Saturday, February 24, 2007

Buying a Car?

COE has plunged to new lows. A few of my friends are buying their first car. As cars are considered liabilities, I share some money saving tips when buying a car.

First, don't limit your choice, try to have a few options. Even though you may like a particular model only, try to have a few models where you can test drive and negotiate the best deals.

Once you have tried a few models (some you know you won't be buying), ask for the best deals (some will give leather seats, window film, discount, stereo upgrade, etc) Use whatever is negotiated to negotiate with the dealer of the car of your choice, but without giving the impression that you only want to purchase that particular model.

I recently helped a friend to negotiate a better deal for a Nissan, which the dealer was initially reluctant to give freebies. However, while my friend only wants the nissan model, we also looked at Mazda and Mitsubishi, and we managed to negotiate very good deals from the dealer, with one of them giving free solar film, cash discount and some other freebies. Using this, we negotiate with the Nissan dealer and managed to squeeze out a free solar film and cash discount.

Another trick is to avoid test drive (yes, avoid test drive, I am not kidding) Its a practice by many car dealers where sales rep locked in the potential client whom he served and then this client will not be allowed to purchase the car of the same marque from another sales rep. The lock in period is typically 2 weeks to 1 month. Once you test drive, you lost the upper hand in negotiating for a better deal. Only test drive once the deal is negotiated. If possible, test drive your friend's car for a better feel.

For continental marque, these cars are usually highly spec and therefore the straightforward thing is to negotiate for cash discount. I once managed to help a friend negotiate a 5 figure cash discount for a luxury car.

Tuesday, October 31, 2006

Is your client Risk Adverse?

A lot has been said and heard on the word "risk adversion"

But in my years of dealing with end investors, I realised that most of them are not risk adverse, rather I consider them "loss adverse".

Risk adverse refers to inability to tolerate even the slightest swing in the market. Loss adverse is another thing altogether.

Let's put this in mathematical terms:

Risk Adverse investor:

10% loss and 10% gain. A risk adverse investor will not tolerate his investment that swings between 10% loss and 10% gain although he know over time he'll be up 10% based on historical observations/experience. He magnitude of distress on 10% loss is the same has his magnitude of happiness over 10% gain.

Loss Adverse Investor:

same scenario: 10% gain and 10% loss. This investor is more distressed by the 10% loss than they are happy with an equivalent 10% gain. So he will lose sleep over 10% loss and yet when he has 10% gain, he is only marginally happy. And the fear of loss will make this investor having the tendancy to sell winning stocks while holding on to losing positions.

So, many a times, potential investors are not risk adverse, but they are loss adverse. Many advisers think their clients are risk adverse, but is most of the time not true, so understanding this physcology of investing will help to educate your clients and make them sleep well over their investments

Sunday, October 22, 2006

Dealing with Objections: Currency risk in Unit Trust

One common objection I have encountered is that potential investors will be wary of the potential currency risk in unit trusts and any adverse movements in currencies will have adverse impact on returns. Very often, I even heard of investors or even financial advisers having the common misconception that currency exposures are hedged to the base currency, in the case of Singapore Unit Trusts, SGD.

The reality is that more often than not, currency exposure is not hedged and most unit trust are exposed to currency risks as a result of the underlying assets that the fund invests in.

So then, how to handle this objection???

Well, it is actually quite simple. Yes, there is underlying currency exposure, but just how much can currency affect a portfolio?

Say look at Boeing, the world leading commercial aircraft manufacturer. In 22nd Oct 2001, Boeing Stock Price closes at USD$33.80, fast forward to today, 5 years later, it closed USD$81.74 on 21st Oct 2006, whopping return of 142%!!! For financial advisers who encountered this problem, ask your potential client to find a major currency that depreciates to the extend that the 142% gain is completely wiped out.

Not convinced? Football Club Newcastle United Share Price has move almost 250% in 5 years, Apple Computer price in 22 Oct 2002 was USD$14.70, it is USD$79.95 as of 21 Oct 2006, a rise of 443%! There are many examples of 4-5 baggers stocks that move more than 100%, some even more. In contrast, it'll be extremely rare if any to find any currencies that depreciates to that magnitude. So if your potential clients are worried about currency exposure, ask them to look at the potential opportunity costs by quoting the example mentioned.

Furthermore, in a global portfolio, chances that losses in a currency will be offset by gains in others.

This story can also be used to convince clients that there are more opportunities in overseas market as compared to just investing in Singapore.

Thursday, October 19, 2006

Investment Basics: Don't ask me how much!

One article contributed by my friend, Tony Low, who is currently a fund analyst with a major financial institution. Happy Reading

Investment Basics: Don’t ask me how much

It has always been perplexing when investors ask, "How much is the fund price? Is it too expensive to buy now?" Is a fund priced at $1 cheaper and henceforth a better value than a $3 fund? This article aims to debunk the myth that price matters when you invest in a unit trust.

First off, investors need to understand how the fund price is derived. We must also check whether the price is affected by any corporate actions. After that, we look at how the timing of the launch also affects the fund prices.

How is the Net Asset Value (NAV) calculated?
In the morning of each business day, the valuation team of the Fund would be busily
compiling the closing values of the assets of the fund from the previous day. The assets of the fund would be made up of the various equities and/or bonds that the fund manager had purchased on behalf of the fund. The total market values are all summed up to give a Fund Total NAV for the day. The Fund’s daily NAV is thus simply taking the Fund Total NAV divided by the total number of units outstanding.

Let us use the UOB Global Emerging Market Portfolio SGD (UOB GEMs) as an
example. According to the last annual report, the fund had a Total NAV value of
S$90,547,777 as of 30 June 2005. At that point in time, the fund had also issued
75,035,757 units. Thus the NAV on the 30 June 2005 was calculated as S$90,547,777 /
75,035,757 = S$1.2067, rounded off to S$1.21.

As you can see, the fund price calculation is dependent on two factors, the Total NAV
and number of units in issue. The value of the fund is thus related to the investment
performance of the fund manager. For obvious reasons, a better performing fund would
tend have a higher Total NAV than a not-so-good fund, therefore, it is also likely to have a higher price. Let’s take a look at some real life examples. Both the Henderson Global Property Fund and the DBS Global Property Securities Fund were launched at around the same period in March 2005. As at 21 February 2006, the Henderson fund is priced at S$1.21 while the DBS fund is priced at S$1.146. Since inception, the Henderson fund had a bid-bid return of 26.01% while the DBS fund reported a 15.12% return. In this example, the Henderson Property fund demonstrated superior returns over the same period, hence resulting in a higher fund price.

However, a higher fund price does not necessarily translate to a better performing fund. Confused yet? Let’s use another real life example, the DBS Shenton Income Fund (SIF) and the Franklin Templeton Global Bond Fund. The DBS SIF is now priced at S$1.534 as at 21 February 2006 while the FT Global Bond is priced at a whopping S$10.59. Does this mean that the FT fund is 7 times better than the SIF? The answer is No! The reason the FT has such a high price is because when Templeton launched the fund in December 2003, it was already priced at $10 per unit. An investor with S$10,000 would receive only 1,000 units (assume no sales charge) if they had bought the fund then. It is purely.the Fund Manager’s decision to determine the launch price and are even funds that are trading as high as US$100 per unit.

Dividends and stock splits
In the last couple of years, Fund Managers have recognized the yearning of local
investors for dividend payouts and have structured their funds to make annual, semi-annual, quarterly and even monthly payouts. All these payouts are made using the income derived from the fund (and sometimes from the NAV) and is usually expressed as an X amount of cents per unit held. The fund would have a dividend ex-date (xd) whereby the price of the fund would fall by the amount of dividend declared, assuming the underlying market remains unchanged. Therefore, the fund price of a dividend-paying fund would tend to be lower than a fund that doesn’t do any payouts.

I will use the Prudential MIP fund to demonstrate this point. The Pru MIP is divided into two classes, the ‘M’ class, whereby the dividends are paid out on a monthly basis, and the ‘A’ class whereby the dividend is paid on an annual basis (although iFast automatically reinvests it for their clients). Regardless of whether the client purchases the ‘M’ or ‘A’ class, the underlying assets are the same, and thus clients should be indifferent to either. However, a quick look at the prices will see that the ‘M’ class is priced at 0.996 on 29 December 05 while the ‘A’ class was priced higher at 1.037. One should not think that the MIP ‘A’ is a better fund than the ‘M’ fund, as the different is price is purely due to the different frequency in payouts.

Another type of corporate action that could affect fund price is the ‘Stock Split’. It is because of the investing public’s preference for a ‘cheap’ fund that fund managers tend to do stock splits for a fund that has climbed to a high price level. The reasons given by the fund managers are that a ‘cheaper’ priced fund will attract more interest from new investors, and as the fund size grows from the inflows of new money, current investors will benefit from a falling expense ratio as the fixed costs are spread amongst more people. Investors can tell if the fund has undergone a stock split by referring to the fund factsheet. Therefore, it is not fair to compare prices of a fund that has done a split with one that didn’t do any.

When was it launched?
Another factor that affects the price of a fund has something to do with the timing of when it was launched. A fund that was launched at the wrong time could have suffered through the falling market and would sometimes still be ‘under water’ or less than S$1.00, even after a few years. Conversely, a fund that was launched at the right time could see its price appreciate by 2 or 3 times. Both funds could be invested in the exact same market and could even hold the exact same stocks, but for the fact that one was unlucky enough to be launched at the wrong time.

Let’s take a look at 2 funds that invests in the volatile technology market. The UOB
Global Technology Fund was launched on September 1997 and is priced at S$1.2238 as
of 21 February 2006. The ABN Amro Star Global Technology Fund was launched right
at the peak of the bubble in February 2000, and is now priced at S$0.209..Looking at the chart below, we can see that the performance of both funds for the past 6 months are nearly identical as both have a high correlation to the NASDAQ (green line). However, how do we explain the vast difference in fund prices? Pure luck, or unluckiness of the ABN fund in terms of timing.

So what does matter?
This question can best be answered by asking why the investor decided to invest in that fund in the first place. If an investor decides to invest in an Asian fund because he feels there is growth potential, he should then go out and pick the best Asian fund available, using his own set of criteria, i.e. Past returns, volatility, expense ratio etc. He should disregard the fund price of the fund that he has selected, since it will have no direct bearing on the future performance of the selected fund.

Tony Low
The opinions expressed in this article are strictly the writer’s and does not necessarily represent Hong Leong Finance’s (HLF) views. This article is published for information only and does not have any regard to the specific investment objective, financial situation and the particular needs of any specific person who may receive this document. The information provided in this article may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets orcompanies. The writer reserves the right to make changes and corrections to its opinions or views expressed here at any time, without notice.

The investor must make their own assessment of the relevance, accuracy and adequacy of the information provided in this presentation and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessment. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the investoracting on any information, opinion or estimate provided in this presentation.

Wednesday, October 18, 2006

Recommended Book to Read for self improvement

My reading habit only started since year 2003. I used to be bored by books. However, it is never too late to begin this critical, important and useful habit. I have read a few investment books which I think are good books which you should try to get a copy.

Rich Dad Poor Dad
Smart Couple Finishes Rich
Intelligent Investor by Benjamin Graham
Adventure Capitalist by Jim Rogers
A Mathematican Plays the the Stock Market by John Allen Paulos
The Bond King - Biography of Bill Gross

Good to Great by Jim Collins
The Toyota Way*** ( I recommend this book to all, its really a good book to learn how Toyota grew to almost the number 1 car manufacturer today)
Our Iceberg Is Melting by John Kotter

REITS - What are they?

REITS - Real Estate Investment Trusts started in 1960s in the USA under specific REITS legislation. This form of investment vehicle has been gaining popularity in recent years. But really, just what is the main impact of REITs to a property???

Now REIT is a generic term for entities with the following characteristics:
-Ownership and management of income-producing real estate is the primary business of a REIT
-Most of its profits are distributed as dividends to investors
-Generally exempted from company tax
-Typically offer investors high yields as well as liquidity

Now, if you guys remember the Golden Shoe in Raffles Place, it used to be an old building with some old shops. Now that this building is under a REITS, there are renovations going on to improve the building. Tenants are also changing. We don't know who are the future tenants yet but its definitely going to be more high end with some key anchor tenants to improve the building rental yields. Another eg is Market Street Carpark along Cross Street, the makeover has just been completed, from what used to be building housing some old shops and cafeterias (the coffee shop kind), it is now housing tenants such as 7-eleven, coffee club, coffee bean, Soup Spoon and some more upmarket hair saloons. One other example is Raffles City, the work done on expanding the basement shopping area has been completed recently and has added more space and introduced high profile tenants like Ding Tai Fung Restaurant which will draw in crowds and improve rental income.

I will snap some pictures which you can see the impact of securitisation on commercial properties. But I strongly suggest go to market street carpark to see for yourself the impact.

What to look for in REITS?
Rental yield, Type of property in the REITS, Occupancy Rate, Weighted average lease term to expiry of lease.

Exchange Traded Funds

Lesson 1 from Economics: Savings equals Investment. To an economy, how much the population save is how much the economy as a whole can invest. The same hold for an individual: how much one can save is how much one can invest. Keeping deposit in banks is also a kind of investment. It is just not much people looking at it that way. Even if you never buy stocks or fund. You are investing, in pure cash, in the form of bank deposit.I have one recommendation. Buying "Exchange Traded Fund". Whenever one accumulates a small sum of money, dump it into ETF. Whether it is Tracker Fund of Singapore, which tracks the Straits Times Index in Singapore, ABF II Asia Bond Fund Index, or Spider, which tracks the S&P in the States, ETF is (one of) the most efficient way of investing in equities/bonds. In addition, by dumping small amount into ETF regularly, one is also "dollar averaging" one's investment. From my investing experience in stocks/futures/options/forex/mutual funds/arbitrage/hedging since 1998, I find this investment method the most efficient one.

Why ETFs? Well, for one, unlike Mutual Funds, prices are real time pricing, which is similar to shares. Mutual funds are forward pricing basis. Mutual Funds have a higher management fees due to the believe that active management can add value to investor's portfolio. But in developed markets like USA where information efficiency is high, there is little room for portfolio managers to exploit pricing inefficiencies and outperform the market. Many managers in US do not outperform the S&P index.

Problem with investing in ETFs in Singapore? Well, liquidity is low. The alternative is to open a US trading Account or HK trading account with a local brokerage and invest in ETFs listed in these markets where liquidity is much higher.

Share your knowledge

Share your knowledge: You may not have lots of wealth to share, but you sure have lots of knowledge to share for the benefit of all

Knowledge and wealth are almost equivalent. One can find a lot of cases in Talmud where knowledge and wealth is compared side by side. In simple terms, knowledge and wealth increases side by side.Both knowledge and wealth only function when there is a "flow". Wealth being locked up and not reinvested into the society is no better than poverty. By the same token, knowledge that is not circulated to others are antiques kept in store room where nobody can appreciate. A wealthy man reinvesting his capital as direct/indirect investment is similar to a wise man teaching others with knowledge he acquired. Knowledge has an advantage over wealth here: any one dollar can only be allocated to one investment; but a piece of knowledge can be multiplied and spread to hundreds or even millions. There is no scarcity in knowledge.

Lesson I learnt: Since I read so many books, I acquired new knowledge. Such knowledge, if not spread and communicated to others, is like "dead capital". I should spend more time to disseminate such knowledge to people around me. That's why this Blog is created. Keep a lookout for it.