I was glad that someone finally wrote about the varying degree of risk of different investment instruments in the Straits Times on 28 September 2008.

Singaporeans love to compare prices and do their research on different brands of electronic items, home appliances, cars, travel packages etc. before settling on their final buy.

Ironically, when it comes to investing their money, little research is undertaken and people tend to go with the advice of their relatives and  friends who may not know all the facts of a particular instrument.  Even the sales persons at the banks may not be acknowledgeable enough to do just that.

In the article “10 Degrees of Risks: From the Safest to the Most Dangerous” by Lorna Tan, she discusses about the corresponding risk level of ten different types of investments and their pros and cons.

And you know what, unit trusts win hands down! Unit Trust is ranked no. 5 on a scale of 1 to 10 (most dangerous).

Ranking at no. 1 is cash, followed by bank deposits, no. 3 is money market funds and no. 4 is bonds where the returns may not keep pace with inflation.  Ranking from 6 to 10 respectively are equities (shares), complex structured products, futures, foreign currency trading and hedge funds.

Below is an extract from the article:

Unit Trusts

‘What: When you invest in a unit trust, you are pooling your money together with many other investors. For a fee, a professional fund manager invests this pool of money in bonds, stocks and other instruments to reap returns consistent with the stated investment objectives of the fund. The potential returns vary from 6 per cent to double-digit figures.

Pros: Your investments are managed by professionals. Through unit trusts, you are exposed to a wider pool of equity stocks and gain better diversification.

Cons: Ms Ng cautioned that unit trust investments are not without risks and capital can be lost. The minimum investment amount is low at $1,000.”

Unit trusts are suitable for most investors as there is a wide range of funds with different asset classes to choose from.

Unit trusts are recommended for new investors as well as experienced investors and for those who want to gain diversification at lower cost.

For the full article, go to category Newspaper/Magazine articles.

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Q: How does the Monetary Authority of Singapore ensure that unit trusts here are in safe hands?

Referring to Page 16 of “Making Sense of Unit Trusts”, you will realize that the bulk of the funds you are investing in are approved by the Monetary Authority of Singapore (although that does not mean that returns are assured).

You can see on Page 17 that MAS sets out rules and regulations that, among other things, require fund managers to adhere to to ensure that the investments they manage are sufficiently liquid and diversified. MAS thus forms another pair of eyes, in addition to the trustees of the funds.

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

Next - “What will happen to my investment if the unit trust is terminated?”

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Views from the iFAST Research Team

The main question on every investor’s mind would be “How effective would this US$700 billion bailout plan be in tackling the current financial crisis?”

With this in mind, the iFAST Research Team has put together their views in a short Q & A.

Q: What will be the impact of the US$700 billion rescue plan proposed by the US Treasury and the Federal Reserve on the financial markets? How effective would this be in stemming the crisis in the financial markets?

A: The proposal is the largest bailout plan since the Great Depression. It definitely injected the much needed confidence into financial markets by telling investors that the government would put in tremendous efforts in trying to end current crisis. However, we are still awaiting the details on the plan, in order to provide a concrete view of whether the plan would be effective in stemming the crisis in the financial markets.

Q: This plan is funded entirely using the money of US taxpayers. Would this have any negative implications for the US economy and the US dollar?

A: While we do not think that the plan can stave off a recession, the alternative of not having a rescue plan would potentially see the economy going through a much worse recession. The plan would add on to the US debt levels, which suggests weakness in the dollar. However, currency weakness has been seen before the crisis and as other major economies weaken, we think the USD would likely remain stable.

Q: In the long run, do you think the current financial crisis will produce some positives for the global financial markets?

A: The current crisis allows the stronger banks to buy over troubled banks at attractive prices. In the process, they also acquire talent and expertise which can complement their existing businesses. The current crisis also allows banks to develop better risk management techniques. Although the current deleveraging and tougher regulations after the crisis could suggest lower profitability, these surviving financials would remain an important part of the equity market, and also part of an investor’s portfolio.

Q: How should investors react to the volatility in the equity markets now?

A: On 22 September, the US S&P 500 index fell by 3.8%, after talks that negotiations on the US$700 billion bailout plan may drag into the following week.

There is also concern in the market over the impact the bailout package would have on the broader US economy in the coming years.

We think that this is a time where investors are still unsure of what kind of policies would work or not, as such, investors tend to be very jittery. However, we think that the pessimism over the financial crisis, and its negative effects, will not simply go away by injecting fresh funds into battered mortgage debts.

The pessimism would dissipate when investors realize that most of the pessimism has already been priced into the markets.

It’s quite impossible for anyone to pick the market bottom, but as always, we believe in buying into the markets when it is at a low, and at current valuation levels, it looks like a good time.  Investors should look beyond the current volatility and remain invested in the markets for the long haul.

A New Landscape on Wall Street

Looking ahead, Wall Street in the post-financial crisis era would be vastly different. Following the approval by the US Federal Reserve of the application by Goldman Sachs and Morgan Stanley to become banks, the heady era of investment banking is all but over.

This financial crisis has exposed the shortcomings of the current financial system. Reckless lending by the financial institutions, the packaging of sub-prime mortgages into complex derivative products etc.; all of the excesses which have come to characterize the financial landscape of Wall Street, have been swept away with this current crisis.

Although the costs of this financial crisis have been tremendous, there remains the silver lining. The financial institutions left standing in the aftermath of this crisis would only become better and stronger. The current “forced consolidation” of the financial industry also means that the industry would become better regulated in the future.

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Today, we’ll take a look at:

Q: Will my unit trust holdings ‘disappear’ along with the collapse of major US banks?

We first need to understand the structure of a unit trust. I draw your attention to some extracts from the national financial education program “Moneysense” website on “Making Sense of Unit Trusts”.

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

On page 2

You will learn that one of the merits of unit trust is that it invests in a wide range of assets and this means that your risk exposure to any single company collapsing is not likely to wipe out your investments. If however, you are holding on to individual stocks or have direct investments (not unit trust) with a bank that went down, your risk exposure will be much higher and can be adversely impacted.

It is also interesting to note that during bad times when some firms collapse, surviving companies that ride through the crisis will have a bigger market share moving forward.  Hence, a diversified fund will cushion your fall during the bad times and allow you to benefit from the potential higher profitability of surviving firms. These will be companies with good balance sheets, strong management and successful businesses.

On page 15

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

You will see one of the most important features of the underlying structure of a unit trust - the fact that it is called a unit trust means that investors’ money are held in a trust where an independent party called the trustee is appointed as custodian of the fund’s assets.  The trustee ensures that the appointed fund managers are managing the fund according to guidelines laid out in the trust deed to minimize the risk of mismanagement by the fund managers.

As an investor, you can be rest assured that your investments are held in trusts and the funds are separated from the fund managers’ assets (which can be taken away by creditors).

In essence, Unit Trusts offer:

1. Security (trust structure)
2. Protection from single market calamity (through individual fund & portfolio diversification)
3. Certainty (given time, diversified investments have historically recovered)

The next concern that many investors have now is: ‘How does the Monetary Authority of Singapore ensure that unit trusts here are in safe hands?

Check out the reply tomorrow.

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Great morning to you!

If you’ve just visited my blog, this is a continuing segment where I’ll be sharing with my clients the facts and a rational approach to the current US financial crisis.

Here’s the answer to the next question.

Q: The value of my unit trust investments has fallen along with the market turmoil. What should I do now?

The US is the leading world economy in terms of market capitalization.  Any collapse in their financial institutions will inevitably have a triggering impact on the rest of the world, even though direct exposure may not be there.

The good news is your unit trust investment portfolio is well diversified into different regions and asset classes. We have selected your funds based on valuations and sound investment principles that are used by successful investors like Warren Buffet and Peter Lynch.

From the very beginning (3 to 4 years back), we have been bearish about the US economy. Therefore, your portfolio has no or very little exposure to the US.

The next question that we will be exploring is: Will my unit trusts holdings ‘disappear’ along with the collapse of the major US banks?

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Given the recent events in the US financial markets, we have compiled a set of questions and concerns you may have:

• Why are banks in the US filing for bankruptcy?
• The value of my unit trust investments has fallen along with the market turmoil. What should I do now?
• Will my unit trust holdings vanish along with the collapse of major US banks?
• How does the Monetary Authority of Singapore ensure that unit trusts here are in safe hands?
• What will happen to my investment if the unit trust is terminated?
• I have AIG unit trusts. What is their fate?
• Should I withdraw or sell my investments now? What would happen if I do?
• Is this a good time to invest?

We have written, specially for our clients, answers to the above with the facts and a rational approach in making the best of the current circumstances.

Here are some of the news-makers that have sparked the recent waves of concern among investors and the public globally:

• $1 trillion in bailouts using US tax-payer money
• AIG
• Lehman Brothers
• Merrill Lynch being acquired by Bank of America
• Fannie Mae and Freddie Mac
• Citigroup
• Bear Sterns
• Housing loan bubble

Q: Why are banks in the US filing for bankruptcy?

The predicament that major US banks are facing now is due to the over lending of mortgage loans to poor credit rating consumers (sub-prime) during the housing boom in the US a few years back. The sub-prime loans are in turn repackaged in the form of investment tools such as structured deposits and sold to investors.

When the economy starts to take a turn for the worse, many of the sub-prime loans could not be repais and the domino effects spills over.

Warren Buffet in his annual report of 2002 highlighted that ‘financial derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal’.

The good news is that most Asia banks, including Singapore’s, are not sophisticated enough to dabble into such products and hence the exposure to these instruments is limited.

As your financial advisor, we have always stayed away from structured deposits as a form of investment. Hence, the bulk of your investments is predominantly invested in either unit trusts or low risk endowment funds via insurance companies (non-AIA).

Watch this space for the answer to the next question:  The value of my unit trust investments has fallen along with the market turmoil. What should I do now?

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The road to happiness lies in two simple principles:
Find what is that interests you and that you can do well, and when you find it, put your whole soul into it - every bit of energy and ambition and natural ability you have.

John D. Rockefeller III

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