Tuesday, 26 April 2011
What to invest your money in
Report from The Business Times (Singapore) dated Fri, Dec 24, 2010
What to invest your money in
By Genevieve Cua
THE process of picking investments for a portfolio may be a bewildering exercise.
You are faced with more than a thousand unit trusts and insurance funds. There are also nearly 80 exchange traded funds (ETFs), plus even a fairly new instrument called exchange traded notes (ETNs).
How do you go about selecting instruments that are appropriate for your needs?
This edition of Smart Money gives an overview of the various instruments available and how they may make sense for you. The specific underlying investments and exposures will vary, of course, and it will be up to you and your adviser - if you have one - to decide on the combination of exposures and instruments to invest in.
The structure of the vehicle you may choose - whether unit trust, investment-linked insurance fund (ILP) or ETF - is an important decision as well, as it may have a bearing on costs, liquidity and risks.
Here are some basic definitions and points to consider on each instrument.
UNIT TRUSTS
Unit trusts are unitised investment funds that pool together investors' monies to invest in assets such as stocks and bonds.
They are typically professionally and actively managed, which makes them ideal for retail investors who may not have enough funds to buy assets directly and still achieve diversification. They are also appropriate for those who do not have the time or inclination to do their own research on individual stocks and bonds.
Unit trusts are typically sold through banks and financial advisers. Investors who are self-directed can also buy or sell funds through fund supermarket portals.
The mode of investment in unit trusts - and generally any other pooled investment such as ETFs or ILPs - can be through a single lump sum or, in the case of unit trusts or ILPs, through a regular investment plan, which can be as frequently as monthly or quarterly.
A regular investment plan is typically recommended for a long-term investor as it encourages discipline and reduces the timing risk. This is because by committing to invest a pre-determined amount regularly over a period, you automatically buy more units when the market is down and less when the market is high.
This is part of the essence of investing by 'dollar cost averaging'. ETFs do not have regular savings plans as purchases are made on the secondary market in fixed lot sizes, as opposed to transacting on the primary market in fixed dollar amounts.
Unit trusts will incur costs, including annual management fees, trustee fees and sales charges. Liquidity is typically not an issue as units are cancelled or created when there is a sale or purchase. There is usually daily fund valuation to come up with a net asset value. But when you buy or sell units, you may not immediately know your purchase or sale price. Instead, you transact based on a forward valuation - the next working day's value.
INVESTMENT-LINKED INSURANCE FUNDS
ILPs are also pooled and professionally managed investment funds, but with insurance cover.
They are typically sold through insurance advisers, and sometimes through banks.
Insurance companies offer ILPs to give policyholders the flexibility to set their own asset allocation and exposures within an insurance policy. There are currently ILPs that offer nearly zero protection, and those who invest in a lump sum or single premium can view it almost like a unit trust.
The big differences between ILPs and unit trusts lie in the insurance coverage itself. Regular premium ILPs in particular may be whole-life policies or a long-term savings plan for a child's future education expenses. Such policies seek two objectives - to provide protection as well as savings growth over the medium to long term.
While many insurers offer ILPs that feed into unit trusts, ILP funds are actually not trust structures. While there will be annual management fees, there is no trustee; nor is there a prospectus. However, ILPs do have a product summary that contains information similar to that in a prospectus.
Yet another very important thing to note about ILPs is the costs. The insurance coverage will have its own set of charges, including the cost to provide a death benefit; and also a policy fee which is an annual administrative charge for regular premium plans. These fees are not calculated as part of the underlying investment fund's total expense ratio.
It is best to ask your insurance adviser to itemise these costs, particularly the cost of insurance. The latter is usually deducted by cancelling fund units. The older you get, the more costly the cover gets, and you may well find that with time, a larger portion of your premium is actually funding mortality charges rather than investments.
There are also distribution costs. These will be clearly stated in the benefit illustration. For example, it is possible that the bulk of your first-year premium is going to the agent's commission, and annual premiums are fully invested in fund units only from the fourth year.
You should also be aware of the sales charge, which is typically 5 per cent. Your premium will buy fund units at the offer price. Units are cancelled to fund expenses such as insurance costs at the bid price.
EXCHANGE TRADED FUNDS
Exchange traded funds (ETFs). These are actually unit trusts that are listed on the exchange.
ETFs are traded through a broker who will charge a commission for transactions, similar to share trading.
The advantage of a listing is that prices are transparent and easy to track. You also transact at a known price, unlike unit trusts and ILPs where you may not immediately know the sale or purchase price.
Unlike unit trusts and ILPs, however, an ETF's traded price may deviate from its net asset value due to a number of factors including market demand.
The specific market exposure of an ETF will vary widely, and you should be prepared to take on that particular market risk. There may also be currency risk if the ETF is denominated in a foreign currency.
On liquidity, ETFs will have market makers to ensure liquidity, but those that are thinly traded may have fairly wide bid/ask spreads, which effectively raises your transaction costs. ETFs are traded through brokers, who will charge a brokerage fee.
A big distinction of ETFs from unit trusts and ILPs is that the ETFs are typically passive index tracking instruments. Hence, total expense ratios of ETFs will be a fraction of actively managed funds. Most unit trusts and ILPs are actively managed funds and management fees can exceed 2 per cent for equity funds, for instance. With ETFs, the management fee can be as low as 0.18 per cent.
The structure of ETFs can also vary, and may be complex to boot. One type of ETF invests directly in the assets that represent an index; another type is synthetic - that is, the exposure is achieved through derivatives such as swap contracts. Synthetic ETFs will involve counterparty risks which can be mitigated to some extent. Some unlisted unit trusts can have these complex structures and market risks too. If a particular structure is too complex for you to understand, it may be best not to invest.
EXCHANGE TRADED NOTES
Exchange traded notes (ETNs). An ETN is a debt instrument where investment exposure and returns may be linked to a market index or to a single commodity. ETFs, in contrast, typically do not provide exposure to a single asset.
At the moment there is just one ETN listed on the SGX, linked to commodities. Because ETNs' exposure is to a market index, investors may confuse the instrument with ETFs. In reality ETNs present quite a different basket of risks, even though the investment theme - be it commodities or an equity market return - may be similar to ETFs.
The big thing to remember about ETNs is that they are a debt instrument. Most ETNs are long dated, with a maturity of about 30 years or longer. The ETN listed on SGX, for instance, will mature in 2036. Investors are free to sell on the exchange through a broker or redeem the ETN with the issuer in a large block of securities. But they could also choose to hold it to maturity and receive the return linked to index after fees at that point in time. There is no guarantee of principal; and no dividend or coupon payments.
While ETFs are backed by securities held in trust, or by a collateral arrangement, ETNs are usually not. This is a major distinction from ETFs, where investors own a pro-rated share of assets in a trust. With ETNs, there are no assets to back up the note, and the issuers can use the funds raised for their own purposes, including business expansion as well as hedging their exposure to the ETN itself.
By investing in ETNs, you are effectively also banking on the credit quality of the issuer. ETNs themselves are typically not rated, but the issuer will have a rating, which will be disclosed in documentation. You have to be cognisant of the credit risks; a deterioration in the credit quality of the issuer could cause the ETN's price to drop, even if the index to which it is linked remains sound and positive. You may also lose part or all of your investment if the issuer defaults on its obligations under the ETNs.
Exchange traded notes a good choice for small investor
EXCHANGE traded notes (ETNs) are a way for investors to access a variety of investment markets including commodities and equities. But while investors may think they are similar to ETFs (exchange traded funds), ETNs are actually quite a different vehicle.
ETNs are debt instruments; they are senior unsecured debt issued by an institution, typically with a very long maturity. Unlike corporate bonds, however, they are structured to provide a return linked to a range of assets, which can be equity, commodity or interest rate indices.
As such, they provide a convenient way to access markets when you have a relatively modest sum to invest, or when those markets are difficult to access.
Among ETNs' advantages are an exchange listing, which makes prices transparent and easy to track.
There are also market makers to help provide liquidity.
Here are a number of major characteristics of ETNs:
ETNs versus corporate bonds. Corporate bonds are issued by institutions to raise capital for various purposes, which will be explained in issue documents. ETNs are also issued by institutions to raise funds for corporate purposes and for hedging their exposure to the ETN. The portion used for hedging, says Jin-Chuan Duan, is likely to be relatively small. Professor Duan is director of the Risk Management Institute and Cycle & Carriage Professor of Finance at the National University of Singapore. 'It's safe to assume that the funds will in large part be for corporate use.'
Unlike bonds, the issuers of ETNs will not pay a coupon, and they collect management fees to boot. ETNs are actually riskier than corporate bonds as the investor takes on market risk - that is, the return and principal amount payable when the investor sells or redeems the note will depend on the performance of the market index to which it is linked. In contrast, corporate bonds' payment of coupon and return of principal do not depend on the behaviour of any market index.
Credit risk. This is a second major risk. Just as with corporate bonds, you will need to be mindful of the credit risk of the ETN issuer. The issuer's credit rating is typically specified in an ETN's prospectus. Note there is no credit rating on the note itself. A credit downgrade may cause the ETN's price to fall even if the underlying market to which the note is linked remains sound.
'One important lesson from the financial crisis of 2008-2009 is that big financial institutions can go bust,' says Prof Duan.
Liquidity. Prof Duan says liquidity risk deserves special attention. Using the iPath DJ-UBS Commodity Index ETN as an example, investors can expect to realise a return before the note's maturity in 2036 by selling on the exchange or redeeming the note through the issuer, Barclays.
'Redemption requires a minimum of a large block of securities and is unlikely to be applicable to small investors. One should not be surprised to see very little trading volume on ETNs. Thus, the liquidity risk of ETNs is generally quite significant,' says Prof Duan.
No tracking error. One advantage of ETNs is that there is zero tracking error or deviation between the note's indicative value and the index. At redemption or maturity, the investor should receive the return linked to the index less a management fee.
UTs, ILPs, ETFs, ETNs: Pick what suits you
THE alphabet soup of acronyms denoting investment vehicles can be confusing. Are UTs (unit trusts) right for you? Or perhaps ILPs (investment-linked insurance plans); or maybe it's ETFs (exchange-traded funds) or ETNs (exchange-traded notes)?
Before you get tied up in knots, it's important to ascertain your own objectives. Are you saving for a long-term goal, or taking an opportunistic short-term bet? Be familiar too with your current holdings, as it is possible that a UT or an ETF may actually hold securities that you already own directly.
If sleeping well is important to you, you will want to be diversified. Diversification may not yield the best returns at any point in time, but it should cushion you through market volatility.
UTs, ETFs and ILPs lend themselves to a long-term portfolio. They can be complementary: ETFs generally give broad market returns, and UTs in theory should generate returns better than an index, which is why you pay higher fees.
One common approach, particularly among institutions, is to use ETFs for core allocations. On the periphery, you could take higher risks through actively managed funds or funds with more concentrated exposures.
ILPs may be seen mainly as investment instruments if the insurance cover is minimal. This is the case if you are investing in a single-premium mode. But a regular-premium ILP is probably best viewed as a protection plan.
As an investment, it is inefficient because of the relatively high costs that are external to the underlying funds - such as mortality charges. These costs will reduce the expected annualised return substantially.
This is evident when you examine the plan's 'reduction in yield' which may be itemised in any benefit illustration. For example, a regular-premium plan for a 35-year-old male with a death benefit of $200,000 - using a simple balanced fund as the underlying investment - may see a net expected annualised return of 5.37 per cent, from a theoretical 9 per cent gross return over 20 years. This suggests that annual expenses could exceed 3.6 per cent.
ETNs are debt instruments with a market exposure. If you are unfamiliar with them, or are uncomfortable with the credit quality of the issuer, it may be best to refrain from investing in them. It is argued that ETNs may have a place in a portfolio as their tracking error - the extent to which the ETNs deviate from the index - is zero. But ETFs offer low tracking errors as well.
Corporate bonds may be more suitable for investors who want a regular coupon and their principal at maturity, while ETNs are for investors who are willing to undertake the market risks of ETNs to achieve potentially higher returns. And, if you want a pure exposure to an index, you can generally get it through an ETF.
This article was first published in The Business Times.
What to invest your money in
By Genevieve Cua
THE process of picking investments for a portfolio may be a bewildering exercise.
You are faced with more than a thousand unit trusts and insurance funds. There are also nearly 80 exchange traded funds (ETFs), plus even a fairly new instrument called exchange traded notes (ETNs).
How do you go about selecting instruments that are appropriate for your needs?
This edition of Smart Money gives an overview of the various instruments available and how they may make sense for you. The specific underlying investments and exposures will vary, of course, and it will be up to you and your adviser - if you have one - to decide on the combination of exposures and instruments to invest in.
The structure of the vehicle you may choose - whether unit trust, investment-linked insurance fund (ILP) or ETF - is an important decision as well, as it may have a bearing on costs, liquidity and risks.
Here are some basic definitions and points to consider on each instrument.
UNIT TRUSTS
Unit trusts are unitised investment funds that pool together investors' monies to invest in assets such as stocks and bonds.
They are typically professionally and actively managed, which makes them ideal for retail investors who may not have enough funds to buy assets directly and still achieve diversification. They are also appropriate for those who do not have the time or inclination to do their own research on individual stocks and bonds.
Unit trusts are typically sold through banks and financial advisers. Investors who are self-directed can also buy or sell funds through fund supermarket portals.
The mode of investment in unit trusts - and generally any other pooled investment such as ETFs or ILPs - can be through a single lump sum or, in the case of unit trusts or ILPs, through a regular investment plan, which can be as frequently as monthly or quarterly.
A regular investment plan is typically recommended for a long-term investor as it encourages discipline and reduces the timing risk. This is because by committing to invest a pre-determined amount regularly over a period, you automatically buy more units when the market is down and less when the market is high.
This is part of the essence of investing by 'dollar cost averaging'. ETFs do not have regular savings plans as purchases are made on the secondary market in fixed lot sizes, as opposed to transacting on the primary market in fixed dollar amounts.
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Unit trusts will incur costs, including annual management fees, trustee fees and sales charges. Liquidity is typically not an issue as units are cancelled or created when there is a sale or purchase. There is usually daily fund valuation to come up with a net asset value. But when you buy or sell units, you may not immediately know your purchase or sale price. Instead, you transact based on a forward valuation - the next working day's value.
INVESTMENT-LINKED INSURANCE FUNDS
ILPs are also pooled and professionally managed investment funds, but with insurance cover.
They are typically sold through insurance advisers, and sometimes through banks.
Insurance companies offer ILPs to give policyholders the flexibility to set their own asset allocation and exposures within an insurance policy. There are currently ILPs that offer nearly zero protection, and those who invest in a lump sum or single premium can view it almost like a unit trust.
The big differences between ILPs and unit trusts lie in the insurance coverage itself. Regular premium ILPs in particular may be whole-life policies or a long-term savings plan for a child's future education expenses. Such policies seek two objectives - to provide protection as well as savings growth over the medium to long term.
While many insurers offer ILPs that feed into unit trusts, ILP funds are actually not trust structures. While there will be annual management fees, there is no trustee; nor is there a prospectus. However, ILPs do have a product summary that contains information similar to that in a prospectus.
Yet another very important thing to note about ILPs is the costs. The insurance coverage will have its own set of charges, including the cost to provide a death benefit; and also a policy fee which is an annual administrative charge for regular premium plans. These fees are not calculated as part of the underlying investment fund's total expense ratio.
It is best to ask your insurance adviser to itemise these costs, particularly the cost of insurance. The latter is usually deducted by cancelling fund units. The older you get, the more costly the cover gets, and you may well find that with time, a larger portion of your premium is actually funding mortality charges rather than investments.
There are also distribution costs. These will be clearly stated in the benefit illustration. For example, it is possible that the bulk of your first-year premium is going to the agent's commission, and annual premiums are fully invested in fund units only from the fourth year.
You should also be aware of the sales charge, which is typically 5 per cent. Your premium will buy fund units at the offer price. Units are cancelled to fund expenses such as insurance costs at the bid price.
EXCHANGE TRADED FUNDS
Exchange traded funds (ETFs). These are actually unit trusts that are listed on the exchange.
ETFs are traded through a broker who will charge a commission for transactions, similar to share trading.
The advantage of a listing is that prices are transparent and easy to track. You also transact at a known price, unlike unit trusts and ILPs where you may not immediately know the sale or purchase price.
Unlike unit trusts and ILPs, however, an ETF's traded price may deviate from its net asset value due to a number of factors including market demand.
The specific market exposure of an ETF will vary widely, and you should be prepared to take on that particular market risk. There may also be currency risk if the ETF is denominated in a foreign currency.
On liquidity, ETFs will have market makers to ensure liquidity, but those that are thinly traded may have fairly wide bid/ask spreads, which effectively raises your transaction costs. ETFs are traded through brokers, who will charge a brokerage fee.
A big distinction of ETFs from unit trusts and ILPs is that the ETFs are typically passive index tracking instruments. Hence, total expense ratios of ETFs will be a fraction of actively managed funds. Most unit trusts and ILPs are actively managed funds and management fees can exceed 2 per cent for equity funds, for instance. With ETFs, the management fee can be as low as 0.18 per cent.
The structure of ETFs can also vary, and may be complex to boot. One type of ETF invests directly in the assets that represent an index; another type is synthetic - that is, the exposure is achieved through derivatives such as swap contracts. Synthetic ETFs will involve counterparty risks which can be mitigated to some extent. Some unlisted unit trusts can have these complex structures and market risks too. If a particular structure is too complex for you to understand, it may be best not to invest.
EXCHANGE TRADED NOTES
Exchange traded notes (ETNs). An ETN is a debt instrument where investment exposure and returns may be linked to a market index or to a single commodity. ETFs, in contrast, typically do not provide exposure to a single asset.
At the moment there is just one ETN listed on the SGX, linked to commodities. Because ETNs' exposure is to a market index, investors may confuse the instrument with ETFs. In reality ETNs present quite a different basket of risks, even though the investment theme - be it commodities or an equity market return - may be similar to ETFs.
The big thing to remember about ETNs is that they are a debt instrument. Most ETNs are long dated, with a maturity of about 30 years or longer. The ETN listed on SGX, for instance, will mature in 2036. Investors are free to sell on the exchange through a broker or redeem the ETN with the issuer in a large block of securities. But they could also choose to hold it to maturity and receive the return linked to index after fees at that point in time. There is no guarantee of principal; and no dividend or coupon payments.
While ETFs are backed by securities held in trust, or by a collateral arrangement, ETNs are usually not. This is a major distinction from ETFs, where investors own a pro-rated share of assets in a trust. With ETNs, there are no assets to back up the note, and the issuers can use the funds raised for their own purposes, including business expansion as well as hedging their exposure to the ETN itself.
By investing in ETNs, you are effectively also banking on the credit quality of the issuer. ETNs themselves are typically not rated, but the issuer will have a rating, which will be disclosed in documentation. You have to be cognisant of the credit risks; a deterioration in the credit quality of the issuer could cause the ETN's price to drop, even if the index to which it is linked remains sound and positive. You may also lose part or all of your investment if the issuer defaults on its obligations under the ETNs.
Exchange traded notes a good choice for small investor
EXCHANGE traded notes (ETNs) are a way for investors to access a variety of investment markets including commodities and equities. But while investors may think they are similar to ETFs (exchange traded funds), ETNs are actually quite a different vehicle.
ETNs are debt instruments; they are senior unsecured debt issued by an institution, typically with a very long maturity. Unlike corporate bonds, however, they are structured to provide a return linked to a range of assets, which can be equity, commodity or interest rate indices.
As such, they provide a convenient way to access markets when you have a relatively modest sum to invest, or when those markets are difficult to access.
Among ETNs' advantages are an exchange listing, which makes prices transparent and easy to track.
There are also market makers to help provide liquidity.
Here are a number of major characteristics of ETNs:
ETNs versus corporate bonds. Corporate bonds are issued by institutions to raise capital for various purposes, which will be explained in issue documents. ETNs are also issued by institutions to raise funds for corporate purposes and for hedging their exposure to the ETN. The portion used for hedging, says Jin-Chuan Duan, is likely to be relatively small. Professor Duan is director of the Risk Management Institute and Cycle & Carriage Professor of Finance at the National University of Singapore. 'It's safe to assume that the funds will in large part be for corporate use.'
Unlike bonds, the issuers of ETNs will not pay a coupon, and they collect management fees to boot. ETNs are actually riskier than corporate bonds as the investor takes on market risk - that is, the return and principal amount payable when the investor sells or redeems the note will depend on the performance of the market index to which it is linked. In contrast, corporate bonds' payment of coupon and return of principal do not depend on the behaviour of any market index.
Credit risk. This is a second major risk. Just as with corporate bonds, you will need to be mindful of the credit risk of the ETN issuer. The issuer's credit rating is typically specified in an ETN's prospectus. Note there is no credit rating on the note itself. A credit downgrade may cause the ETN's price to fall even if the underlying market to which the note is linked remains sound.
'One important lesson from the financial crisis of 2008-2009 is that big financial institutions can go bust,' says Prof Duan.
Liquidity. Prof Duan says liquidity risk deserves special attention. Using the iPath DJ-UBS Commodity Index ETN as an example, investors can expect to realise a return before the note's maturity in 2036 by selling on the exchange or redeeming the note through the issuer, Barclays.
'Redemption requires a minimum of a large block of securities and is unlikely to be applicable to small investors. One should not be surprised to see very little trading volume on ETNs. Thus, the liquidity risk of ETNs is generally quite significant,' says Prof Duan.
No tracking error. One advantage of ETNs is that there is zero tracking error or deviation between the note's indicative value and the index. At redemption or maturity, the investor should receive the return linked to the index less a management fee.
UTs, ILPs, ETFs, ETNs: Pick what suits you
THE alphabet soup of acronyms denoting investment vehicles can be confusing. Are UTs (unit trusts) right for you? Or perhaps ILPs (investment-linked insurance plans); or maybe it's ETFs (exchange-traded funds) or ETNs (exchange-traded notes)?
Before you get tied up in knots, it's important to ascertain your own objectives. Are you saving for a long-term goal, or taking an opportunistic short-term bet? Be familiar too with your current holdings, as it is possible that a UT or an ETF may actually hold securities that you already own directly.
If sleeping well is important to you, you will want to be diversified. Diversification may not yield the best returns at any point in time, but it should cushion you through market volatility.
UTs, ETFs and ILPs lend themselves to a long-term portfolio. They can be complementary: ETFs generally give broad market returns, and UTs in theory should generate returns better than an index, which is why you pay higher fees.
One common approach, particularly among institutions, is to use ETFs for core allocations. On the periphery, you could take higher risks through actively managed funds or funds with more concentrated exposures.
ILPs may be seen mainly as investment instruments if the insurance cover is minimal. This is the case if you are investing in a single-premium mode. But a regular-premium ILP is probably best viewed as a protection plan.
As an investment, it is inefficient because of the relatively high costs that are external to the underlying funds - such as mortality charges. These costs will reduce the expected annualised return substantially.
This is evident when you examine the plan's 'reduction in yield' which may be itemised in any benefit illustration. For example, a regular-premium plan for a 35-year-old male with a death benefit of $200,000 - using a simple balanced fund as the underlying investment - may see a net expected annualised return of 5.37 per cent, from a theoretical 9 per cent gross return over 20 years. This suggests that annual expenses could exceed 3.6 per cent.
ETNs are debt instruments with a market exposure. If you are unfamiliar with them, or are uncomfortable with the credit quality of the issuer, it may be best to refrain from investing in them. It is argued that ETNs may have a place in a portfolio as their tracking error - the extent to which the ETNs deviate from the index - is zero. But ETFs offer low tracking errors as well.
Corporate bonds may be more suitable for investors who want a regular coupon and their principal at maturity, while ETNs are for investors who are willing to undertake the market risks of ETNs to achieve potentially higher returns. And, if you want a pure exposure to an index, you can generally get it through an ETF.
This article was first published in The Business Times.
Currencies: The next big thing
Report from The Business Times (Singapore) dated Fri, Feb 11, 2011 Currencies: The next big thing
By Genevieve Cua
OVER THE LAST few years, currency has emerged as a big investment theme as the macro plays - a weak bias for the US dollar, a positive undertone for Asian currencies - have been strong and are often spoken of by strategists.
How can you benefit without actually trading currencies yourself?
Enter Henderson Global Investors with a new Global Currency Fund, a purely systematic or quantitative strategy that seeks exposure to currencies with the highest 'carry'.
The carry trade basically involves buying a higher yielding currency, using a low-yielding currency to fund the trade. The investor profits from the interest rate differential. There is, of course, currency risk in the trade. If the currency in which you are deposited in plunges, it could wipe out the rate differential.
Carry - the largest driver
There are roughly three drivers of currency returns over time - carry, momentum and valuation. Of these, carry has historically been the biggest source of return over the long term. But there are periods when it fares very poorly. 2008 was one such memorable rout. As risk aversion soared, the traditional carry trade reversed and caused huge losses as investors fled from higher yielding currencies such as the Australian dollar, and piled into the US dollar.
Singapore, incidentally, has seen less than a handful of dedicated currency funds. Two have actually closed in the last year or two, partly due to dwindling fund sizes and poor returns. Prudential currently has its Income X fund, which gives exposure to the carry strategy, with an overlay of active management.
Bob Arends, Henderson's head of currency, says interest is keen among retail and private clients. The Luxembourg-domiciled fund has about US$72 million in assets. Mr Arends is described as a pioneer of currency alpha management. He started his career in 1996 with Shell's pension fund, and was responsible for its currency programme. He later joined Fortis Bank as global head of currency management.
'Pension funds want to have stable returns over time, a limited drawdown and good performance. Over time, the carry trade works very well, as there is a strong risk premium. But sometimes it doesn't work. We look for a way to be out of the market in extreme risk conditions.'
The fund seeks to mitigate risk in two main ways - diversification and downside protection. On the first point, the fund has substantial exposure, for instance, to emerging market currencies. In the last three years, the latter has generated double digit returns every year, he says.
Downside protection is achieved through a stop loss on all positions. He declined to specify the stop loss level. That currency markets are large, deep and liquid work in the fund's favour, he says, as it is relatively easy and efficient to enter and exit a trade, even at crisis moments. Investors, he says, appear to be warming to currency funds as an alternative to emerging market debt.
'Last year there was significant inflow into emerging debt, but the risk of (emerging market) debt is very high now. Most investors understand that inflation is picking up and EM rates will rise. That means you should not hold debt. We would argue that you should get out of EM debt.
'If you are bullish on emerging markets, you should be considering EM equities or currencies. Currencies do well when rates go up.'
The fund's engine seeks currencies with the highest carry on a risk-adjusted basis and a positive trend.
The more liquid G10 currencies comprise 70 per cent of the portfolio and emerging currencies 30 per cent. At the moment, the EM currency exposure is roughly 35 per cent. As a UCITS III structure, the fund can invest in forwards, swaps and other derivatives.
Absolute returns
This means that at any time a relatively small proportion of the fund's assets is invested in a trade. About 70 per cent of the fund is in liquid, short-term deposits. Leverage is, however, inherent in such contracts, and is capped at two times.
The fund is positioned as an absolute return vehicle, with a target return of 10 per cent. A performance fee of 20 per cent will apply to any excess return above a cash benchmark. There is a high water mark, which means the fund must exceed its previous high before the fee will kick in.
Bloomberg earlier reported that carry trades were profitable for most of the last three decades.
The strategy produced average annual returns of 21 per cent in the 1980s with no down years, and was the best of four commonly used strategies.
In the 1990s, carry trades suffered three down years including a 54 per cent loss in 1992. The strategy incurred losses three years in a row from 2006 to 2008.
This article was first published in The Business Times.
By Genevieve Cua
OVER THE LAST few years, currency has emerged as a big investment theme as the macro plays - a weak bias for the US dollar, a positive undertone for Asian currencies - have been strong and are often spoken of by strategists.
How can you benefit without actually trading currencies yourself?
Enter Henderson Global Investors with a new Global Currency Fund, a purely systematic or quantitative strategy that seeks exposure to currencies with the highest 'carry'.
The carry trade basically involves buying a higher yielding currency, using a low-yielding currency to fund the trade. The investor profits from the interest rate differential. There is, of course, currency risk in the trade. If the currency in which you are deposited in plunges, it could wipe out the rate differential.
Carry - the largest driver
There are roughly three drivers of currency returns over time - carry, momentum and valuation. Of these, carry has historically been the biggest source of return over the long term. But there are periods when it fares very poorly. 2008 was one such memorable rout. As risk aversion soared, the traditional carry trade reversed and caused huge losses as investors fled from higher yielding currencies such as the Australian dollar, and piled into the US dollar.
Singapore, incidentally, has seen less than a handful of dedicated currency funds. Two have actually closed in the last year or two, partly due to dwindling fund sizes and poor returns. Prudential currently has its Income X fund, which gives exposure to the carry strategy, with an overlay of active management.
Bob Arends, Henderson's head of currency, says interest is keen among retail and private clients. The Luxembourg-domiciled fund has about US$72 million in assets. Mr Arends is described as a pioneer of currency alpha management. He started his career in 1996 with Shell's pension fund, and was responsible for its currency programme. He later joined Fortis Bank as global head of currency management.
'Pension funds want to have stable returns over time, a limited drawdown and good performance. Over time, the carry trade works very well, as there is a strong risk premium. But sometimes it doesn't work. We look for a way to be out of the market in extreme risk conditions.'
The fund seeks to mitigate risk in two main ways - diversification and downside protection. On the first point, the fund has substantial exposure, for instance, to emerging market currencies. In the last three years, the latter has generated double digit returns every year, he says.
Downside protection is achieved through a stop loss on all positions. He declined to specify the stop loss level. That currency markets are large, deep and liquid work in the fund's favour, he says, as it is relatively easy and efficient to enter and exit a trade, even at crisis moments. Investors, he says, appear to be warming to currency funds as an alternative to emerging market debt.
'Last year there was significant inflow into emerging debt, but the risk of (emerging market) debt is very high now. Most investors understand that inflation is picking up and EM rates will rise. That means you should not hold debt. We would argue that you should get out of EM debt.
'If you are bullish on emerging markets, you should be considering EM equities or currencies. Currencies do well when rates go up.'
The fund's engine seeks currencies with the highest carry on a risk-adjusted basis and a positive trend.
The more liquid G10 currencies comprise 70 per cent of the portfolio and emerging currencies 30 per cent. At the moment, the EM currency exposure is roughly 35 per cent. As a UCITS III structure, the fund can invest in forwards, swaps and other derivatives.
Absolute returns
This means that at any time a relatively small proportion of the fund's assets is invested in a trade. About 70 per cent of the fund is in liquid, short-term deposits. Leverage is, however, inherent in such contracts, and is capped at two times.
The fund is positioned as an absolute return vehicle, with a target return of 10 per cent. A performance fee of 20 per cent will apply to any excess return above a cash benchmark. There is a high water mark, which means the fund must exceed its previous high before the fee will kick in.
Bloomberg earlier reported that carry trades were profitable for most of the last three decades.
The strategy produced average annual returns of 21 per cent in the 1980s with no down years, and was the best of four commonly used strategies.
In the 1990s, carry trades suffered three down years including a 54 per cent loss in 1992. The strategy incurred losses three years in a row from 2006 to 2008.
This article was first published in The Business Times.
Putting money into bonds
Report from The Business Times (Singapore) dated Wed, Apr 20, 2011
Putting money into bonds
By Maxie Aw Yeong and Teh Shi Ning
BONDS, often viewed as the boring, lesser cousins of instruments such as shares or commodities, can in fact offer something for every investor, whether conservative or risk-taking. This week, we go over the basics of what to look out for when adding them to your investment portfolio.
In essence, bonds are IOUs - financial contracts issued by governments, companies or some other organisations looking to raise funds. Typically, the bondholder lends the bond-issuer a fixed amount of money, for a fixed time period, in exchange for regular payment - a fixed amount of interest known as the coupon. If you hold on to the bond until its maturity date, you get back what you lent originally (the principal, or bond par price). As bonds, once issued, can be traded, you can also gain by selling it at a higher price before maturity.
Why invest in bonds?
A bond is seen as a 'fixed-income' instrument because it pays a regular amount at designated intervals. Singapore Management University's Associate Professor of Finance (Practice) Joseph Lim says: 'This is advantageous for investors looking for a steady stream of income from their investments - for example, retirees.'
In comparison, the dividend income a share investor gets may not be as reliable.
The capital value of the bond - which the investor will get back in full upon maturity - is also more stable than the price of a share. In fact, if a company goes into liquidation, bondholders, like other creditors, get repaid ahead of shareholders.
Of course, this low-return stability can be a drawback, particularly for young investors with a longer investment time-horizon. SIM University's head of programme for finance Associate Professor Sundaram Janakiramanan notes, though, that with Singapore's stock market being highly volatile over the past three years, it could be wise to diversify into bonds 'that are less volatile, and provide periodic return'.
Risks?
Yes, like any investment, bonds have their risks too - the bond issuer could go bankrupt and default on payments, or inflation could erode any gains you make from investing in the bond.
Ngee Ann Polytechnic School of Business and Accountancy senior lecturer Chong Kek Weng says: 'The savvy bond investor needs to be aware of macroeconomic trends such as inflation, unemployment, GDP/GNP, international trade as well as government fiscal and monetary policies.'
This is especially so in the current low interest rate environment, says SMU's Prof Lim. 'Interest rates are now more likely to go up than down. An increase in interest rates will result in a fall in bond prices,' he says.
SIM University's Prof Sundaram, too, cautions that how the market price of the bond moves affects whether the investor gains or loses if he wishes to sell his bond before maturity. He thinks it is 'not prudent' to invest in Singapore bonds at the moment.
Bonds generally also lack protection from inflation. Inflation affects the real value of both your principal (what you get when the bond matures) and your interest payments.
Inflation has been rising, so one question to ask is whether it could be higher than the coupon rate on your bond, in which case, the money you've invested in the bond may not be growing fast enough to keep up with inflation. There are exceptions though - certain bonds have coupon payments adjusted for inflation.
Also, although bonds can appear relatively safer with their fixed payments, the possibility of default must still be factored in, says Prof Sundaram. 'There is always a chance that a bond issuer might default on their coupon payments or the principal at time of contract maturity.'
Bond investments Government bonds
# Singapore Government
Securities are issued directly by the Monetary Authority of Singapore (MAS) via primary auctions which are announced periodically. You can submit bids for these via the DBS, UOB and OCBC ATMs once MAS has announced a primary auction, if you have a valid individual securities account with The Central Depository. Or, you can buy and sell SGS on the secondary market through an agent bank.
# Corporate bonds
Corporate bonds are listed on the Singapore Exchange so to buy them you will need to use a stockbroker who can trade securities on SGX. You can then buy or sell them just as shares of listed companies are bought and sold, at the market price. This can be done online too, if you're using an online broker.
Mr Chong observes that bond issuance is rising in popularity among companies, which means investors 'can look forward to more choices and a greater variety of listed bonds in the market'.
# Bond funds
Bond funds are professionally managed funds which pool together small investors' monies to buy bonds. It can be an economical way for a young investor to access the wider range of bonds which are not as accessible to retail investors with no investment expertise and a smaller portfolio.
A managed fund also diversifies across a range of bonds to reduce investors' exposure to any single issuer's risks, with fund managers monitoring risks too. But this means that the company will take management fees and some professional charges.
# International bonds
Some banks here offer both Singapore dollar bonds and bonds in an international currency, issued by corporations or governments from around the world. 'There is an exchange rate risk involved when investing in foreign bonds,' notes Prof Sundaram.
Such an investment can be attractive as bonds issued in a high interest rate country such as Australia will have a higher yield than that of bonds issued in low interest rate Singapore. But as this requires currency conversion, it is a good proposition only as long as the Singapore dollar does not appreciate substantially.
Know your bond jargon
# Term of maturity
Generally, bonds with a shorter term have a lower coupon. Bonds with a longer term of maturity usually offer higher payouts due to a longer waiting time before the borrower gets back his money.
# Coupon payment
Different bonds offer different coupon rates. Holding other factors constant, bonds with higher coupons are more attractive due to the higher yearly payout that the bondholder receives.
# Rating
Agencies like Standard and Poor's and Moody's Investors Service issue credit ratings on bonds. A higher rating suggests the bond is safer and that the issuer is more financially credible - less in debt with a lower probability of default. A bond rated AAA or AA is considered 'high grade', while one rated BBB and above is 'investment grade'. Junk bonds are usually high-yield bonds whose issuers have a speculative credit rating that is below investment grade.
'The difference between the yields of different rated bonds, known as yield spreads, tends to increase while the economy is not doing well, and reduces when the economy is doing better,' says Prof Sundaram.
# Denomination
Bonds are usually denominated in the currency of the country in which the bonds are issued, though they can be issued in a foreign currency too. The yield on the bond is then related to the interest rate in the country whose currency it uses.
Some common types of bonds include:
# Fixed-rate bonds: These pay the same level of interest throughout the tenure of the bond, until it matures.
# Adjustable-rate bonds: The interest paid on these varies according to economic conditions. Such bonds are often pegged to an index, such as the federal funds one or an interbank rate.
# Zero-coupon bond: This type of bond does not pay interest during its life-span, and so is normally sold at a discount to its actual value. So the investor makes his gain when he resells the bond, or redeems it at full value.
# Convertible bond: This usually has a low coupon rate, but allows its holders the additional option of converting the bond into shares in the issuing company, at a certain price, typically fixed at a premium to the market price of the shares.
# Singapore Government Securities (SGS): These bonds are issued by the Singapore government, with maturities of two, five, seven, 10, 15 and 20 years. The Singapore government does not actually need to borrow money to finance its expenditure. Its issuance of SGS is more to provide a liquid investment alternative with little risk of default, and to establish a liquid government bond market to serve as a benchmark for the corporate bond market.
This article was first published in The Business Times.
Putting money into bonds
By Maxie Aw Yeong and Teh Shi Ning
BONDS, often viewed as the boring, lesser cousins of instruments such as shares or commodities, can in fact offer something for every investor, whether conservative or risk-taking. This week, we go over the basics of what to look out for when adding them to your investment portfolio.
In essence, bonds are IOUs - financial contracts issued by governments, companies or some other organisations looking to raise funds. Typically, the bondholder lends the bond-issuer a fixed amount of money, for a fixed time period, in exchange for regular payment - a fixed amount of interest known as the coupon. If you hold on to the bond until its maturity date, you get back what you lent originally (the principal, or bond par price). As bonds, once issued, can be traded, you can also gain by selling it at a higher price before maturity.
Why invest in bonds?
A bond is seen as a 'fixed-income' instrument because it pays a regular amount at designated intervals. Singapore Management University's Associate Professor of Finance (Practice) Joseph Lim says: 'This is advantageous for investors looking for a steady stream of income from their investments - for example, retirees.'
In comparison, the dividend income a share investor gets may not be as reliable.
The capital value of the bond - which the investor will get back in full upon maturity - is also more stable than the price of a share. In fact, if a company goes into liquidation, bondholders, like other creditors, get repaid ahead of shareholders.
Of course, this low-return stability can be a drawback, particularly for young investors with a longer investment time-horizon. SIM University's head of programme for finance Associate Professor Sundaram Janakiramanan notes, though, that with Singapore's stock market being highly volatile over the past three years, it could be wise to diversify into bonds 'that are less volatile, and provide periodic return'.
Risks?
Yes, like any investment, bonds have their risks too - the bond issuer could go bankrupt and default on payments, or inflation could erode any gains you make from investing in the bond.
Ngee Ann Polytechnic School of Business and Accountancy senior lecturer Chong Kek Weng says: 'The savvy bond investor needs to be aware of macroeconomic trends such as inflation, unemployment, GDP/GNP, international trade as well as government fiscal and monetary policies.'
This is especially so in the current low interest rate environment, says SMU's Prof Lim. 'Interest rates are now more likely to go up than down. An increase in interest rates will result in a fall in bond prices,' he says.
SIM University's Prof Sundaram, too, cautions that how the market price of the bond moves affects whether the investor gains or loses if he wishes to sell his bond before maturity. He thinks it is 'not prudent' to invest in Singapore bonds at the moment.
Bonds generally also lack protection from inflation. Inflation affects the real value of both your principal (what you get when the bond matures) and your interest payments.
Inflation has been rising, so one question to ask is whether it could be higher than the coupon rate on your bond, in which case, the money you've invested in the bond may not be growing fast enough to keep up with inflation. There are exceptions though - certain bonds have coupon payments adjusted for inflation.
Also, although bonds can appear relatively safer with their fixed payments, the possibility of default must still be factored in, says Prof Sundaram. 'There is always a chance that a bond issuer might default on their coupon payments or the principal at time of contract maturity.'
Bond investments Government bonds
# Singapore Government
Securities are issued directly by the Monetary Authority of Singapore (MAS) via primary auctions which are announced periodically. You can submit bids for these via the DBS, UOB and OCBC ATMs once MAS has announced a primary auction, if you have a valid individual securities account with The Central Depository. Or, you can buy and sell SGS on the secondary market through an agent bank.
# Corporate bonds
Corporate bonds are listed on the Singapore Exchange so to buy them you will need to use a stockbroker who can trade securities on SGX. You can then buy or sell them just as shares of listed companies are bought and sold, at the market price. This can be done online too, if you're using an online broker.
Mr Chong observes that bond issuance is rising in popularity among companies, which means investors 'can look forward to more choices and a greater variety of listed bonds in the market'.
# Bond funds
Bond funds are professionally managed funds which pool together small investors' monies to buy bonds. It can be an economical way for a young investor to access the wider range of bonds which are not as accessible to retail investors with no investment expertise and a smaller portfolio.
A managed fund also diversifies across a range of bonds to reduce investors' exposure to any single issuer's risks, with fund managers monitoring risks too. But this means that the company will take management fees and some professional charges.
# International bonds
Some banks here offer both Singapore dollar bonds and bonds in an international currency, issued by corporations or governments from around the world. 'There is an exchange rate risk involved when investing in foreign bonds,' notes Prof Sundaram.
Such an investment can be attractive as bonds issued in a high interest rate country such as Australia will have a higher yield than that of bonds issued in low interest rate Singapore. But as this requires currency conversion, it is a good proposition only as long as the Singapore dollar does not appreciate substantially.
Know your bond jargon
# Term of maturity
Generally, bonds with a shorter term have a lower coupon. Bonds with a longer term of maturity usually offer higher payouts due to a longer waiting time before the borrower gets back his money.
# Coupon payment
Different bonds offer different coupon rates. Holding other factors constant, bonds with higher coupons are more attractive due to the higher yearly payout that the bondholder receives.
# Rating
Agencies like Standard and Poor's and Moody's Investors Service issue credit ratings on bonds. A higher rating suggests the bond is safer and that the issuer is more financially credible - less in debt with a lower probability of default. A bond rated AAA or AA is considered 'high grade', while one rated BBB and above is 'investment grade'. Junk bonds are usually high-yield bonds whose issuers have a speculative credit rating that is below investment grade.
'The difference between the yields of different rated bonds, known as yield spreads, tends to increase while the economy is not doing well, and reduces when the economy is doing better,' says Prof Sundaram.
# Denomination
Bonds are usually denominated in the currency of the country in which the bonds are issued, though they can be issued in a foreign currency too. The yield on the bond is then related to the interest rate in the country whose currency it uses.
Some common types of bonds include:
# Fixed-rate bonds: These pay the same level of interest throughout the tenure of the bond, until it matures.
# Adjustable-rate bonds: The interest paid on these varies according to economic conditions. Such bonds are often pegged to an index, such as the federal funds one or an interbank rate.
# Zero-coupon bond: This type of bond does not pay interest during its life-span, and so is normally sold at a discount to its actual value. So the investor makes his gain when he resells the bond, or redeems it at full value.
# Convertible bond: This usually has a low coupon rate, but allows its holders the additional option of converting the bond into shares in the issuing company, at a certain price, typically fixed at a premium to the market price of the shares.
# Singapore Government Securities (SGS): These bonds are issued by the Singapore government, with maturities of two, five, seven, 10, 15 and 20 years. The Singapore government does not actually need to borrow money to finance its expenditure. Its issuance of SGS is more to provide a liquid investment alternative with little risk of default, and to establish a liquid government bond market to serve as a benchmark for the corporate bond market.
This article was first published in The Business Times.
How to say 'good riddance' to credit card scammers
Report from The Nation/Asia News Network dated
The scammers of this digital age are so good that even the most cautious person can easily fall into their traps.
Just recently, a female executive received an unexpected phone call in the middle of a business dinner.
Normally, the worst case scenario for this situation would be the usual suspect - a very annoying telemarketing call. So why was she getting paler and paler?
The reason she looked so alarmed was that, in the space of less than a month, she had received similar calls from different callers, all on the same subject: the old car she sold 10 years ago. The exact details of the car - its make, model, colour, and even the licence plate number - were accurately referred to by all the callers, who were offering her a personal loan at "a special interest rate".
They all thought she must be in need of quick cash. She needed no collateral for this loan - but she needed to come out to meet the callers at an ATM!
Other popular targets of these scammers are people who travel a lot, like businesspeople, who make frequent financial transactions in random places. These people are targeted because they often pay by credit card so as to get a receipt with which they can later reimburse their expenses. By the time the card owner realises the fraud, millions may have already been spent.
In other cases, the victims are ordinary folk already struggling to make ends meet. Their lifetime savings are sucked dry almost as soon as they hang up the phone.
So just how is it possible for someone to get hold of your personal information like credit card numbers, past records of financial transactions or even full details of your car licence plate and ownership information?
The most basic way, which is now easy to spot and so no longer popular, is by duplicating your credit card information via the magnetic stripe readers at the gas station. Digging a credit card sales slip from a rubbish bin is also effective but a bit too primitive for many. Nowadays, hacking credit card information from e-shopping websites is one of the most popular methods for these cunning thieves.
Another possible but more organised method is through rogue telemarketing agents. These bad guys make copies of your credit card application and supporting documents and sell the list to illegal parties in bulk.
This kind of fraud is such a lucrative business that scammers have invested to open underground operations in countries where the laws are lax. No wonder the callers speak Thai with a foreign accent.
How can we minimise the risk?
• Never leave your credit card out of sight anywhere. Good department stores and reliable merchants will either ask you to come to the cashier counter or even bring a mobile card reader to you.
• After receiving a call from your bank, always double check with its call centre to make sure the call is really legitimate. It is very unlikely that banks will conduct financial transactions through an outsourced agent.
• Always check that your financial statement matches your sales slips.
• When shopping online, make sure the website you are browsing has the locked key symbol and its URL "https", or that the site certified by global financial bureaus like Visa or MasterCard.
Follow these precautions and you'll be able to say to these devious scammers: "Good riddance!"
Janejit Ladpli is vice president, Travel & Leisure Marketing Division, Krungthai Card (KTC).
How to say 'good riddance' to credit card scammers
By Janejit LadpliThe scammers of this digital age are so good that even the most cautious person can easily fall into their traps.
Just recently, a female executive received an unexpected phone call in the middle of a business dinner.
Normally, the worst case scenario for this situation would be the usual suspect - a very annoying telemarketing call. So why was she getting paler and paler?
The reason she looked so alarmed was that, in the space of less than a month, she had received similar calls from different callers, all on the same subject: the old car she sold 10 years ago. The exact details of the car - its make, model, colour, and even the licence plate number - were accurately referred to by all the callers, who were offering her a personal loan at "a special interest rate".
They all thought she must be in need of quick cash. She needed no collateral for this loan - but she needed to come out to meet the callers at an ATM!
Other popular targets of these scammers are people who travel a lot, like businesspeople, who make frequent financial transactions in random places. These people are targeted because they often pay by credit card so as to get a receipt with which they can later reimburse their expenses. By the time the card owner realises the fraud, millions may have already been spent.
In other cases, the victims are ordinary folk already struggling to make ends meet. Their lifetime savings are sucked dry almost as soon as they hang up the phone.
So just how is it possible for someone to get hold of your personal information like credit card numbers, past records of financial transactions or even full details of your car licence plate and ownership information?
The most basic way, which is now easy to spot and so no longer popular, is by duplicating your credit card information via the magnetic stripe readers at the gas station. Digging a credit card sales slip from a rubbish bin is also effective but a bit too primitive for many. Nowadays, hacking credit card information from e-shopping websites is one of the most popular methods for these cunning thieves.
Another possible but more organised method is through rogue telemarketing agents. These bad guys make copies of your credit card application and supporting documents and sell the list to illegal parties in bulk.
This kind of fraud is such a lucrative business that scammers have invested to open underground operations in countries where the laws are lax. No wonder the callers speak Thai with a foreign accent.
How can we minimise the risk?
• Never leave your credit card out of sight anywhere. Good department stores and reliable merchants will either ask you to come to the cashier counter or even bring a mobile card reader to you.
• After receiving a call from your bank, always double check with its call centre to make sure the call is really legitimate. It is very unlikely that banks will conduct financial transactions through an outsourced agent.
• Always check that your financial statement matches your sales slips.
• When shopping online, make sure the website you are browsing has the locked key symbol and its URL "https", or that the site certified by global financial bureaus like Visa or MasterCard.
Follow these precautions and you'll be able to say to these devious scammers: "Good riddance!"
Janejit Ladpli is vice president, Travel & Leisure Marketing Division, Krungthai Card (KTC).
Thursday, 14 April 2011
Before you start investing
| Report from The Business Times (Singapore) dated 6 April 2011 :- Before you start investing | ||||
 | ||||
| By Teh Shi Ning IT is a truth widely acknowledged that a single man in possession of a good fortune must be in want of a good investment to marry that fortune to.
One reflection of rising investor interest among the young has been the Singapore Exchange lowering the minimum age to open a trading account to 18 two years ago, but the number of savvy young investors and success stories of their ilk appear to be on the rise too. Interestingly, people often embark on financial planning and investing later than they think is ideal. While based on the rather dated National Financial Literacy Survey of 2005, 54 per cent of those surveyed thought they should start planning their finances once they start work, but only 32 per cent actually did. This does still seem to be the case. Most would appreciate the importance of investing, over and above saving, especially in this current low-interest rate environment. But many are also daunted by the sheer array of investment products and opportunities out there. To warm up for the plunge into these asset classes next week, here are a few points to think through before you start investing, or for those already dabbling in investments, to take stock of where you are headed. | ||||
What are your investment objectives? What is your investment horizon?
Investment objectives are set by balancing your current and future financial needs.
Youth is on the investor's side. Each person's investment objectives are shaped by the stage of the life-cycle he or she is at, says Ang Ser-Keng, senior lecturer of finance at the Singapore Management University's Lee Kong Chian School of Business.
'The investment objective is important because it affects the time horizon,' says Mr Ang. So, a young person who has by default a longer expected life span, can afford to view his investments over a longer time horizon and thus take on riskier investments in exchange for potentially higher returns.
But people in their 20s would range from those still in tertiary education, to fresh entrants to the workforce, to others who may need to factor in support for ageing parents. So, age is not the sole determinant - lifestyles and personal financial commitments shape investment goals too.
Other points to consider include whether big-ticket expenses such as a wedding, a car or a house are on the cards, and whether you intend to save for and finance your children's university education.
Will upkeep of a certain lifestyle retirement suffice, or do you aim to attain spectacular investment success Warren Buffett-style (and give most of it away)? Why you intend to amass wealth will help determine where you decide to put your money into and how.
What is your financial situation/ net worth?
It's also worth having a clear idea of how monthly income and expenses affect how much you can invest.
Mr Ang says a simple gauge of how much you are able to put to work in the markets is to figure out your (Keynesian) money demand in transactionary, precautionary and speculative terms.
In other words, cash for day-to-day needs, cash for the rainy day and cash available to invest and grow.
Invest only with money you can comfortably spare both now and in the foreseeable future, he says.
'It also does not hold you hostage to having to sell assets at very low prices under adverse market conditions, very frequent these days, so that you can sleep well at night.'
What is your risk profile?
Most people can instinctively say if they have a good appetite for risk, or a tendency to shy away from risks. But that is only a subjective type of risk profiling.
'It is a common myth that a risk profile is just about how much risk an investor is willing to take - risk taking versus risk aversion,' Mr Ang says.
If a risk profile is to be used in asset allocation, it needs to be supplemented with an objective risk profiling. In other words, not just how much risk you think you can take, but how much you can actually afford to take.
'The litmus test of an investor's capacity to take risk is whether he would suffer a significant loss in quality of life if a complete loss of the investment occurs,' Mr Ang says. If so, he should then view himself as owning a lower risk profile, even if behaviourally, he is a risk taker.
How much do you know about investing?
'An investment in knowledge always pays the best interest,' Benjamin Franklin once said, a phrase just as well applied to investing for financial gain.
While money management is a lot of common sense, investing entails products and strategies that are not always easy to understand.
On top of researching thoroughly any investment product or strategy, the basic rule which bears repeating, going by the fallout post-Lehman's collapse, is to ask till you understand, and if you still don't, avoid.
Some oft-mentioned strategies include:
Diversification and asset allocation
Spreading the wealth you wish to invest across a variety of investments helps reduce the risk that the failure of any single investment wipes out the value of your entire portfolio.
Different products react differently to the shocks which rock world markets more frequently these days, and diversification can be undertaken by asset classes but also by sectors and geographies.
Think about the composition of your portfolio methodically. The mix of assets in your portfolio ought to help reduce your overall risk, while the exact allocation depends on your investment horizon and risk tolerance.
Dollar-cost averaging
Some advocate invest set amounts on a regular basis over a certain time horizon, whichever way the market heads, as a useful way to invest amid volatility. The idea behind this is that since investors are unlikely to be able to 'buy low and sell high' or 'time the market' all the time, it is preferable to buy a smaller amount each time but do so regularly.
While no shield against market fluctuations, dollar-cost averaging is supposed to lower the average cost of investments over time compared to that of a one-off investment. This is because, in theory, regular investing will mean buying more shares when prices are low and fewer shares when prices are high.
Making cash investments
| Making cash investments | ||
| ||
| By Jermaine Ng A KEY rule of investing is to not invest in something that you do not understand. Most investors are faced with three fundamental investment choices: cash, stocks and bonds. There are variations on each investment option which can sometimes be confusing, and push investors to not follow the rule above. To help with this, the BT-Citibank Young Investors' Forum will start by looking at cash this week, and the other two options in the following weeks. Perhaps we should start by defining 'cash'. For the purpose of investing and savings, cash - or cash equivalents - is defined as notes and coins, or balances in the bank account, says Ang Ser-Keng, senior lecturer of finance at the Singapore Management University's Lee Kong Chian School of Business. Cash is an asset class which is typically seen as a safe investment with nary a risk. What differentiates it from other asset classes is that it usually ensures that the investor has a specific return. It also matures quickly - as short as three months. How and where can we invest our cash? 'Very broadly, cash can be invested in stocks, bonds, money markets or placed in bank deposits,' says Mr Ang. Bank deposit accounts can generically be classified into demand deposits and time deposits. 'Demand deposits allow savers to draw their monies out at any time with no restrictions nor penalties - these could be savings or checking accounts,' says Mr Ang. The latter provides the ability to write cheques to make payments. Time deposits, on the other hand, require savers to keep the monies with the bank for a specific period of time - such as three, six, nine or 12-month intervals. 'For this certainty, the bank pays a higher interest for time deposits and there is usually a penalty for early withdrawal,' he says. If deposits do not really appeal to you, you might want to consider investing in money market securities as an alternative. |
These are 'short-term instruments that have a maturity period of less than a year'. They are highly liquid and represent very high-quality instruments, says Mr Ang. Examples include government bills and Negotiable Certificates of Deposits.
'Another alternative would be money market funds that afford the benefits of diversification across different instruments,' says Mr Ang.
Not to be confused with money market accounts, money market funds seek to maintain a net asset value of $1 per share while earning interest at the same time. While low-risk, these also yield lower returns and may not be as feasible as a long-term investment option.
Insurance can also be an indirect investment. 'Insurance is an indirect
way of investing in stocks, bonds or placing it in deposits or money markets,' says Mr Ang. 'The premium that is paid to the insurance company would need to be invested to produce the returns (interest) that the insured expects from the insurance policy.'
As a fresh investor, you must take note that cash is highly liquid - it is one of the most liquid asset classes that anyone can have in his portfolio.
So cash-based investments are good for retaining liquidity, or 'the ability to convert the instrument to cash quickly and cheaply, at the lowest transaction cost, whenever it is needed', within your portfolio.
'One of the things that is crucial for an investor is to have a good sense of how much transaction fees or penalty is involved when liquidating that asset or if there is a way to cash out of the investment,' says Mr Ang.
Another thing to note is that different accounts have different fees levied.
'Each bank would charge a fee if the depositor has amounts less than minimum sums,' says Mr Ang. 'In addition, some banks charge for each cheque book that is issued. Some saving accounts provide for higher interest rate if you continue to deposit amounts on a continuous basis (usually monthly), failing which you will earn very minimal interest rate.'
It is also important not to confuse savings with investing in cash.
'Technically, one does not 'invest' cash as savings is not equal to investing,' says Mr Ang. 'Saving connotes placing money in the bank account where a depositor takes risk on the safety of the bank receiving those deposits.'
'In some cases, the government provides guarantees against losses resulting from bank failures. Investing, on the other hand, requires the investor to take additional risks, such as market risks and firm specific risks.'
While many people tend to see cash as simply a back-up tool to turn to in times of emergency, it does have the capabilities to hold a strong position in one's portfolio assets.
It is always useful to set aside a certain percentage of one's portfolio in cash equivalents, mainly because of the stability and certainty it provides: This asset class is indisputably safer and less risky than investing in other asset classes.
Another advantage is that it prevents you from liquidating assets from other classes when you have a large upcoming expense.
For example, if you have to pay for a house or a car, it may not seem like the best option to liquidate some of your portfolio - especially if the market is bearish.
'(Cash equivalents) can be readily converted to cash whenever needed,' says Mr Ang, which is preferable to liquidating part of your long-term investment portfolio.
On the downside, of course, cash equivalents yield relatively poorer returns. 'In many cases, interest is below inflation,' said Mr Ang.
Singapore's consumer price inflation rate stood at 5 per cent in February, and inflationary pressures are expected to be sustained as energy and commodity prices continue to climb. What this means is that cash investments are left poorly fended in a season of escalating price levels.
Also, cash equivalents are 'still subject to the safety of the bank', says Mr Ang, because 'there is a limit to which the government will guarantee deposits'.
Sounds mind-boggling? Worry not, for it simply means having to do ample question-asking before sectioning a portion of your money in cash equivalents.
It is also important to research and query each bank and financial institution to see which fits you best - after all, it is your money at stake.
This article was first published in The Business Times.
Tuesday, 12 April 2011
Working From Home - The Pros and Cons
Working From Home - The Pros and Cons
Posted on April 12, 2011 by Admin
How To Find Out If Working From Home Is For You
How To Find Out If Working From Home Is For You
Posted on April 12, 2011 by Admin
The Hidden Benefit of Working From Home for Yourself
The Hidden Benefit of Working From Home for Yourself
Posted on April 12,2011 by Admin
Home Business Trap #1: Trading Hours For Dollars
Home Business Trap #1: Trading Hours For Dollars
Flipping through late night TV infomercials you’ll find any number of celebrities hawking the latest business system to folks who hate their day job and are looking for an easy way into their own home based business. The biggest trap people fall into is jumping from the corporate world into a home business that is still trading their most valuable asset (time) for dollars. Except now they are working more hours because their is nobody else to take up the slack. As the boss, they now have all the responsibility.
Looking around the available opportunities in the online world there’s not much difference. Many of the supposedly good ‘online businesses’ really only offer a way for people to work from home in their PJ’s but still are trading hours for dollars. Some examples are building small sites to sell for $150-200. Building a site is hard work – why would you want to turn over the profit potential to someone else?
Article marketing is really a grinding way to earn a living. Selling services on discount sites such as fiverr is really not a profitable option.
If you’re not building a system that develops multiple residual income streams you’re never going to build true wealth for yourself.
What is residual income? In the traditional business world an example would be accumulating rental properties, allowing the rent income to pay the mortgage off over a 15 year period and then you own them free and clear and the rent income is 100% profit (well, almost – you need to deduct maintenance and taxes).
The online version of real estate is domain names and web sites. Instead of borrowing hundreds of thousands of dollars to purchase real estate you can buy a domain name and hosting for a few dollars and with some dedicated work build a web site (or spend $50 or so to outsource). If you build a niche site around a product that you can sell as an affiliate you can bring in $5-20 per day per site. Once complete, the site takes very little maintenance so you can move on to the next site and before long have a network of 100+ sites working for you. No payroll, no real estate taxes and no roofs to replace.
Building 100+ sites might seem like an impossible task if you’re just getting started. It’s kind of like eating an elephant though – it can be done you just need to do it one bite at a time. Your first site is going to take some time to complete. Keyword research, finding a suitable domain name, installing your site software, theme, plug-ins, etc. and then you need to write the articles and promote. There are a number of shortcuts that can save you significant time and money. Before long you’ll be putting up a new site in a matter of hours instead of days.
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