The allure of Financial Advisors

I have to admit then when I first entered the working world, the experience of  sudden "huge" cash inflows monthly can be quite overwhelming. It is also at this stage where most of us will be targeted by Financial Advisors. After all, at that stage of our lives, we had few commitments, were eager to compound our wealth and probably had little or no Financial Literacy at all. The perfect target.

Then there is the feeling of exclusivity of having people managing your "wealth", advising you on which funds or assets to invest in. You are ok with paying a small fee for this service, thinking you are in good hands. Every once in a while, you might also receive updates or reports on the Macro economic situations, which uses terms such as "fiscal cliff", "monetary easing", "hunt for yield" etc...you get the idea. Sounds like they know their stuff.

But is it all good really? Well, I have the following questions you could ask yourself about this.

1. Is the advisor a true friend of yours that you have known for many years?
2. If the answer to the above question is no, is there a conflict of interest if the advisor's monetary gain is achieved by making you invest and maintain a sizeable investment portfolio, irregardless of the portfolio's performance? In other words, the advisor makes money irregardless of whether you make or lose money.
3. Is your investment decision based on just a few meetings with the advisor and by him showing you some of the funds that had made money in the past?
4. Lastly, the most important of all, did the advisor show you his company track records of how actual client portfolios, net of fees, performed in the past? AND benchmark the performance to anything at all?

By answering the above questions above, I believe most would have realised they are letting the advisors handle and manage their money purely by faith. Faith in that their investment portfolio will turn out well in the future. What is the basis of this faith really?

As Jon from BigFatPurse has said in the last few paragraphs of his post, Financial Literacy (the lack of it), compounded over time can lead to loss of tens or hundred thousands of dollars. One can no longer afford to ignore it because one "finds it too complex to understand".

Hope this article can inspire people to take some concrete actions towards improving their financial literacy.

My own STI ETF investing update

Sometimes people asked me if I implement the POSB BCIP, which I advocate, and my answer is no.

This is because I know that I am conditioned to buy the STI ETF when it falls, but I cannot say the same for others who are new to investing (and usually these are the people suited to index investing). Below shows the different points at which I bought the STI ETF in 2015:

Although my plan is to invest roughly once every month, you can see that there were no purchases during mid April to end June. And there were 3 purchases within the span of a month in mid Aug to early Sept alone.

If the STI undergoes further correction, I'll expect myself to be buy more. So I do hope in the near future, there are opportunities to accumulate the STI at even cheaper prices.

Time to abandon the Permanent Portfolio?

I have invested in the (modified) Permanent Portfolio for slightly over 3 years now. And I'm considering abandoning it.

Don't get me wrong, it is not that I am giving up or that I no longer believe it works. It is because I have found another strategy that should give even higher returns.

Even if the Permanent Portfolio works as it should, it generates an average compounded returns of 9%. However, the other strategy generates 15% returns, based on backtested data as well.

As this strategy involves investing in US equities as well, and currently, the US market is at the 3rd highest CAPE ratio in the 130-year history (27.1 at time of writing), I am waiting for a correction to happen before I make the final decision. If that happens, I can also see for myself what happens to my Permanent Portfolio.

I'll wait...

Insurers Participating Fund Performance

I remember a few years back when buying insurance policies, there are two illustrations of the Cash Value of the policy, depending on the Insurer's Participating Fund (a.k.a. Par Fund) investment returns of 3.75% or 5.25%.

Currently, it seems the industry standard has lowered the illustration for returns of 3.25% and 4.75%.

As the the Cash Value of these illustration can only be realised only if the underlying Par Fund achieve at least those returns, I set to find out the past performance of the different Par Funds for the more common insurers.

First, I present the Par Fund's Expense Ratio, extracted from comparefirst.sg.

		2011	2012	2013	2014	Average
AIA			0.12%	0.13%	0.10%	0.12%
Tokio Marine			0.12%	0.11%	0.10%	0.11%
Great Eastern		0.21%	0.22%	0.23%		0.22%
NTUC Income			0.153%	0.147%	0.160%	0.15%
Manulife		0.17%	0.17%	0.17%		0.17%
Prudential			0.27%	0.27%	0.26%	0.27%

Next, I have collected the individual year performance of each insurer's Par Fund and obtained the following cummulative performance from beginning of year 2005:

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	CAGR
AIA	100%	101.7%	108.2%	114.9%	102.0%	115.4%	123.7%	124.8%	137.1%	138.4%		3.68%
Tokio Marine	100%	113.2%	130.8%	146.8%	121.6%	146.0%	155.8%	154.7%	171.0%	175.0%	186.3%	5.76%
Great  Eastern	100%	105.0%	113.8%	126.2%	112.0%	122.6%	130.7%	132.7%	145.7%	151.0%		4.68%
NTUC Income	100%	106.8%	118.3%	131.0%	116.5%	130.4%	138.1%	136.9%	148.6%	151.1%	159.3%	4.21%
Manulife	100%	103.5%	119.8%	131.1%	119.8%	139.7%	149.9%	148.5%	164.4%	162.8%		5.57%
Prudential	100%	107.4%	122.2%	133.0%	101.2%	124.9%	133.9%	134.1%	148.9%	156.6%	165.9%	4.59%

From the above data, it is clear that why Tokio Marine is the only insurer in Singapore to have honoured their bonus projections for the past 66 years.

Invest in STI ETF in 17 mouse clicks

As the title says, here we go:

Financial News Anecdote

Straits Times article in "Money" section on 7th Mar 2015 (Saturday) headlined "Upbeat sentiment lifts local bourse", and went on to say "Hopes on positive US jobs data and optimism in Europe are key reasons"

Another Bloomberg article also dated 7th March 2015 states "S&P500 tumbled in the final session of the week after data showed employers added 295,000 workers to payrolls in February, .. unemployment rate dropped to 5.5 percent, the lowest in almost seven years."

The same reason leads to 2 very different outcomes, amusing indeed. Why is that so? Singapore is 13 hours ahead of New York, and this is a perfect example of people finding reasons to justify stock market's performance, and there isn't a need for it in the first place.

Performance of CPFIS and ILP Funds

This post is inspired by the Sunday Times article on 1 Mar 2015, titled "CPFIS-included funds outperformed the STI"

The article compared the performance of CPFIS and ILP funds to the Straits Times Index over a 1 year period. I'm quite sure a longer time horizon will tell a different story.

I went to the source which provided the data (http://www.imas.org.sg/index.php/resources/report) and extracted data all the way back from 1999. Investing (especially for retirement) is for the long term.

To have a fair comparison, I will use the MSCI World Total Returns (TR) as the benchmark (data which the IMAS report provides), as the universe of Unit Trusts and ILP Funds invests in the whole world (Asia, US, Emerging Market etc).

	3 Year Rolling Total Returns (SGD)
	Dec-02	Dec-05	Dec-08	Dec-11	Dec-14
MSCI World TR USD*	N.A.	N.A.	-31.66%	25.60%	60.04%
CPF IS Unit Trust (Equity)	-40.17%	74.71%	-27.68%	42.73%	40.11%
CPF IS ILP (Equity)	-39.47%	60.60%	-27.40%	32.86%	38.53%

*Data of MSCI World not available in reports for period 1999-2005

I shall re-arrange data from the above table into the following 2 sections:
I extracted the cummulative yearly returns and summarised them into the following 2 sections:

CPFIS Funds vs ILP Funds vs MSCI World Index
The table and graph below shows the cumulative Total Returns since Dec 2005:

	Dec-05	Dec-08	Dec-09	Dec-10	Dec-11	Dec-12	Dec-13	Dec-14	Dec-14
MSCI World TR USD	100.00%	114.43%	68.34%	87.10%	89.28%	85.83%	94.22%	124.05%	137.36%
Singapore Straits Times CR	100.00%	151.96%	77.24%	127.05%	139.87%	116.04%	138.87%	138.89%	147.55%
CPF IS Unit Trust (Equity)	100.00%	137.00%	72.32%	107.40%	114.73%	99.70%	112.26%	127.98%	139.86%
CPF IS ILP (Equity)	100.00%	139.03%	72.60%	107.41%	112.74%	95.39%	106.79%	122.61%	132.03%

The performance of Unit Trusts and ILP are for the entire universe of equity funds, in the respectively categories. One would achieve the above performance only if one buys the entire basket of equity funds in the respective categories.

On the other hand, one can just buy one (or a few) ETFs directly like the iShares MSCI World Index ETF, to obtain the equivalent performance of the MSCI World TR performance.

CPFIS Unit Trusts vs ILP Funds

	Cummulative Total Returns (SGD)
	Dec-99	Dec-02	Dec-05	Dec-08	Dec-11	Dec-14
CPF IS Unit Trust (Equity)	0%	-40.17%	34.54%	6.86%	49.59%	89.70%
CPF IS ILP (Equity)	0%	-39.47%	21.13%	-6.27%	26.59%	65.12%

The performance of ILP Funds trails that of Unit Trusts' in all the 3-year rolling periods where there are gains. In periods where there are losses, the ILP Funds did only slightly better by about 0.3%.

I can conclude that ILP Equity Funds are in general a terrible investment vehicle. The reason behind their sub-par performance might be due to their higher fees or just plain lousy fund managers.

Summary

• The above CPFIS Unit Trusts and ILP Funds have not take into account the effect of sales charges, which is levied every time an investment is made (e.g. monthly for ILP monthly premium payment).
• One can just invest in the World Index to achieve comparable performance to funds managed by "Professional" fund managers.
• The exception might be if one believe in his/her Financial Advisors' forecast which sector will prosper in the next 15 years, and concentrate the investments in the particular sector.  Good luck to those who trust these forecasts/predictions.
• ILP Equity Funds greatly underperform Equity Unit Trusts.

Company Analysis Pt 2

A continuation of Pt 1, which looked at the earnings of the company.

Based on their latest 2014 Annual Report, I shall summarise briefly the company's Net Worth (a.k.a. Book Value).

Amounts stated are in millions, unless otherwise stated

Assets

Cash

The company holds $298 million in cash and equivalents

Properties and Land

	Book Value	Liquidation Value
Investment Properties	$654	$654
Leasehold Land	$0.283	$0.283
Total	$952	$952

The company holds the above assets, which probably can be liquidated close to the above stated value of $952 million.

Investment Holdings

		Book Value	Liquidation Value
Short-Term	Investments (quoted)	$31.6	$15.3
Long-Term	Investment (quoted)	$127	$63.5
	Investment (unquoted)	$16.6	$8.80
	Development property	$241	$120
	Amt due from associates	$85	$42.5
	Total:	$501	$250

Assuming a conservative liquidation value 50% of book value: $250 million.

Receivables

	Book Value	Liquidation Value
Trade Receivables	$16.0	$8.0
Amount due from Associates	$114	$57
Cash pledged to bank	$39.3	$39.3
Amount due from  jointly ctrl entities	$0.460	$0.23
Total:	$170	$104.5

 

As the company is in net cash position, it is unlikely it will default on its bank borrowings, hence the cash pledged to bank will be considered 100% recoverable.

Amount due from associates is quite significant. They are businesses where the company has a 20-50% equity stake in, and are incorporated in Indonesia, Malaysia and PRC.

Total liquidation value of Receivables: $104.5 million.

Inventories

	Book Value	Liquidation Value
Inventories	$15.1	$7.5
Total:	$15.1	$7.5

The book value of the company’s Inventories is after deduction of allowance for obsolete inventories. So a 50% margin of safety should be more than sufficient, leading to conservative Liquidation Value of $7.5 million.

Adding the total liquidation values of the above assets, the total sum is $1.314 billion.

Liabilities

Let's look at what the company owes.

	Book Value
Current Liabilities	$134
Non-current Liabilites	$325
Non-controlling Interest	$3.08
Total:	$462

Total liabilities and non-controlling interest of $462 million.

Summary

With assets conservatively valued at $1.32 billion and liabilities of $462 million. The company has a conservative net worth of $852 million.

The company has been in existence since 1957 and was listed in 1973. The market as on 13th February 2015 is selling this company for $803 million. One can buy $852 million (conservatively valued) worth of assets for just $803 million.

On top of this, these assets based on past 10-year record, has been generating on average, annual EBT of  $77 million and operating cashflow of around $33 million.

Lastly, this company has been growing its Net Tangible Assets every year for the past 10 years.

I'll leave it to the individual to decide if this company, Metro Holdings, is a good buy.