiwan, the Philippines and Vietnam are inflaming nationalist forces.
As consumers, firms and investors become more cautious and risk-averse, the equity-market rally of the second half of this year has crested. Given the seriousness of the downside risks to growth in advanced and emerging economies alike, the correction could be a bellwether of worse to come for the global economy and financial markets next year. PROJECT SYNDICATE
Nouriel Roubini is Chairman of Roubini Global Economics, Professor at New York University's Stern School of Business, and co-author of Crisis Economics.
Investing for income in a lower growth world
21 Nov 2012 08:00
By Aymeric Forest
Fund Manager
Schroders Multi Asset Investments
Investors everywhere are looking for income; at the same time, traditional sources of income are drying up. It is time to widen the opportunity set.
Relying on one asset class for income reduces opportunity and carries more risk than in the past
A benchmark-unconstrained multiasset fund has the flexibility to find attractive yield wherever it arises
It is important to focus on quality and risk management to avoid capital erosion and ensure sustainable income
Traditional sources of income are drying up…
The ‘traditional’ way to earn income has been to hold government bonds (issued in your home market) or money market instruments. In this economic environment these no longer provide an answer since they do not provide a yield high enough to satisfy investors’ objectives, either in inflation-adjusted or absolute terms.
Since 2007 government bond yields have dropped to levels unseen since the Great Depression. Governments and central banks across the world are committed to providing the lowest possible cost of refinancing so that the banking system is gradually able to repay debt without causing too much damage to already low economic growth.
Very low interest rates and quantitative easing (where the government prints money to buy assets such as government bonds), combined with risk aversion and the poor outlook for growth, have contributed to the falls in government bond yields.
…in a lower growth world
The excessive borrowing accumulated since the 1990s is likely to continue having an effect on economic growth for several years ahead. Governments are being forced to tighten fiscal policy and reduce spending in order to reduce their debt, while households and banks are also over-borrowed.
Historically economic growth rates have on average been 4 percentage points lower when a country’s debt exceeds 90 per cent of its GDP.
This level of debt, already reached by some developed markets, may soon be reached by more countries.
With slowing economic growth, capital gains from investments will be harder to find – and come at a greater level of risk.
…while demand for income increases
The pressure on public finances is likely to prevent governments from meeting all of their pension promises and the responsibility for generating investment income will increasingly fall on individuals. But with traditional sources of income yielding less, investors are currently unlikely to make up this gap unless they take a new approach to income investing.
Schroders carried out a ‘European Wealth’ study to assess the attitudes and outlook of investors across Europe (taking 1,400 investors into account across nine countries). We found that there is a substantial gap between the level of income in retirement that these investors desire and their likely retirement income. Excluding the UK, the annual shortfalls ranged between €10,000 and almost €23,000 per annum.
Why investors need to consider a multi-asset approach to income
With yields from traditional sources of income falling, and with risk rising, investors need to maximise their opportunities and diversify.
Single asset class risks have increased
Previously, the level of risk was directly related to the yield provided by any particular asset class. In other words, higher-yielding assets carried more risk and lower-yield assets less. However, the current economic background is vulnerable to shocks and any single asset class is likely to suffer from a higher level of systemic risk. This makes diversification more important than ever.
Widen the opportunity set
A multi-asset approach delivers an improved risk/return trade off in comparison to holding each asset class on its own.
It can take advantage of a wider range of income-generating asset classes – not just the traditional government bonds or money market instruments. This includes higher yielding equities, infrastructure, and different types of bonds, such as investment grade and high yield debt, emerging market debt and municipal debt, from all around the world.
… with an unconstrained approach
A benchmark-unconstrained approach means taking advantage of yield opportunities in whichever region or sector they arise – without having to ‘hug’ a given multi-asset benchmark.
It is possible to construct a multi-asset portfolio yielding in excess of 5% – providing that you are unconstrained in terms of asset allocation and use a non market-cap approach to security weighting.
A global and unconstrained framework is required to open more doors to hidden opportunities. Even in low-yielding markets it is possible to find high-yielding securities. By reducing constraints investors can capture income more safely.
… focusing on quality
It is important not to chase the highest yields, but look for income that is sustainable. What matters for investors is not only the promise of a future yield but the associated probability of default on the payment of a coupon or of a dividend cut.
Through a disciplined risk management process
One way of managing risk is to ensure that the portfolio is diversified and not overly-concentrated in companies, industries, currencies, countries or asset classes.
In today’s market, high dividend companies tend to be concentrated in sectors such as telecoms or financials, or in some countries like Australia and the UK.
Sometimes diversification is not enough and you need to be able dynamically to hedge unwanted sources of risk. This can include hedging duration (the risk that interest rates go up) and equity market risk.
The evolution of downside risk management techniques and derivative instruments enables the astute investor to have access to the required income while aiming at a lower level of volatility than is typically the case when investing in a single higher-yielding asset class.
In conclusion
Income investing is not new. What is new are the challenges faced by investors in creating a portfolio with the right level both of income and risk in this low yield, low growth, more uncertain world.
And yet the demand for incomegenerating asset classes and solutions is increasing all the time.
Investors are aware that with low returns from cash in many markets the only chance to achieve their objectives is to take more risk but that this increases the probability of capital erosion. This is why managing risk and avoiding drawdowns is as important as finding income.
We believe that the best strategy to achieve a positive real return and a high income is to combine unconstrained security selection focused on sustainable yield with a strong dynamic risk management focused on diversification and capital preservation.
By Aymeric Forest
Fund Manager
Schroders Multi Asset Investments
Investors everywhere are looking for income; at the same time, traditional sources of income are drying up. It is time to widen the opportunity set.
Relying on one asset class for income reduces opportunity and carries more risk than in the past
A benchmark-unconstrained multiasset fund has the flexibility to find attractive yield wherever it arises
It is important to focus on quality and risk management to avoid capital erosion and ensure sustainable income
Traditional sources of income are drying up…
The ‘traditional’ way to earn income has been to hold government bonds (issued in your home market) or money market instruments. In this economic environment these no longer provide an answer since they do not provide a yield high enough to satisfy investors’ objectives, either in inflation-adjusted or absolute terms.
Since 2007 government bond yields have dropped to levels unseen since the Great Depression. Governments and central banks across the world are committed to providing the lowest possible cost of refinancing so that the banking system is gradually able to repay debt without causing too much damage to already low economic growth.
Very low interest rates and quantitative easing (where the government prints money to buy assets such as government bonds), combined with risk aversion and the poor outlook for growth, have contributed to the falls in government bond yields.
…in a lower growth world
The excessive borrowing accumulated since the 1990s is likely to continue having an effect on economic growth for several years ahead. Governments are being forced to tighten fiscal policy and reduce spending in order to reduce their debt, while households and banks are also over-borrowed.
Historically economic growth rates have on average been 4 percentage points lower when a country’s debt exceeds 90 per cent of its GDP.
This level of debt, already reached by some developed markets, may soon be reached by more countries.
With slowing economic growth, capital gains from investments will be harder to find – and come at a greater level of risk.
…while demand for income increases
The pressure on public finances is likely to prevent governments from meeting all of their pension promises and the responsibility for generating investment income will increasingly fall on individuals. But with traditional sources of income yielding less, investors are currently unlikely to make up this gap unless they take a new approach to income investing.
Schroders carried out a ‘European Wealth’ study to assess the attitudes and outlook of investors across Europe (taking 1,400 investors into account across nine countries). We found that there is a substantial gap between the level of income in retirement that these investors desire and their likely retirement income. Excluding the UK, the annual shortfalls ranged between €10,000 and almost €23,000 per annum.
Why investors need to consider a multi-asset approach to income
With yields from traditional sources of income falling, and with risk rising, investors need to maximise their opportunities and diversify.
Single asset class risks have increased
Previously, the level of risk was directly related to the yield provided by any particular asset class. In other words, higher-yielding assets carried more risk and lower-yield assets less. However, the current economic background is vulnerable to shocks and any single asset class is likely to suffer from a higher level of systemic risk. This makes diversification more important than ever.
Widen the opportunity set
A multi-asset approach delivers an improved risk/return trade off in comparison to holding each asset class on its own.
It can take advantage of a wider range of income-generating asset classes – not just the traditional government bonds or money market instruments. This includes higher yielding equities, infrastructure, and different types of bonds, such as investment grade and high yield debt, emerging market debt and municipal debt, from all around the world.
… with an unconstrained approach
A benchmark-unconstrained approach means taking advantage of yield opportunities in whichever region or sector they arise – without having to ‘hug’ a given multi-asset benchmark.
It is possible to construct a multi-asset portfolio yielding in excess of 5% – providing that you are unconstrained in terms of asset allocation and use a non market-cap approach to security weighting.
A global and unconstrained framework is required to open more doors to hidden opportunities. Even in low-yielding markets it is possible to find high-yielding securities. By reducing constraints investors can capture income more safely.
… focusing on quality
It is important not to chase the highest yields, but look for income that is sustainable. What matters for investors is not only the promise of a future yield but the associated probability of default on the payment of a coupon or of a dividend cut.
Through a disciplined risk management process
One way of managing risk is to ensure that the portfolio is diversified and not overly-concentrated in companies, industries, currencies, countries or asset classes.
In today’s market, high dividend companies tend to be concentrated in sectors such as telecoms or financials, or in some countries like Australia and the UK.
Sometimes diversification is not enough and you need to be able dynamically to hedge unwanted sources of risk. This can include hedging duration (the risk that interest rates go up) and equity market risk.
The evolution of downside risk management techniques and derivative instruments enables the astute investor to have access to the required income while aiming at a lower level of volatility than is typically the case when investing in a single higher-yielding asset class.
In conclusion
Income investing is not new. What is new are the challenges faced by investors in creating a portfolio with the right level both of income and risk in this low yield, low growth, more uncertain world.
And yet the demand for incomegenerating asset classes and solutions is increasing all the time.
Investors are aware that with low returns from cash in many markets the only chance to achieve their objectives is to take more risk but that this increases the probability of capital erosion. This is why managing risk and avoiding drawdowns is as important as finding income.
We believe that the best strategy to achieve a positive real return and a high income is to combine unconstrained security selection focused on sustainable yield with a strong dynamic risk management focused on diversification and capital preservation.
Time to tighten rules for business trusts?
Teh Hooi Ling
21/11/2012
ELEVEN business trusts had been launched on the Singapore Exchange since the first one - Pacific Shipping Trust - hit the market in May 2006.
That maiden business trust on SGX has since been taken private. And then there are 10.
How has this asset class done so far? Not good at all.
Not a pretty sight
Of the 11 business trusts, only two - Pacific Shipping Trust and K-Green Trust - made money for their unitholders who got in at the initial public offering stage. But even for these two trusts, unitholders would have done better just investing in the Straits Times Index. Pacific Shipping underperformed the STI by 3.8 per cent a year, and K-Green by 4.8 per cent.
The worst performer is Indiabulls Property Trust, followed by the two remaining shipping trusts - First Ship Lease and Rickmers Maritime.
Overall, on average, a unitholder who bought into these trusts at IPO price would have lost an average of 23.4 per cent. This is after taking into consideration the distributions if any. The average underperformance relative to the STI is a whopping 11.5 per cent a year.
Hence the indisputable conclusion: business trusts have not been a rewarding asset class for investors so far.
Compare them with another type of trusts - real estate investment trusts (Reits) - and the performance of the two cannot be more different than night and day. What could cause the vast difference in the performance of these two types of business structures? Is there something inherent in the rules of business trusts that favours the sponsors over investors?
Well, yes. Business trusts are managed by trustee-managers. Under the Singapore Business Trusts Act, the trustee-manager can be removed only if 75 per cent of unitholders vote in favour. At a discussion organised by CFA Institute's Standards and Financial Market Integrity committee last week, numerous participants noted that for sponsors, business trust is "a ready structure to exercise their control disproportionate to their cashflow rights".
Sponsors can sell off 74 per cent of the value of the assets, and still retain full control via the trustee-manager. In Reits, the manager can be removed by a simple majority of unitholders' vote at a general meeting.
Business trusts also have fewer restrictions which allow them to do a lot more things and hence make them riskier. They can hold various types of assets, like real estate, infrastructure assets or ships. Some, like ships, may not have any meaningful terminal value. For real estate, they can undertake development as well. On the other hand, Reits can only hold income yielding real estate.
On the borrowing front, there are no limits for business trusts. The gearing for Reits, meanwhile, is capped at 35 per cent, or up to 60 per cent if it obtains, discloses, and maintains a credit rating from rating agencies.
In terms of distribution, business trusts are not required to distribute any dividends. They may pledge to distribute a certain percentage of income as dividends, but this can change.
As for Reits, they must distribute at least 90 per cent of income to enjoy tax transparency under Income Tax Act.
The less rigorous regime of the business trusts allows sponsors to exercise their boundless creativity.
Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors. In Singapore, the average investor is far from being sophisticated.
Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts.
21/11/2012
ELEVEN business trusts had been launched on the Singapore Exchange since the first one - Pacific Shipping Trust - hit the market in May 2006.
That maiden business trust on SGX has since been taken private. And then there are 10.
How has this asset class done so far? Not good at all.
Not a pretty sight
Of the 11 business trusts, only two - Pacific Shipping Trust and K-Green Trust - made money for their unitholders who got in at the initial public offering stage. But even for these two trusts, unitholders would have done better just investing in the Straits Times Index. Pacific Shipping underperformed the STI by 3.8 per cent a year, and K-Green by 4.8 per cent.
The worst performer is Indiabulls Property Trust, followed by the two remaining shipping trusts - First Ship Lease and Rickmers Maritime.
Overall, on average, a unitholder who bought into these trusts at IPO price would have lost an average of 23.4 per cent. This is after taking into consideration the distributions if any. The average underperformance relative to the STI is a whopping 11.5 per cent a year.
Hence the indisputable conclusion: business trusts have not been a rewarding asset class for investors so far.
Compare them with another type of trusts - real estate investment trusts (Reits) - and the performance of the two cannot be more different than night and day. What could cause the vast difference in the performance of these two types of business structures? Is there something inherent in the rules of business trusts that favours the sponsors over investors?
Well, yes. Business trusts are managed by trustee-managers. Under the Singapore Business Trusts Act, the trustee-manager can be removed only if 75 per cent of unitholders vote in favour. At a discussion organised by CFA Institute's Standards and Financial Market Integrity committee last week, numerous participants noted that for sponsors, business trust is "a ready structure to exercise their control disproportionate to their cashflow rights".
Sponsors can sell off 74 per cent of the value of the assets, and still retain full control via the trustee-manager. In Reits, the manager can be removed by a simple majority of unitholders' vote at a general meeting.
Business trusts also have fewer restrictions which allow them to do a lot more things and hence make them riskier. They can hold various types of assets, like real estate, infrastructure assets or ships. Some, like ships, may not have any meaningful terminal value. For real estate, they can undertake development as well. On the other hand, Reits can only hold income yielding real estate.
On the borrowing front, there are no limits for business trusts. The gearing for Reits, meanwhile, is capped at 35 per cent, or up to 60 per cent if it obtains, discloses, and maintains a credit rating from rating agencies.
In terms of distribution, business trusts are not required to distribute any dividends. They may pledge to distribute a certain percentage of income as dividends, but this can change.
As for Reits, they must distribute at least 90 per cent of income to enjoy tax transparency under Income Tax Act.
The less rigorous regime of the business trusts allows sponsors to exercise their boundless creativity.
Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors. In Singapore, the average investor is far from being sophisticated.
Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts.
Tuesday, November 20, 2012
Is happiness more important than money?
20 November 2012
KHOO BEE KHIM khoobeekhim@mediacorp.com.sg
SINGAPORE - Today's 18- to 35-year-olds choose happiness over wealth, according to Singapore's Generation Asia findings.
The online survey of 1,500 people is Asia's most comprehensive psychographic study in terms of the number of respondents, geographical coverage and insights into 16 key topics: Beauty, communication, education, entertainment, fashion, food, health, kids, love, luxury, media, money, sports, technology, travel and vehicles.
One of the key findings was that 75.4 per cent feel that happiness is more important than making money.
Mr Hari Ramanathan, Regional Strategy Director of marketing communications company Y&R, said: "Having grown up in a prosperous and rapidly progressing Singapore, this is a generation that's often accused of being soft and spoilt. Are we surprised at this finding because we've always been led to believe that this is a very materialistic generation?"
He had posed the question to a panel of opinion leaders at the unveiling of the findings.
One of the panel members, Executive Editor of TODAY Phin Wong, 34, said: "The bigger question is, do they know what makes them happy? Do they know what direction happiness lies? Do they know what it takes to be happy versus a list of things they don't like?"
Ms Eugenie Yeo, 33, Regional Brand Marketing Manager of Discovery Networks Asia Pacific and one half of Riot! Records, believed that making money is not their priority as they have an easy life. "At 30, they might still be living with their parents. Financial gain isn't their priority," she said.
"It is about balance. In today's society, without money, you'd be a very unhappy person," said Ms Pearlyn Koh aka DJ Foxxxy, 24. "It is about earning enough and spending within your means."
Mr Melvin Yuan, 35, founder of social business consultancy Omnifluence, who felt that society has a part to play in inculcating this value in today's youth, said: "Just this morning, someone made a comment that he doesn't see the spark in the eyes of his kids after they started school."
"To come back to Phin's point, do these youths know what happiness is? Or is it something that society is teaching them?" he added.
Mr Nicholas Seguy, 32, co-founder of French sneaker brand Feiyue, did not agree with the findings. "I don't see that as the real behaviour of 18- to 35-year-olds in Singapore. I think they are still very driven by materialism, if not more than the generation before them."
Conducted for Y&R by partner agency VML Qais, Singapore is the fourth market to unveil its findings, following Vietnam, Thailand and the Philippines.
Monday, November 19, 2012
Why we ignore, overlook or underestimate risks
19 Nov 2012 07:08
TEH HOOI LING
Unwise decisions could be due to greed; other factors are naivete, complacency and overconfidence
A retired businessman who successfully built up his businesses, from timber trading to real estate, recounted to me how he was “conned” of millions of dollars by a fund manager. Over dinner last week, a colleague told the story of another colleague who parted with more than $100,000 of his hard-earned money to invest in an antique trading venture with yet another colleague. He lost the entire sum.
When we hear of such tales, we usually place the blame squarely on greed. Yes, in certain cases, greed is the culprit. But there are a lot more factors at play which may cause us to make less-than-wise decisions.
Naivete is one. Naivete is defined by The Free Dictionary as the state or quality of being inexperienced or unsophisticated, especially in being artless, credulous or uncritical.
There is no lack of get-rich-quick schemes out there: those advertised in the papers; those brought to us by friends and relatives, or even strangers we met on the street or online; those recommended by private bankers who put their commissions above their clients’ interests.
If one is credulous and not critical, and perhaps a little greedy, then one could very easily fall prey to bad investments.
How to counter naivete? One good way is to talk to friends who are investment savvy on the soundness of what one is about to do. One should also carry out one’s own due diligence. Do your research on the Web to find out the experiences of others who have participated in the schemes. Be sure to get your information from independent websites and not “testimonials” provided on the scheme providers’ websites. Read up on how the scheme makes its money. Make sure that it is legitimate and it makes good business sense. Always understand what you are putting your money into, and know what could cause you to lose your capital.
It is useful to keep a few common sayings in mind: “If it’s too good to be true, it probably is” and “There is no such thing as a free lunch”.
But naivete cannot explain why the retired businessman handed over millions of dollars to the so-called fund manager without proper due diligence on the fund management company, or how Mr Oei Hong Leong purportedly lost some $1 billion from foreign exchange and United States Treasury bond transactions.
I put that down to complacency and overconfidence. We get complacent and overconfident when we have had a few positive experiences. In the retired businessman’s case, his initial few investments with the fund manager yielded lucrative returns. He got back his capital plus a fat return in a short space of time. That increased his trust in the fund manager and caused him to let down his guard in his subsequent dealings.
As for traders, a string of successful trades tend to boost their confidence.
A couple of things happen when we become complacent and overconfident. One, we put the amount we raise at risk. Worse still, if we borrow to bet or invest. Two, we may begin to skip some of the steps in the process which made our first few investments successful in the first place.
When we bet big, or when we skip some parts of our due diligence process or analysis, or when we relax some of the criteria for our investments, we are taking on more risks.
Hence, for every investment that you make, always ask: What is the risk to my capital? What could go wrong? What is the damage to my overall financial health if this deal goes awry?
Mr Warren Buffett, one of the most successful investors of all time, has two golden rules in investing. Rule No. 1: Do not lose your capital. Rule No. 2: Do not forget Rule No. 1.
Next week, we will talk about what makes some risks toxic and how to manage them.
And to clarify a point made in last week’s article, the deferred annuity will pay out $41,000 annually on the initial sum of $300,000 paid 10 years ago, or the guaranteed surrender value of $475,000 now. The payment will be for a minimum period of 10 years, or for as long as the life insured is still alive.
In other words, the annuitant will get back the full $475,000 in under 12 years. Unfortunately, annuities in the market today do not provide as generous a payout as before.
hooiling@sph.com.sg
TEH HOOI LING
Unwise decisions could be due to greed; other factors are naivete, complacency and overconfidence
A retired businessman who successfully built up his businesses, from timber trading to real estate, recounted to me how he was “conned” of millions of dollars by a fund manager. Over dinner last week, a colleague told the story of another colleague who parted with more than $100,000 of his hard-earned money to invest in an antique trading venture with yet another colleague. He lost the entire sum.
When we hear of such tales, we usually place the blame squarely on greed. Yes, in certain cases, greed is the culprit. But there are a lot more factors at play which may cause us to make less-than-wise decisions.
Naivete is one. Naivete is defined by The Free Dictionary as the state or quality of being inexperienced or unsophisticated, especially in being artless, credulous or uncritical.
There is no lack of get-rich-quick schemes out there: those advertised in the papers; those brought to us by friends and relatives, or even strangers we met on the street or online; those recommended by private bankers who put their commissions above their clients’ interests.
If one is credulous and not critical, and perhaps a little greedy, then one could very easily fall prey to bad investments.
How to counter naivete? One good way is to talk to friends who are investment savvy on the soundness of what one is about to do. One should also carry out one’s own due diligence. Do your research on the Web to find out the experiences of others who have participated in the schemes. Be sure to get your information from independent websites and not “testimonials” provided on the scheme providers’ websites. Read up on how the scheme makes its money. Make sure that it is legitimate and it makes good business sense. Always understand what you are putting your money into, and know what could cause you to lose your capital.
It is useful to keep a few common sayings in mind: “If it’s too good to be true, it probably is” and “There is no such thing as a free lunch”.
But naivete cannot explain why the retired businessman handed over millions of dollars to the so-called fund manager without proper due diligence on the fund management company, or how Mr Oei Hong Leong purportedly lost some $1 billion from foreign exchange and United States Treasury bond transactions.
I put that down to complacency and overconfidence. We get complacent and overconfident when we have had a few positive experiences. In the retired businessman’s case, his initial few investments with the fund manager yielded lucrative returns. He got back his capital plus a fat return in a short space of time. That increased his trust in the fund manager and caused him to let down his guard in his subsequent dealings.
As for traders, a string of successful trades tend to boost their confidence.
A couple of things happen when we become complacent and overconfident. One, we put the amount we raise at risk. Worse still, if we borrow to bet or invest. Two, we may begin to skip some of the steps in the process which made our first few investments successful in the first place.
When we bet big, or when we skip some parts of our due diligence process or analysis, or when we relax some of the criteria for our investments, we are taking on more risks.
Hence, for every investment that you make, always ask: What is the risk to my capital? What could go wrong? What is the damage to my overall financial health if this deal goes awry?
Mr Warren Buffett, one of the most successful investors of all time, has two golden rules in investing. Rule No. 1: Do not lose your capital. Rule No. 2: Do not forget Rule No. 1.
Next week, we will talk about what makes some risks toxic and how to manage them.
And to clarify a point made in last week’s article, the deferred annuity will pay out $41,000 annually on the initial sum of $300,000 paid 10 years ago, or the guaranteed surrender value of $475,000 now. The payment will be for a minimum period of 10 years, or for as long as the life insured is still alive.
In other words, the annuitant will get back the full $475,000 in under 12 years. Unfortunately, annuities in the market today do not provide as generous a payout as before.
hooiling@sph.com.sg
Wednesday, November 14, 2012
No-fee fund aims for 12% return
Teh Hooi Ling
14/11/2012
A FUND that aims to deliver 12 per cent a year and does not charge any management fees - that's what a new fund management firm is bringing to the market. It is an offering to the increasing number of accredited investors in Singapore who have yet to qualify as private banking customers, said founders of Aggregate Asset Management.
Many of these investors have holdings in unit trusts that have not been doing well, says Kevin Tok, one of the three founders.
Mr Tok, who has 20 years of experience in financial planning, says most of these clients are directed to unit trusts by their financial advisers after having gone through the six-step financial planning process.
"There aren't a lot of options out there for them. The boutique fund managers in Singapore don't actively market their service to this group of people," he says.
There's no way a typical client can retire well with a portfolio of unit trusts that charge very high fees, he says.
Unit-trust investors have to incur 3 to 5 per cent of sales charge and one to 2 per cent in annual management fees regardless of whether the funds make money or not. "If you leave your money there for five years, 10 per cent of the money disappears. And the value doesn't add up," points out Mr Tok, 43.
"The trick of (growing your savings for) retirement is to find something that's proven, that gives you an average of 8 to 10 per cent return a year instead of going round in circles looking for all sorts of strange products, like gold products, or trying to find something unproven to hit your 10 per cent," he says.
Value investing - buying of stocks with low multiples of earnings and cash flows, low price-to-net tangible assets, high dividend yields - is a proven process that generates good long-term returns, says Aggregate co-founder and its fund manager, Eric Kong, 44.
"We have no doubts that the value investing process can put our clients in good shape in the long term for retirement needs," he says. "We are putting our money where our mouths are."
Aggregate Value Fund, a small-cap Asia long only fund, will not have any sales charge and there will be no management fees. Mr Kong, and another founder and fund manager Wong Seak Eng, 33, say they will not be collecting any salaries. The firm will only charge the fund 20 per cent should it manage to increase its value above the initial $1 per unit subscription price. Performance review will be done every six months, and subsequent fees will only be charged if the fund exceeds its previous high, that is it has a high water mark in industry parlance.
The three founders and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. "We are not worried. We are not desperate because we know that this process is a good and sustainable process. Even if we have to (have) packet lunch everyday for the first two years, we will do it," says Mr Kong.
Office now is a $1,000 a month shared space in Bishan.
Says Mr Wong: "We are already mentally prepared that we are subsidising our investors in the sense that we will pay for the rental, air fares for company visits etc out of our own pockets. And under the new MAS (Monetary Authority of Singapore) regime for fund management firms, we have to maintain a capital of $250,000 at all time. We are mentally and financially prepared for that.
"We may have to wait two, three, or five years. It depends on the market cycle. But we will definitely work hard to deliver for the investors so that we will also be rewarded."
As noted by Mr Kong, the value investing process as adopted by various value funds has shown impressive records. Yeoman Capital, where Mr Kong and Mr Wong were from before striking out on their own, has returned a 12.7 per cent compounded annually net of all fees in Singapore dollar terms over about 15 years to September 2012.
Target Asset Management returned 17.6 per cent a year between 1996 and November 2010. Its fund manager liquidated the fund as it had gotten too big. A new value fund was started in June 2011, and it has returned 3.99 per cent since inception to end-October in difficult market conditions. It outperformed the MSCI Asia ex-Japan Index by more than 10 percentage points.
Aggregate, says Mr Kong, will generate stock ideas in a quantitative way. Then it will add a layer of analysis before selecting the stocks for its portfolio. An independent search process is very important in generating stock ideas. "You have to be very impartial in the search."
He developed his search process, scoring companies on the strength of their balance sheets, earnings record, and dividends record. "There are more than 10,000 stocks out there. (This quantitative screening) gives you a very fast way of getting to the undervaluation when the news are not out yet," he says.
Mr Kong's background is in computer programming, having worked in the Ministry of Defence in operations research "where we used algorithms and computer models to solve real-life problems".
But investment is his passion. And so he took the Chartered Financial Analysis exams some 10 years ago. He paved his entry to the fund management industry by first joining the banks, Citi and UOB. He then offered to work for free in a local fund management firm in order to gain fund management experience. But he was rejected because the firm wanted a CFA charterholder. Mr Kong wasn't one yet because he didn't have the necessary work experience.
He eventually joined Yeoman in 2002 and was made a partner a few years later. He left the firm in end-2009 to spend time with his home-schooled elder daughter.
According to Mr Kong, since he started tracking his personal portfolio, the return was 17.8 per cent a year between May 2005 and June 2012. Currently, 30 per cent of his portfolio is in Hong Kong, 20 per cent each in Singapore and Malaysia, and the rest in Thailand and Japan.
Aggregate will take a very diversified approach, with each stock making up not more than 2 per cent of its portfolio in a steady state.
"Warren Buffett advocates the focus approach," says Mr Kong. "But we find that when you bring your holding up to 5, 10, 20 per cent of your portfolio, you'll make more behavioural mistakes. You start to get emotionally attached to the stock, you fall in love with the stock. That is dangerous because it can really affect your judgment."
Also, Mr Buffett has a gift. He is able to read business very accurately. Not everyone has that kind of gift, notes Mr Kong. Aggregate prefers a more conservative and boring approach. "We concentrate on what's currently on hand."
Mr Wong chips in: "We don't make any unnecessary projections into the future."
Aggregate would rather look at the track record of companies, going as far back as 10, 20 years. Typically, Mr Kong says, the fund will hold its stocks for about five years.
Mr Kong reckons now is a good time to start a fund because valuations for equities are not high. He sees great value in Hong Kong. Some stocks there are yielding up to 10 per cent. He names Oriental Watch, Lai Fung and Herald as examples of undervalued stocks in Hong Kong; New Hoong Fatt in Malaysia and MK Real Estate in Thailand.
On the marketing of the fund, Mr Tok says the plan is to put Aggregate Value Fund on the iFast platform for products that cater to high net worth individuals.
The minimum subscription of the fund is $150,000. There is a one-off $2,000 subscription fee to cover the administrative, legal and compliance costs. There is a 5 per cent early-exit charge within the first three years. This however will be waived for investors who may want to withdraw less than 5 per cent from the fund every year as income.
DBS Bank is the fund's custodian, Ernst & Young its auditor, and Rajah & Tann its legal advisers. Crowe Horwath First Trust Fund Services is the fund administrator.
Besides Aggregate, APS Alpha fund also does not charge management fees. Another boutique fund manager, Lumiere Capital, also launched its Lumiere Value Fund in 2007 without management fees. But it started charging one per cent management fees at end-2010.
Monday, November 5, 2012
Predicting the next shock
5 November 2012
Gary Shilling
The growing gulf between the behaviour of investors enamoured with monetary and fiscal largess and the reality of globally weakening economies - a phenomenon I call the Grand Disconnect - is profoundly unhealthy.
It will end, sooner or later, in any case. One way it could be eliminated is through the rapid expansion of economies globally.
The past and current massive monetary and fiscal stimulus or other forces might rekindle growth. Some investors point to the recent stabilisation of United States house prices as the beginning of a revival.
I have my doubts. The huge deleveraging in the private sector in the US and abroad; the unresolved odd-couple tensions between the Teutonic North and the Club Med South in the euro zone; and the needed shift in China from an export-led economy to one powered by domestic consumption suggest that "risk on" investments will collapse to meet recessionary and chronically slow-growing economies.
What will cause the agonising reappraisal by bullish investors? Probably a shock, as was the case in limited ways with the euphoria over the first two rounds of quantitative easing by the Federal Reserve and Operation Twist.
The Greek debt crisis in early 2010 ended the QE1 stock rally. The QE2-spawned bull market ended early last year with the second flare-up of Greek worries and the widening European financial and economic woes. The optimism generated by Operation Twist concluded with the realisation that Europe's travails may be unsolvable, and with worries about the "fiscal cliff" in the US.
Forecasting specific jolts is hazardous, though I can list several possibilities.
OFF A FISCAL CLIFF?
A hard landing in China might do the job, with growth slowing to 5 to 6 per cent, especially after the effect is felt in world trade, commodities demand and prices and commodity producers' currencies. There is a growing consensus that this is in the cards.
A fall off the fiscal cliff is another possibility. If Congress and the administration do not act by the end of this year, the Bush-era tax cuts will expire, the payroll tax on employees reverts to 6.2 per cent from 4.2 per cent, unemployment benefits drop from a 99-week maximum to 26 weeks, and US$1.2 trillion (S$1.47 trillion) in mandatory federal-spending cuts and tax increases over 10 years begin to kick in.
The nonpartisan Congressional Budget Office estimates that the fiscal cliff will cut 2013 gross domestic product by 4 per cent. In itself, that has the makings of a major recession, and its effects would be compounded in an already recessionary economy.
I believe that the US government will avoid the fiscal cliff - at least temporarily. Even the representatives and senators affiliated with the Tea Party want to be re-elected, and telling their constituents that austerity is good for their souls would not garner them many votes.
With the current Congress and administration gridlocked, they could use a so-called lame-duck session after the election to postpone the tax increases and spending cuts, leaving the next Congress and administration to deal with the mess. That is what happened last December - when they negotiated a three-month respite - and again in February, when they delayed action for the rest of this year.
Or they could wait for a new administration to be sworn in and tackle the fiscal cliff retroactively.
One way or the other, I doubt the economy will go off the fiscal cliff. An old friend, former Representative Barber Conable of New York, who later served as President of the World Bank, often told me that "Congress ultimately does the necessary thing, but only when forced to and as late as possible".
Few in Washington are likely to stand on principle and let the economy fall into an abyss. Note, however, that defusing the fiscal-cliff menace would not add stimulus to the economy - it will simply keep existing government spending and tax rates intact.
OIL PRICES AND BANK FAILURES
Another possibility is that a surge in the price of oil, possibly triggered by an Iran-related crisis in the Middle East, shatters investor euphoria. That is what happened with the oil embargo in 1973 and Iran's Islamic Revolution in 1979.
To be sure, the US is becoming less dependent on imported energy. But petroleum is fungible and price increases elsewhere will affect the US, along with Europe and China. A huge energy-cost increase would be a debilitating tax on already-stressed consumers.
There also is the danger that a major European bank will fail, generating a global financial crisis. Banks are so intertwined through loans, leases, derivatives and other instruments that a blow in Europe would be felt around the world.
Banks normally look at their derivatives exposure on a net basis after hedges and other offsets are accounted for. But the gross or notional value of derivatives is 26 times the net, according to the Bank for International Settlements, and if a bank goes belly up, the counterparties are stuck with the notional amount.
CORPORATE EARNINGS
Add major corporate-earnings disappointments to the list of possible shocks. Ever-optimistic Wall Street analysts believe Standard & Poor's 500 operating earnings fell slightly in the third quarter compared with the year-earlier period, but a 14 per cent revival is expected in the fourth quarter.
Yet suppose my forecast is correct and operating earnings drop to US$80 per share over four consecutive quarters, due to recession-induced declines in corporate revenues, a narrowing of profit margins from record levels and currency-translation losses as the dollar strengthens. That US$80 is more than 20 per cent lower than analysts' estimates, and would be a big disappointment to many bullish investors.
QE1, QE2 and Operation Twist got increasingly larger bangs for the buck. But that is not the case with QE3 and recent actions by the European Central Bank (ECB), at least so far; each successive announcement by the Fed and ECB got less pop in the S&P 500. Since peaking on Sept 14, the day after QE3 was announced, that index has been relatively flat, in contrast to gains in comparable days of trading after the three earlier quantitative easings.
It is early into QE3, but does this suggest that investors are getting cautious and wary, and believe the Fed has gone back to the well one time too often? Are investors anticipating a hard landing in China or one of the other shocks I outlined?
Overall, I disagree with the "It's so bad, it's good" crowd. Conditions are so bad, they are just plain bad. The huge monetary and fiscal stimulus in the US and elsewhere in the past five years has failed to offset the gigantic deleveraging in global private sectors. And such measures are unlikely to do so until that process is completed in another five to seven years. BLOOMBERG
Gary Shilling is President of consultancy A Gary Shilling & Co, and the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.
Why Are Investors Fleeing Equities?
Monday, 5 November 2012
Hint: It's Not the Computers
By ANDREW ROSS SORKIN | New York Times
Let's stop with the excuses.
You've no doubt been reading a lot about a "crisis of confidence" on Wall Street in recent days after software problems at a big trading firm sent the stock market, briefly, into a tizzy.
Everyone is hyperventilating at the errant trades at the Knight Capital Group - suggesting, in the words of Arthur Levitt, that these malfunctions "have scared the hell out of investors." The problems at the firm were immediately lumped together with Facebook's glitch-filled initial public offering, the flash crash of 2010 and the rescinded public offering of BATS Global Markets, among others.
Apparently - if the experts are to be believed - these computer errors are the reason "investors are fleeing the markets like never before," Dennis Kelleher, president of Better Markets, told The Los Angeles Times. Dozens of articles about the trading blunder included some form of that contention, using statistics showing that $130 billion or more had been withdrawn from mutual funds over the last year or so.
Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn't made a buck.
"The cult of equity is dying," Bill Gross, the founder of Pimco, wrote in his monthly letter last week.
"Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well," Mr. Gross wrote. His letter came after he had sent a Twitter post that read: "Boomers can't take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money."
(Mr. Gross, who manages the largest bond fund in the world, started a stock fund several years ago, too, so he has a vested interest in seeing stocks succeed for his clients.)
This is not to say that Knight Capital's software debacle is helping instill confidence in investors. But it's doubtful it would make a Top 10 list of reasons for investors to flee.
So why are so many investors sitting on their hands? The unemployment crisis, the European debt crisis and the looming fiscal-cliff crisis, to name just a few reasons. Economic growth is slowing, not just in the United States but in China, too.
Those are the same reasons that chief executives and boards of American companies are sitting on $2 trillion in cash and not investing in their own businesses. They are scared, rightly or wrongly, about the future. (It should be noted that some of the most skilled investors, including Warren Buffett, contend that when everyone's scared, that's usually a good time to invest. Mr. Buffett famously advised that investors "should try to be fearful when others are greedy and greedy only when others are fearful." But it doesn't seem like that advice is being followed.)
Even the hedge fund titan Louis M. Bacon has been so humbled by the stock market that he returned $2 billion to his investors last week rather than risk losing it.
None of these fundamental issues have anything to do with a computer that ran amok or a trade order mistakenly entered by a fat finger.
Blaming computers is not a new phenomenon. In 1988, months after the 1987 crash, The New York Times explained that small investors shared a "fear of being whip-sawed by program trading."
"I think everybody is concerned about the flight of the small investor - the S.E.C., the exchanges, everyone," Howard L. Kramer, assistant director of the Securities and Exchange Commission's division of market regulation, said in another article, also in 1988.
Here are the numbers today: About $171 billion has flowed out of mutual funds over the last year, according to the Investment Company Institute, which tracks mutual fund data. Where has all that money gone?
Bonds. About $208 billion has flowed into the bond market over the same period, according to numbers from the I.C.I.
The fact that so few long-term investors are in the stock market has only worsened the volatility, since it often seems as if the only people who are trading stocks are the professionals.
Which brings us back to the "crisis of confidence." This does exist among investors, but they are not focused on how computers are making the markets go haywire. Rather, they are concerned about the future of the economy and, yes, trust.
Individuals are worried that it's hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street's own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don't believe they stand a chance against the professionals.
Consider this: Of 878 students at 18 high schools across 11 different states surveyed by the Financial Literacy Group, three-quarters of them said they agreed with this statement: "The stock market is rigged mostly to benefit greedy Wall Street bankers."
So for now, it seems, trading firms don't just need to throw out their electronic trading systems or bring in more regulators to oversee their stock executions. They need the country to get a shot in the arm to address its economic problems, and they need the public to have faith in the long term.
Instead of pointing the blame at one incident or another, look at the fundamentals.
Hint: It's Not the Computers
By ANDREW ROSS SORKIN | New York Times
Let's stop with the excuses.
You've no doubt been reading a lot about a "crisis of confidence" on Wall Street in recent days after software problems at a big trading firm sent the stock market, briefly, into a tizzy.
Everyone is hyperventilating at the errant trades at the Knight Capital Group - suggesting, in the words of Arthur Levitt, that these malfunctions "have scared the hell out of investors." The problems at the firm were immediately lumped together with Facebook's glitch-filled initial public offering, the flash crash of 2010 and the rescinded public offering of BATS Global Markets, among others.
Apparently - if the experts are to be believed - these computer errors are the reason "investors are fleeing the markets like never before," Dennis Kelleher, president of Better Markets, told The Los Angeles Times. Dozens of articles about the trading blunder included some form of that contention, using statistics showing that $130 billion or more had been withdrawn from mutual funds over the last year or so.
Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn't made a buck.
"The cult of equity is dying," Bill Gross, the founder of Pimco, wrote in his monthly letter last week.
"Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well," Mr. Gross wrote. His letter came after he had sent a Twitter post that read: "Boomers can't take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money."
(Mr. Gross, who manages the largest bond fund in the world, started a stock fund several years ago, too, so he has a vested interest in seeing stocks succeed for his clients.)
This is not to say that Knight Capital's software debacle is helping instill confidence in investors. But it's doubtful it would make a Top 10 list of reasons for investors to flee.
So why are so many investors sitting on their hands? The unemployment crisis, the European debt crisis and the looming fiscal-cliff crisis, to name just a few reasons. Economic growth is slowing, not just in the United States but in China, too.
Those are the same reasons that chief executives and boards of American companies are sitting on $2 trillion in cash and not investing in their own businesses. They are scared, rightly or wrongly, about the future. (It should be noted that some of the most skilled investors, including Warren Buffett, contend that when everyone's scared, that's usually a good time to invest. Mr. Buffett famously advised that investors "should try to be fearful when others are greedy and greedy only when others are fearful." But it doesn't seem like that advice is being followed.)
Even the hedge fund titan Louis M. Bacon has been so humbled by the stock market that he returned $2 billion to his investors last week rather than risk losing it.
None of these fundamental issues have anything to do with a computer that ran amok or a trade order mistakenly entered by a fat finger.
Blaming computers is not a new phenomenon. In 1988, months after the 1987 crash, The New York Times explained that small investors shared a "fear of being whip-sawed by program trading."
"I think everybody is concerned about the flight of the small investor - the S.E.C., the exchanges, everyone," Howard L. Kramer, assistant director of the Securities and Exchange Commission's division of market regulation, said in another article, also in 1988.
Here are the numbers today: About $171 billion has flowed out of mutual funds over the last year, according to the Investment Company Institute, which tracks mutual fund data. Where has all that money gone?
Bonds. About $208 billion has flowed into the bond market over the same period, according to numbers from the I.C.I.
The fact that so few long-term investors are in the stock market has only worsened the volatility, since it often seems as if the only people who are trading stocks are the professionals.
Which brings us back to the "crisis of confidence." This does exist among investors, but they are not focused on how computers are making the markets go haywire. Rather, they are concerned about the future of the economy and, yes, trust.
Individuals are worried that it's hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street's own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don't believe they stand a chance against the professionals.
Consider this: Of 878 students at 18 high schools across 11 different states surveyed by the Financial Literacy Group, three-quarters of them said they agreed with this statement: "The stock market is rigged mostly to benefit greedy Wall Street bankers."
So for now, it seems, trading firms don't just need to throw out their electronic trading systems or bring in more regulators to oversee their stock executions. They need the country to get a shot in the arm to address its economic problems, and they need the public to have faith in the long term.
Instead of pointing the blame at one incident or another, look at the fundamentals.
Subscribe to:
Posts (Atom)