2009 ~ Moneytalk

Thursday, December 31

Returns for 2009

Posted by Kay at Thursday, December 31, 2009 7 comments

Today is the last day of 2009 and it is time once again to review the return for this year. This year has been a good year for me since I bought quite near the lows of the stock market and watch my portfolio rebound with such a ferocity that was totally unexpected by me. I only started to keep track of my portfolio systematically slightly more than a year ago by keeping track of all my transactions and dividends inclusive of any corporate actions. After which, I use the Excel function of internal rate of return to compute my annualized return. My target is to achieve an annualized return of at least 20% inclusive of reinvested dividends over the next one to two decades.

Currently, my annualized return stands at 53.4%. Of course, I do not expect to achieve this kind of return in the long term. This return is partly skewed by the excellent performance of the stock market this year.

Moving on to the return of the stock market for 2010, I'm not very optimistic about the coming year. This view of mine goes against the view of many experts and the general sentiment of the stock market currently. From the beginning of 2009 until now, STI has gained a total of 58.4% and it is currently close to 3000 points. If we were to consider the optimistic view that STI will gain another 30%, it will be around 3900 points. Linking this back to economy, 3900 points was when the economy was at its peak. Given that the economy is starting to show signs of stability and the days of phenomenal growth will not be back so soon yet, I don't think that the stock market will do extremely well this coming year. Of course, my opinion can be wrong so time will tell.

I can foresee that for 2010, I will be holding on and building up my capital and will take advantage of any significant corrections in the market by adding on additional positions. Otherwise, I will probably be monitoring the companies in my portfolio and researching on new companies that meet my investment criteria.

Lastly, I wish everyone a happy new year and all the best for your investments in this coming year !

Tuesday, December 29

Medishield

Posted by Kay at Tuesday, December 29, 2009 1 comment

Medishield is an insurance scheme that is operated by the CPF board and this scheme is designed to prevent one from incurring huge medical expenses under certain conditions. It is designed to cover a large portion of medical bills incurred under class B2 or C wards only, in restructured or government hospitals only or selected outpatient treatment. As such, if you wish to stay in a higher class ward, you may have to incur a much larger portion of your medical bill. Furthermore, there are limits associated with the various items. Some of the details, which are taken from the CPF website, are given below.

Medishield runs on a deductible and co-payment or co-insurance system. Basically, the medical bill that is payable is divided into these two portions. Deductible is the amount which you will need to pay before Medishield will pay for your medical bill. This typically range $1,000 to $3,000 depending on the class of ward which you stay in and your age and you only pay for the full deductible once every policy year which is defined as the commencement and renewal date of your Medisheid cover.

Subsequently, you will have to pay for a portion of the remaining amount of medical bill after paying the deductible which is known as the co-payment or co-insurance. Typically, this ranges from 10% to 20% of the remaining amount of medical bill after paying off your deductible. The exact amount of the deductible and co-insurance are given in the table below, as taken from the CPF website.

So how does one get covered under the Medishield ? As taken from the CPF website, Medishield is extended automatically to eligible Singaporeans and Singapore Permanent Residents under the following situations.

(i) If their births or permanent residencies were registered after 1 December
2007;
(ii) If they are registered at national schools as at 1 May 2008, 1 May 2009, 1
May 2010, 1 May 2011, 1 May 2012, 1 May 2013 or 1 May 2014;
(iii) When they make their first CPF contribution after turning 16 years old; or
(iv) If they get married in Singapore.

Otherwise, you can apply for Medishield by logging in to your CPF account and submit an application online. This can also be done for your dependents who are below 16 years old. Do bear in mind that you will have to declare any existing and past medical conditions in submitting your application and the Medishield may not cover such conditions thus it is always important to apply when you are still healthy.

What I have done here is to give a summary of what one needs to know regarding Medishield and this is by no means, comprehensive enough. The CPF board has an excellent article regarding Medishield and its related FAQs and the link is available here.

An hospitalization and surgical plan or in short, H&S plan should be the very first insurance plan that you should buy and Medishield is a very basic type of H&S plan. There may be situations where a class B2 or C ward is not going to meet your needs adequately and you may be forced to upgrade to a higher class ward or switch to a private hospital due to reasons such as availability of better medical treatment or shortened waiting time for treatment. As such, Medishield may not much of a help as it is designed to cover a large portion of your medical bills in a class B2 or C ward only. However, there are other options available and this can includes the purchase of a Medishield-approved Integrated Shield plan which I will blog about it in the future.

Sunday, December 20

Unit trust fees slashed to woo investors

Posted by Kay at Sunday, December 20, 2009 3 comments

Unit trust fees slashed to woo investors
DBS, Fundsupermart among those which now charge just 1%
By Sylvia Paik
(Taken from the Straits Times on 19th December 2009)

A PRICE war seems to have broken out in the unit trust industry in Singapore, with at least three fund distributors now slashing their sales charges to just 1 per cent.

DBS Bank started the ball rolling in early October when it cut its sales charge on all unit trusts to 1 per cent - a move the bank says has already resulted in a two-fold increase in unit trust sales.

Last Tuesday, online fund distributor Fundsupermart.com reduced its sales charge for its 11 best performing funds over a period of three years to 1 per cent.

And The Straits Times has learnt that even though it has not advertised this, Standard Chartered Bank (Stanchart) is also offering a 1 per cent sales charge to selected customers quietly.

Unit trusts are typically sold by banks, insurers, stockbrokers and other independent financial advisers.

These distributors levy an upfront sales charge, which is deducted straightaway from the principal amount an investor puts into a unit trust.

The traditional sales charge in a face-to-face transaction with a customer is usually 5 per cent, but this has been bettered in recent years by a host of cheaper online distributors.

Most online distributors charge between 1.5 per cent and 2.5 per cent, with some going as low as 1 per cent if the customer invests a large amount of money.

At a flat 1 per cent for any investment amount, the three distributors are undercutting the competition significantly.

Mr Jeremy Soo, DBS' managing director and head of consumer banking in Singapore, said the bank slashed the upfront sales to 'give customers greater value for their investments'.

'As part of our continuous efforts to demonstrate product transparency and suitability, and to give customers greater peace of mind when investing, DBS also began offering customers 14 days to review their unit trust investment decisions - seven days more than the industry standard,' he said.

Both initiatives have been well-received by customers, Mr Soo said.

At Fundsupermart, unit trust sales are up 34 per cent since the 1 per cent sales charge was introduced. Its general manager, Mr Wong Sui Jau, said its latest promotion was not a response to DBS' price cuts.

'We have always had ad hoc promotions on and off on a regular basis, and we usually base our promotions on certain themes which are often related to our research outlook,' he said.

Stanchart, a top fund distributor here, continues to charge a sales fee of 'up to 5 per cent', said its spokesman. But The Straits Times understands that the sales charge has been reduced to 1 per cent for some customers.

In response to queries, Ms Janice Poon, who is head of the bank's advisory and segment strategy in Singapore and Malaysia, would only say that the bank reviews its fees and charges periodically.

'Currently, there is no change to our unit trust sales charges. We continue to see a healthy demand for our unit trust products,' she said.

OCBC Bank's head of wealth management in Singapore, Mr Lim Wyson, also said the bank maintains its unit trust sales charges at 'competitive levels'. It charges up to 5 per cent at its branches, but fees are lower - about 2 per cent to 3 per cent - on its online portal finatiq.com.

But cost is not the only factor in selling these investments, Mr Lim cautioned.

'We believe that customers look at factors beyond price, such as their investment strategies, past performance of the fund, track record of the fund manager, among others.'

Some seasoned unit trust investors told The Straits Times the reduced rates do make a big difference.

Mr K. Yong, who has had more than $300,000 invested in unit trusts, said: 'Basically, the unit trust distributors will all give financial advice, but we will look for the cheapest sales charge for the same unit trust.

'I am also considering other options like exchange traded funds, which are more cost-efficient as I do not need to incur any sales charges.'

But others maintained that they are willing to pay higher sales charges if their financial planners provide sound advice.

'Basically, I buy whatever my financial planner recommends, and the sales charge doesn't really bother me,' said Mr S. Cheng, who buys unit trusts for retirement planning.

sylviap@sph.com.sg

Wednesday, December 16

Exchange traded note launched in Singapore

Posted by Kay at Wednesday, December 16, 2009 1 comment

Exchange traded note launched in Singapore
(Taken from the Straits Times on the 16th December 2009)

A new product class similar to exchange traded funds (ETFs) has been launched in Singapore — the first of its kind in Asia outside Japan.

Called exchange traded notes (ETNs), the first of this new breed of product was listed by Barclays Capital on the Singapore Exchange (SGX) last Friday, with more expected in the coming years.

Denominated in US dollars, the first ETN trades in units of 100 and has a yearly fee of 0.75 per cent.

So far, there has been muted response. No trades were done yesterday. Its quoted selling price on the SGX was US$40.86.

Referring to the ETNs, Philippe El-Asmar, Barclays Capital's head of investor solutions, said: “They provide investors with simple, transparent, cost-efficient instruments that provide access to difficult-to-reach markets with the ease of trading through an exchange.”

ETNs are senior, unsecured debt securities linked to the total return of a market index. They were first offered in the United States in 2006 by Barclays Capital under its iPath ETN platform.

According to El-Asmar, iPath ETNs in the US have attracted more than US$5 billion (RM17 billion) in market capitalisation with over US$80 billion in volume traded since their inception.

The first ETN offered in Singapore is an iPath Dow Jones-UBS Commodity Index Total Return ETN, which gives retail and institutional investors a chance to gain exposure to a broad range of commodities during Asian trading hours.

Janice Kan, SGX's senior vice-president and head of product development, said: “The launch of this new product class broadens our suite of investment offerings, and will provide investors with cost-efficient access to the commodities asset class, and eventually a range of other asset classes.”

Perhaps the closest relations of ETNs are ETFs, which are baskets of stocks that typically track the performance of a stock market index. ETFs can also be theme-driven, focusing on certain asset classes or commodities such as gold or agriculture.

ETFs generally carry lower costs — zero sales charges and lower management fees — than unit trusts because they are passively managed.

They trade like stocks on the bourse, so one can buy and sell them at market prices during the trading day. They provide exposure to a variety of markets and offer greater diversification than shares.

ETFs have been growing in popularity in Singapore, with a total of 43 listed and a daily traded volume of S$18 million (RM43 million).

However, ETNs differ from ETFs in several ways. ETNs generally lapse after 30 years and do not yield dividends, whereas ETFs have no expiry date and some offer dividends.

ETNs carry no counterparty risk, unlike certain ETFs, which use derivatives. But ETNs carry an issuer credit risk, as they are debt obligations owed by the issuer to investors.

Tuesday, December 15

Correct expectations of medical insurance plans

Posted by Kay at Tuesday, December 15, 2009 9 comments

Puzzled by insurer's payout for medical claim

RECENTLY, my wife was hospitalised at Mount Alvernia Hospital for four days. Her medical bill came up to $7,995.15.

She is insured under Income's IncomeShield Plan MA, but the total payout by Income was a shocking $240.
I called Income to find out how it arrived at that sum and was told that technically the $7,995.15 was classified as "room and board", hence limiting the claim.

The $7,995.15 included a renal screen, bed charges, clinical consumables and supply, diagnostic imaging services, equipment use, laboratory services, outside hospital services, pharmacy cost, resident medical officer fees, treatment fee and doctor attendance fee.

Given a deductible of $4,000 per policy year and 10 per cent co-insurance, any man in the street would expect an insurance payout of $3,595.63. But this is not the case.

My wife has faithfully paid her premium for the past 15 years without a single claim and this is what she gets in return. I am writing this so the public is made aware of such pitfalls in their medical insurance.

For big insurance companies to cite a technicality as an excuse not to make a decent payout is in no way fair. I urge the Consumers Association of Singapore and leaders in the insurance industry to look into this loose definition of "room and board".
In my opinion, given my wife's good record, Income should honour the $3,595.63 payout as a goodwill gesture.

Lastly, I would like to ask the Central Provident Fund Board why only $450 a day can be used from Medisave for hospitalisation.

Ong Kok Lam

The above was written by a disgruntled medical policyholder by the low payout of the medical bills by NTUC Income and this was published in the forum section on the Straits Times last month. Someone by the name of paufurhs has given an excellent breakdown of the medical bill on the ST forum and why the insurer reimburse only $240 back and this is explained below.

In all "shield plans", regardless if it is CPF Medishield or the private shield plans from private insurance companies, "Room & Board" is broadly defined as expenses including meal charges, professional charges, investigations and other miscellaneous charges. In short, in includes any inpatient medical charges not relating to surgical expenses.

In the gripe letter, and from the description of the expenses, it is very obvious none of the expenses are related to surgery, and so they fall under one category - "Room & Board".

For those who can't figure out how a $7K+ bill can only be entitled to only a $240 reimbursement amount, I breakdown the calculations.

All "shield plans" are integrated with CPF Medishield, thus forming a 2-tier medical insurance plan. During claims, the insurer will calculate which tier will reimburse the most of the expenses incurred, and pay out from that tier.
Incidentally, FYI, a part of the "shield plans'" premiums are paid to CPF Board for the respective Medishield tier.

The bill incurred under the alleged "Room & Board" category was $7,995.15
The limit of claim under the Incomeshield MA tier is $690 per day.
Since patient was warded for 4 days, the max. claimable amount is $2,760.
The established deductible under this tier is $4,000.
As the claimable amount is below the deductible, there will be no payout under this tier of coverage.

Move this $7,995.15 to the Medishield tier.
The limit of claim under the Medishield tier is $450 per day.
Since patient was warded for 4 days, the max. claimable amount is $1,800.
The established deductible under this tier is $1,500 (for B2 ward and above, and for claimable amount between $1,500 to $3,000).
Therefore, the sub-balance after deductible would be $300 ($1,800 - $1,500)
(At this point of calculation, the patient must already bear $7,695.15)
The established co-insurance under this tier is 20% (for B2 ward and above, and for claimable amount between $1,500 to $3,000), which is computed as $60.
Finally, the reimburseable amount under this Medishield tier is $240 ($300 - $60)

The patient bears $7,755.15 ($7,695.15 + $60)

Since the CPF Medisave Account can only be used to pay $450 per day for non-surgical inpatient bills, the patient can only use $1,800 from Medisave to pay for the hospital bill.
The remaining $5,955.15 has to be paid in cash.

This is not the first time I have seen this type of cases appearing on the ST forum. The one thing that is rather similar in these cases is that one thinks that as long they have a medical insurance plan such as Medishield, they are entitled to a stay in any type of wards in any hospitals and they expect a large part of the medical bills to be reimbursed back through the medical insurance plan. Unfortunately, this is not true. One has to match the correct plan with the correct class of ward. In this case, the Incomeshield Plan MA which was originally the Medishield Plus A, ran by the CPF Board, is geared towards the coverage of bills in an 'A' class ward and below in a restructured hospital and Mount Alvernia Hospital is a private hospital. Another point is that this plan is not an 'as charged' plan and thus there are limits to the claims for each category. As such, do make sure that you know what you are entitled to under the medical insurance plan which you have subscribed to and in the unfortunate event that you need to be admitted to a hospital, choose the correct class of ward and hospital.

Thursday, December 10

Genneva Gold

Posted by Kay at Thursday, December 10, 2009 74 comments

There is a pretty interesting post with a few hundred comments on lioninvestor's site. The post was about a company called Genneva Gold, which exists in Malaysia and Singapore. The links to the company's website can be found here. In this post, there were a lot of comments that debate on whether this investment is true or not and there were a lot of heated arguments and debates.

In my opinion, Genneva Gold is likely to be a fradulent company. Firstly, the returns does not corresponds with the risk. It seems to be a high return and low risk investment and that is not possible at all. Secondly, the business model of Genneva Gold seems to be unsustainable. Not much is said about how is the profits of the company being generated. Without being profitable, Genneva Gold will not be able to last long.

There were a lot of interesting insights and detailed analysis made by various parties that explains on why Genneva Gold seems to be a scam. The strange thing is that many still choose to believe that Genneva Gold is workable and not a scam. This is where I think that the greed has blinded them and they choose only to look at the good side of things instead stepping back and take a serious look at this investment. Unfortunately, this is also the very same reason why I think that the majority of people are not likely to do well when it comes to the stock market.

Saturday, December 5

Yearly stock market returns

Posted by Kay at Saturday, December 05, 2009 4 comments

I took this off the Schroders investor handbook as I was taking part in their investment quiz. This chart is rather interesting as it shows that poor performance years are often followed by significant rises subsequently. That's why one should rejoice when the stock market is doing poorly as it offers a chance for investors to buy in. One thing that they don't mention is that poor performance years can be followed by another year of poor performance as seen by the negative year to year returns for 1973 to 1974 and 2001 to 2002.

Saturday, November 28

Dubai debt payment delay

Posted by Kay at Saturday, November 28, 2009 2 comments

Dubai under scrutiny after debt payment delay
(Taken from BBC News on the 28th November 2009)

Dubai's financial health has come under scrutiny after a major, government-owned investment company asked for a six-month delay on repaying its debts.

Dubai World, which has total debts of $59bn (£35bn), is asking creditors if it can postpone its forthcoming payments until May next year.

Dubai World has also appointed global accountancy group Deloitte to help with its financial restructuring.

The company has been hit hard by the global credit crunch and recession.

It was due to repay $3.5bn of its debts next month.

Put simply, everyone in the markets thought that, in the end, the federal government in Abu Dhabi would stand by all of Dubai's bad bets. Apparently, they won't.
Stephanie Flanders, BBC economics editor

The request for a delay in repayments led to major credit ratings agencies downgrading a number of state-backed companies.

Following six years of rapid growth, the Dubai economy has slumped since the second half of 2008.

This has led to Dubai property prices falling sharply.

The Dubai government said in a statement that the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations," said analyst Shakeel Sarwar, of SICO Investment Bank.

Dubai is one of the seven self-governing emirates or states that make up the United Arab Emirates.

Analysts say the Dubai government has paid the price for a flamboyant economic model centred on foreign capital and giant construction projects.

Questions are now being raised about Dubai's ability to repay its debts, said the BBC's Middle East correspondent Jeremy Howell.

Some have speculated it is likely to turn to the more economically conservative Abu Dhabi emirate to bail it out.

Global credit rating agency Standard & Poor's, which rules on a company's or government's ability to repay its debts, said the announcement "may be considered a [debt] default".

Our correspondent said: "Standard & Poor's and Moodys immediately downgraded all six state-backed corporations in Dubai, downgrading some to junk status."

Junk is the term commonly used to describe bonds that are rated below investment grade by ratings agencies.

The Dubai World announcement was made on the eve of the Eid al-Adha Muslim festival, which will see many government agencies and companies close in Dubai until 6 December.

Wednesday, November 25

Past banks interest and loan rate

Posted by Kay at Wednesday, November 25, 2009 No comments

The above statistics were taken from the website of MAS. It shows the different rates for the past 10 years such as the fixed deposit rate and SIBOR. As compared to the past, the interest rates for fixed deposits were much higher as compared to the present state. With interest rates at such a low level, this should dissuade anyone from putting their money into fixed deposits or savings account. Interestingly, finance companies do offer a slightly higher rate consistently than banks for the past 10 years and there are some finance companies which are covered under the Singapore Deposit Insurance Corporation, which covers your deposits up to $20,000.

Monday, November 23

Don't expect interest rates to rise

Posted by Kay at Monday, November 23, 2009 2 comments

Don't expect interest rates to rise: Experts
(Taken from the Straits Times on 23rd November 2009)
By Francis Chan

SAVINGS accounts have seen miserly interest rates of below 1 per cent per annum since 2001 - and people hoping for better yields ahead will be disappointed.

The rates are unlikely to rise - at least in the next six months, experts say.

Monthly average savings rates have been on a downward trend from January to last month. This means the annual average rate for this year is likely to dip below last year's already paltry 0.22 per cent.

Rubbing salt into savers' wounds - inflation is likely to rise next year.

Based on figures from 10 banks and financial institutions compiled by the Monetary Authority of Singapore (MAS), savings accounts earned an average of 0.22 per cent a year in January, before holding at just 0.16 per cent from July to last month.

This is a far cry from the 1.28 per cent savers used to get in 2000, which was the last time interest rates exceeded 1 per cent.

Such measly rates have caused long-time savers such as Mrs F.S. Sim, 31, to dump conventional deposit accounts for other investments.

'The rates for my DBS Bank savings account fell from 0.25 per cent to 0.125 per cent in July...After deducting fees and taking into consideration inflation, I think I might even lose money,' said the communications manager.

Industry experts agree, saying it does not make sense for people who are looking to grow their money to put their savings in a basic deposit account, because of the meagre interest rates.

'Depositing your money in the bank with such low rates can really be only for safekeeping and perhaps for some regular transactions,' said the president of the Association of Financial Advisers (Singapore), Mr Raymond Ng.

'In fact, if you leave it in there for a year, your savings might just get eaten up by inflation.'

Last week, the Trade and Industry Ministry raised its inflation forecast for next year to 2.5 per cent to 3.5 per cent, from 1 per cent to 2 per cent, in view of the recent revision in the annual values of Housing Board flats announced by the Inland Revenue Authority of Singapore.

The MAS, however, did not revise its underlying inflation forecast of 1 per cent to 2 per cent, as its figures excluded the cost of accommodation and private road transport.

One would have to go as far back as 1997, during the last Asian financial crisis when the annual average was 3.08 per cent, for a decent return.

But Mr Ng believes that interest rates of between 3 per cent and 6 per cent are a thing of the past.

'With the current interest rates, your funds will just remain idle and there are many people out there who still do not realise that,' he added.

Deposit rates typically fall along with the Singapore Interbank Offered Rate (Sibor), which is the rate at which banks lend to one another.

Sibor is the key factor that affects the rate that banks pay depositors. It has been hovering around 0.68 per cent, not far off the all-time low of 0.56 per cent set in June 2003.

Analysts also pointed out that Sibor is influenced by interest rates set by the United States Federal Reserve.

And since December last year, the US Fed has held its key federal funds rate at a record low of zero per cent to 0.25 per cent - to help pull the economy out of the worst downturn since the Great Depression.

All signs point to interest rates staying low for some time.

Kim Eng analyst Pauline Lee told The Straits Times: 'We're looking at interest rates to stay flat in the near term, perhaps until the first half of next year.'

Bankers cited another factor for the low rates. They said local banks are typically well-capitalised and hence do not need to attract deposits, even during the downturn.

The dismal amounts earned from bank interest over the years mean the impact on savers - if there were further reductions in rates - would probably be minimal.

For example, if interest rates for a savings account were cut by half from 0.25 per cent to 0.125 per cent, a deposit of $10,000 would earn only $12.50 less a year in interest.

Those wanting to eke out a better return, however, can turn to other options, such as promotional rates that offer higher interest of up to 1.25 per cent or more if certain conditions are met. These could include maintaining a higher minimum deposit amount for a fixed period of time.

Mr Ng, however, said those seeking higher-yielding alternatives would be better off putting their savings in money market funds.

Saturday, November 21

Amount of housing loan for 1st home

Posted by Kay at Saturday, November 21, 2009 3 comments

In an earlier post of mine, I talked about why couples should choose HDB for their 1st home here. If they decide to choose HDB for their 1st home, that will lead us to the question on what is the maximum loan amount they should take up for their housing loan ?

It is often suggested that the maximum housing loan one should take should comprise of a certain percentage of their income, say perhaps from 20% to 30%. That seems a bit too simplistic in my opinion thus I would be sharing my analysis on how much housing loan should one take up.

In my opinion, the most important criteria on the amount of housing loan one should take up is that it must be sustainable and affordable, taking into account of any future circumstances that may arise. So what do I mean by future circumstances that may arise ? Some circumstances may include a increase in the interest rate for those who are taking on variable rates housing loans from banks or retrenchment. With regards to retrenchment, most of us are dependent on our income from our work to pay the housing loan thus the amount of housing loan one should take up must also reflect this issue. It will be financially disastrous if we cannot afford to service the housing loan due to unemployment. Thus it will be important to set aside an amount of cash in the CPF account as a buffer.

To add on, I suggest that one should use their CPF to pay off their housing loan only and not use any additional cash. The reason is that the additional cash can be better utilized by placing them in investments such as an index fund or ETFs for the long run.

In short, the amount of housing loan one should take up should be capped at an amount which can be serviced by their CPF only with an additional amount of fund being left in the CPF to build up a buffer that can tide one through any changes in circumstances.

Let's consider a hypothetical example. A couple's combined monthly income currently stands at $6,000 and they wish to take up a housing loan from HDB to buy their 1st home.

Combined monthly income = $6,000

Monthly contribution to CPF Ordinary Account = 34.5% * 0.6667 * $6,000
= $1,380

After setting aside $180 per month as a buffer in the CPF Ordinary Account,

Amount available for housing loan monthly = $1380 - $180
= $1,200

Using the HDB calculator on the monthly instalment for housing loan here, $1,200 will be enough to service a loan of $300,000 for 30 years. Every year, there will be a contribution of $180 * 12 = $2,160 as a buffer to pay the monthly instalment of the housing loan.

Saturday, November 14

Record $653,000 for HDB flat

Posted by Kay at Saturday, November 14, 2009 2 comments

Record $653,000 for flat
By Jessica Cheam
(Taken from the Straits Times on the 14th November 2009)

A FOUR-ROOM Queenstown HDB flat has sold for $653,000, setting a new record for price per sq ft (psf), amid continuing red-hot demand for resale flats.

The buyers, a male Indonesian permanent resident and a Singaporean woman, could have bought a condominium unit in an outlying area for the price.

But they were won over by the location, just five minutes walk from Queenstown MRT station, and on the top, 40th floor of the block, with unblocked views of greenery from all windows.

The four-year-old 969sqft unit at Forfar Heights, Strathmore Avenue, sold for $68,000 above valuation - a level determined by an independent valuer.

This works out to $674 psf, smashing the previous record of $609 psf, achieved in January last year, by about 10per cent.

This may be an unusually high price but resale prices have been moving up.

Tuesday, November 10

Which ETFs on SGX are cash-based ?

Posted by Kay at Tuesday, November 10, 2009 8 comments

I have received a few queries on which ETFs on SGX are actually cash-based as compared to swap-based ETFs. As explained in a previous post here, swap-based ETFs carry an additional counterparty risk and have less transparency as compared to cash-based ETFs. As such, I have glanced through all the holdings of the ETFs that are listed on SGX. You can also find out for yourself by downloading their financial statements which are available in their annual reports or their quarterly reports or statements. Under these reports, the holdings of the ETF will usually be reflected under the portfolio statement. If the portfolio looks very different from the constituent stocks of the index that it is supposed to track, chances are that this ETF is not cash-based.

So how many ETFs listed on SGX are cash-based ? The answer is surprising low. Currently there are 42 ETFs listed on the SGX. The type of ETF for these ETFs are shown below.

Cash-based ETFs

ABF SG Bond ETF
CIMBFTASEAN40 100 US$
DaiwaFTShariaJ 100 US$
DBS STI ETF 100
STI ETF

Swap-based ETFs

All db x-trackers ETFs
All iShares ETFs
All Lyxor ETFs

I did not include GLD 10US$ as I'm not familiar with it although the prospectus seems to be suggesting that this ETF is holding physical gold indeed. The DIAMONDS 10 US$ and the SPDRS 10 US$ are inactive so I did not include these 2 ETFs too.

As you can see, only 5 ETFs listed on SGX are cash-based. The rest are mainly swap-based ETFs. This means that investors are only left with a few ETFs to choose from if they only wish to invest in cash-based ETFs.

Wednesday, November 4

More on swap-based ETFs

Posted by Kay at Wednesday, November 04, 2009 No comments

In my earlier post about swap-based ETFs, I talked about how the stocks held by these ETFs may not be the constituent stocks of the underlying index that it is supposed to track.

Below are some of the snapshots from the semi-annual report taken from db x-trackers, which is a series of ETFs by the Deutsche Bank. The semi-annual report tells us about the composition of the stocks which are held by these ETFs.

The picture above shows the composition of the stocks held by the db x-trackers MSCI Japan TRN Index ETF. This appears quite alright to me since it is supposed to track a Japanese stock market index and all these stocks are Japanese companies although it may not be part of the index. How about the next one ?

The picture above shows the composition of the stocks held by the db x-trackers FTSE/Xinhua 25 China ETF. So it's supposed to track a stock market index that consists of China companies. Now take a closer look at the composition of the stocks. Do any of these names of these companies sound like China companies to you ? I'm not sure about you but these companies seem to be Japanese companies. This is what I'm talking about. Swap-based ETFs may be holding stocks that have nothing to do with the index which it is supposed to track.

In fact, the composition of stocks in the above list of ETFs issued under db x-trackers have their composition of stocks that sounds like the previous 2 pictures that I have discussed earlier. And these ETFs are tracking the stock indices of countries such as Russia, Vietnam, US, Europe and so on.

Why am I bringing this up ? That is because these ETFs, as discussed in my earlier post, lacks transparency and carries an additional counterparty risk.

Saturday, October 31

UOB Xinhua China A50 ETF

Posted by Kay at Saturday, October 31, 2009 8 comments

UOB has launched the UOB Xinhua China A50 ETF recently. This ETF will track FTSE Xinhua/China A50 index and this index is designed to track the top 50 China A-shares companies by their market capitalization. A-shares are stocks of China companies which are listed in the Shenzhen or Shanghai stock exchange and these shares are listed and denominated in Chinese Yuan. These A-shares can only be owned by Chinese Nationals or Qualifed Foreign Insituitional Investors (QFII) as approved by the China Securities Regulatory Commission (CSRC)

The prospectus of this ETF can be downloaded here. Personally, I have taken a look at the prospectus and I do think that UOB has done a good job in explaining how this ETF works although it is still quite complex. I have taken snapshots of the important information of this prospectus.

After reading through some parts of the prospectus, I feel that the model of this ETF is rather complex. For a start, one is not holding directly to the A-shares of the China companies in the index but is actually holding on to the participatory notes known as P-notes, which is a synthetic representation of the A-shares. These P-notes have some terms and conditions which I am not too comfortable with and these are listed further in the prospectus which you can read about. Besides, both tranches of P-notes are essentially issued by Rabobank and this brings up the issue of counterparty risk.

Sunday, October 25

HDB resale prices high

Posted by Kay at Sunday, October 25, 2009 No comments

HDB resale prices high
Up 3.6% in Q3, with 11,649 units sold; cash top-ups also soar
By Jessica Cheam
(Taken from the Straits Times on 24th October 2009)

Cash-over-valuation amounts for resale HDB flats have quadrupled, from a median of $3,000 in the previous quarter to $12,000 in the third quarter. --

PRICES of resale Housing Board homes have continued their relentless climb, rising another 3.6 per cent in the third quarter to hit a fresh record.

But despite the high prices, demand for resale flats remained hot. A total of 11,649 homes changed hands in the third quarter, reaching a level not seen in five years.

The latest figures, released by HDB on Friday, highlight another important trend. Almost 80 per cent of resale flats were sold above their bank valuations.

And this amount, known as the 'cash-over-valuation' (COV) - or the cash top-up payable by buyers - quadrupled from a median of $3,000 in the previous quarter to $12,000.

Together, the numbers show that resale HDB flats are not just becoming more expensive, but homeowners have to fork out more cash to buy them.

Analysts said on Friday that the feverish buying activity had been fuelled by recent positive economic sentiment, and also some panic buying.

jcheam@sph.com.sg

Friday, October 23

Is that investment safe ?

Posted by Kay at Friday, October 23, 2009 2 comments

To see whether an investment is likely to be credible or not, there are a few simple questions which we can ask ourselves.

Does the return corresponds with the risk being taken ?

As a general rule of thumb, the risk should correspond with the returns. If the risk is low, then the return should be low. But then again, how low is low exactly ? For risk-free investments such as government bonds or fixed deposits, the return should be a low single digit. We should be looking at around 2% plus or minus approximately. For investments which are of low risk, the return should be in the single digit range although this will be higher than that of the risk-free investments. Any investments that promise to return over 10% to 20% or even more and claim to be risk-free is likely to be fraudulent. If the investment that you are considering passes this test, then perhaps you may consider to find out more about it. However, do also remember that for the recent Minibonds saga, they were marketed as low-risk investment products and the returns were low indeed. But I'm sure all of us know that truth by now that these Minibonds were a high-risk and low return investment. So that brings me to my next point.

Do you understand in the product that you are investing in ?
This can be summed up in the next sentence. If you do not understand the investment that you are investing in, then do not invest in it. Pretty simple and straightforward.

To know whether you understand the product that you are investing in, you can ask the following questions.

Do you know how this investment works ?
What is the maximum loss if this investment fails ?
What will happen if this investment folds up ?
Is this investment sustainable in the long run ?

Now this is the tougher part as it probably involves some thinking and research. But this is also another important step which you should do too as a prudent investor. If you are able to answer these questions about the investment which you are about to take up, then it should probably be safe.

Saturday, October 17

Asia markets regain losses

Posted by Kay at Saturday, October 17, 2009 No comments

The two articles below when combined together, can give us a pretty good insight at the current state of the market. When the market was at its maximum pessimism last year, it was the best time to buy as many stocks were trading below their value. Now the tide has turned and those who have already bought into the market earlier on will be waiting for the majority of the market to put their funds into the stock market to bring the indices even higher. This is seen by the new level of optimism in the survey for the 2nd article. Coupled with the recovery of the economy, this should be the beginning of a new market cycle.

Asia markets regain losses
By Alvin Foo, Markets Correspondent
(Taken from the Straits Times on the 16th October 2009)

REGIONAL markets extended their rally on Thursday and have now fought their way back to where they were before the financial crisis struck a year ago.

That is still a long way below the peaks of 2007, but the remarkable rally that began amid the depths of panic and desperation in March is dramatically underlining the region's economic potency.

'The investor pendulum has been swinging towards Asia,' said CIMB-GK regional economist Song Seng Wun. 'The region's recovery prospects look better than anywhere else, and the post-Lehman selldown was probably overdone.'

The Lehman Brothers crash in September last year was the tripwire that sent the global economy into a tailspin, but bourses in the Asia-Pacific region have found traction to stage a recovery.

Wall Street's effort on Wednesday to cross 10,000 points, a surge driven by buoyant US corporate earnings, gave regional markets the push they needed.

The Straits Times Index (STI) closed at a new 13-month high of 2,712.15 points on Thursday, while Hong Kong's Hang Seng Index finished at a 14-month peak of 21,999.08, after crossing 22,000 during the day.

Japan's Nikkei 225 gained 1.77 per cent to 10,238.65, crossing the 10,000 mark for the first time this year, while Australian stocks added 0.6 per cent, bringing the S&P/ASX 200 to a 13-month high of 4,859.90.

The Shanghai market is up 63.7 per cent this year, way above the Dow's 14.1 per cent gain for this year and Britain's FTSE 100 Index's rise of 18 per cent.

The Indian market has surged 78.2 per cent this year, and the Hang Seng is up 52.9 per cent. Back home, the STI has gained 54 per cent for the year, and the Nikkei has added 15.6 per cent.

Japan's Nikkei 225 gained 1.77 per cent to 10,238.65, crossing the 10,000 mark for the first time this year, while Australian stocks added 0.6 per cent, bringing the S&P/ASX 200 to a 13-month high of 4,859.90.

The Shanghai market is up 63.7 per cent this year, way above the Dow's 14.1 per cent gain for this year and Britain's FTSE 100 Index's rise of 18 per cent.

The Indian market has surged 78.2 per cent this year, and the Hang Seng is up 52.9 per cent. Back home, the STI has gained 54 per cent for the year, and the Nikkei has added 15.6 per cent.

S'pore investors most upbeat in Asia: Survey
By Fiona Chan
(Taken from the Straits Times on the 16th October 2009)

INVESTORS in Asia have grown more confident about the global economic recovery, and Singapore investors are enjoying the biggest boost in sentiment.

According to a survey by Dutch banking group ING, investors here have registered the biggest increase in confidence across Asia, with a 24 per cent jump in optimism between June and last month.

The buoyancy may stem from the sustained strong performance of the financial markets and Singapore property market, said ING in a press statement yesterday.

Investors in South Korea and the Philippines were the next most upbeat, with a 19 per cent and 16 per cent increase in sentiment respectively over the same period.

In general, Asian investors are experiencing strong optimism about their local economies improving and the global economy being on the road to recovery.

Export-oriented markets such as Singapore, Hong Kong, South Korea and Taiwan have particularly cheerful investors who anticipate that their economies and that of the United States will continue improving in the fourth quarter.

In Singapore, four out of five investors believe the economic situation will get better by the end of the year.

Almost all of them - 91 per cent - believe that the local stock market will remain constant or rise in the fourth quarter, and on average they expect stocks to rise by another 9.3 per cent in the period.

Many of them are currently invested in sectors poised to benefit when the global recovery picks up, such as financial services, telecommunications, technology and commodities.

Eight out of 10 Singapore investors also believe home prices will not fall for the rest of the year. The average expected rise: 2.6 per cent.

Mr Tim Condon, head of research and chief Asian economist for ING Wholesale Banking, said the Singapore economy has 'snapped back more quickly than expected, albeit from a low base' as the Government did a good job preparing for the recession.

He believes investor confidence has been boosted by the strong rebounds in the stock and property markets, optimism about the tourism industry with the upcoming integrated resorts, and expectations of exports picking up next year with the recovery of the global economy.

One concern that Singapore investors have, however, is inflation. Three-quarters of them expect prices to rise next year, and about two-thirds think interest rates will also go up next year.

The ING Investor Dashboard survey has been published every quarter for more than two years. It is conducted across 13 markets in the Asia-Pacific, including Japan, Australia and New Zealand.

Friday, October 16

OCBC buying ING Asia private bank

Posted by Kay at Friday, October 16, 2009 1 comment

OCBC buying ING Asia private bank
By Clare Jim and Saeed Azhar

HONG KONG/SINGAPORE (Reuters) - Singapore's third-biggest bank OCBC announced its arrival as a serious wealth player after clinching a surprise deal to buy Dutch ING's private banking unit in Asia for $1.5 billion.

Oversea-Chinese Banking Corp (OCBC.SI) beat HSBC (HSBA.L) to the deal, which will triple the assets the Singapore bank manages for the rich and position it for opportunities in the fastest-growing private banking region of the world.

"What this would do is put the private bank on a firmer footing," Trevor Kalcic, banking analyst at RBS in Singapore, said of OCBC. "They had a very small private banking operation."

ING's (ING.AS) sale of its Asian private bank with about $16 billion in assets is its third major disposal in less than a month and the second in the Asia-Pacific region, as it seeks to raise capital to pay back bailout money to the Dutch government.

OCBC said in a statement on Thursday the acquisition will take its private bank assets to $23 billion.

"We are committed to investing more in the business and look forward to capturing greater market share of the growing number of high net-worth individuals in Asia and other markets," said OCBC CEO David Conner.

The purchase price, excluding ING's surplus capital of $550 million, is about 5.8 percent of ING's private banking assets in Asia, and would free up 370 million euros of capital for ING, the banks said.

By comparison, Julius Baer agreed to pay about 2.3 percent of ING's Swiss banking assets in a deal on October 7 excluding the surplus capital.

The CEO of HSBC's private bank Chris Meares told Reuters earlier this month that private banking assets in growth markets such as Asia could command a price of 2-3 percent of assets.

OCBC said the deal would cut its tier-1 capital by 1.5 percentage points to 13.9 percent.

Citigroup analyst Robert Kong said that OCBC's tier-1 capital exceeded the 12.5 percent for its local peers, giving it ample ammunition to seek M&A opportunities.

ASSET PRICES QUESTIONED

OCBC's private bank, which lost a third of its bankers to foreign rivals in 2006, is run by French national Olivier Denis. OCBC also controls insurance firm Great Eastern (GELA.SI) and asset manager Lion Global Investors.

ING's private bank in Asia is run by Renato de Guzman, who has been instrumental in building the business in his home country Philippines and Indonesia. For a newsmaker on the banker click on

The sale of the Asian assets came after it struck a deal to sell its Swiss private banking unit to Julius Baer (BAER1.VX) for 344 million euros on Oct 7. For stories on Dutch financial sector turmoil, click on

ING is in the midst of raising 6 billion euros to 8 billion euros through asset sales under a restructuring program it announced in April. It plans to ultimately exit 10 of the 48 countries where it does business.

The restructuring follows 10 billion euros in state aid ING received in October 2008 and a 22 billion euro asset guarantee it received from the Dutch state in January 2009.

The asset-sale program is seen as one potential way to offset a capital hit, though analysts have been unhappy with the sales thus far. In particular, they have found fault with both the prices paid and the fact that ING is selling assets in a still-depressed market. (Additional reporting by Ben Berkowitz in Amsterdam; Editing by Neil Chatterjee and Muralikumar Anantharaman)

© Thomson Reuters 2009 All rights reserved

Wednesday, October 14

Is it too late to buy in ?

Posted by Kay at Wednesday, October 14, 2009 2 comments

Given the recovery in the local stock market, is it still too late to buy in now ? For this question, I did a simple study by referring back to the historical data of the Straits Times Index.

At its current level which is around 2600, the STI is around 78.5% from the bottom made in March this year. I went to compare the 1 year to 4 years return made from buying the STI after it has plunged from a peak and recovered 78.5% from the previous 2 bottoms prior to this current recovery. Those two bottoms took place in March 2003 at the level of around 1213 and August 1998 at the level of around 805. The results can be seen below.

As only the data for 2 bottoms were used, this is only meant to be used as a rough gauge since I would have prefer to analyze more data. Besides, past performance does not indicate that the future will always turn out to be the same way.

It can be seen that it still may not be too late to buy in as all of the returns are positive except for the annual return after 4 years from buying in after the bottom made on August 1998. Given that the STI is still a distance away from the previous peak of 3900 made in October 2007, I still think that it is still not too late to buy in. However, the returns will definitely not be as great as compared to if one has bought much nearer to the bottom but it will be still be rather significant. Do be prepared to ride out any volatility though as the stock market recovers back to its previous peak.

Saturday, October 10

HDB ramping up supply of flats

Posted by Kay at Saturday, October 10, 2009 No comments

HDB ramping up supply of flats
7,000 units will be released over the next three months
By Jessica Cheam
(Taken from the Straits Times on the 2nd of October 2009)

THE Housing Board will unleash about 7,000 flats onto the market over the next three months in an aggressive step to tackle rising concerns over supply and affordability.

The 7,000 homes exceed the 6,450 units released for first nine months of this year.

They also include 2,132 units in 24 estates across the island that have just been finished, or are near completion. They were launched yesterday in what was the Housing Board's single largest sales exercise in recent times.

National Development Minister Mah Bow Tan announced the move yesterday, on a day when new figures showed that HDB resale flat prices rose 3.2 per cent in the third quarter over the second quarter to reach another record high.

The price surge follows an increase of 1.4 per cent in the second quarter over the first three months of the year.

Mr Mah told the media yesterday: 'I want to assure everybody that there are sufficient flats available across the board for every budget.'

The high demand for housing, reflected in the price rises in yesterday's flash estimates, is likely behind HDB's move to lift housing stock.

Industry analysts say the steps to boost supply should have an impact on resale flat prices.

'COV levels will likely dip due to the immediate addition of these flats,' said PropNex chief Mohamed Ismail.

COV refers to 'cash over valuation' - the cash a buyer pays over and above a flat's valuation.

But Ngee Ann Polytechnic real estate lecturer Nicholas Mak says a dip in COV levels is unlikely to be sustained if the buying momentum continues.

'It will slow down the pace of price increase only temporarily. In the past three years, an average of about 3,200 resale flats were transacted each quarter, which is about 50per cent more than the 2,132 flats offered for sale,' he said.

HDB's move to increase supply comes amid growing discontent among buyers priced out of the market by high demand and limited supply.

HDB resale prices have risen by a hefty 31.2 per cent in the past two years.

An online petition to Mr Mah started circulating last month to collect 1,000 signatures calling for lower flat valuations and more affordable homes.

As of last night, it had received 1,079 names.

The minister added yesterday: 'The Government has made a commitment to provide our people with quality, affordable housing.

'This is a commitment that we will keep... and if there is a necessity, we will step up the building programme even further.'

The new flats earmarked for the rest of the year are being released under two main schemes.

Flat supply under the build-to-order (BTO) scheme for the year will be ramped up to 9,000 from about 8,000 announced previously.

About 5,000 units under the BTO programme will be launched for sale in Punggol, Sengkang, Jurong West, Sembawang, Bukit Panjang and Dawson.

The highly-anticipated 1,700 flats by award-winning architects at Dawson estate in Queenstown, which were to have been launched last month, will now be released in December, said HDB.

The Housing Board also unveiled a new scheme called Sales of Balance Flats (SBF), which will replace the existing balloting, quarterly sales and half-yearly sales exercises.

It offers flats from earlier BTO exercises, the Selective En-bloc Redevelopment Scheme and repurchased flats and will be launched as and when sufficient flats accumulate, said HDB.

The aim is to simplify the flat application process and provide buyers with a wider choice of flats across a range of locations in one exercise.

The 2,132 flats launched yesterday fall under this new scheme. They range from studio apartments to executive flats, priced from $97,000 to $643,000.

Analysts are expecting a rush, especially as the prices of three-, four-, and five-roomers are about half of their respective resale prices, noted Mr Mak.

Home buyer Lynn Koh, 28, is one person preparing to apply.

'COV has risen in Whampoa, where my parents live, so I hope to be successful,' she said.

As of 5pm yesterday, HDB had received 2,038 applications for the 2,132 flats. Applications close on Oct 14.

jcheam@sph.com.sg

Wednesday, October 7

The danger of buying stocks with a low free float

Posted by Kay at Wednesday, October 07, 2009 10 comments

The stock market has been buzzing with news recently over the privatization attempt of CK Tangs by the Tang Family and this counter happens to have a low free float or public float. Basically, the free float of a counter is the number of shares that are held by the public and not by any institutional investors or any majority shareholders. So what is the danger in buying stocks with a low free float ?

1. Low Liquidity

Stocks with a low free float tend to have a low liquidity. As such, you may have a problem selling your shares on the the stock exchange. Furthermore, you may be not able to get a good price since the spread, which is the difference between the buying and selling price, for counters with a low free float is likely to be significant.

2. Privatization Attempt

Any counters with a low free float that has a majority shareholder in it, runs the risk of being taken private by the shareholder. Typically, this will happens when the stock market is depressed, making any privatization attempt to be much less expensive since the share price is likely to be low when the stock market is depressed. As such, the shareholder is not likely to offer a high price to buy over the shares that are held by the public. If you are an investor who had bought such a stock at a higher price and is waiting for the stock to recover after the stock price is being depressed by the stock market, you may be forced to take a realized loss during such a privatization attempt since the offer price in the privatization attempt may be lower than your buying price.

Thursday, October 1

New insurance law addresses pitfalls of trusts

Posted by Kay at Thursday, October 01, 2009 No comments

New insurance law addresses pitfalls of trusts
By Lorna Tan, Senior Correspondent
(Taken from the Sunday Times on the 27th of September, 2009)

Life has just become a lot easier for holders of life policies, thanks to a new law that has simplified the rules governing the process of nominating beneficiaries.

The Insurance Nomination Law, as the regulation is known, came into effect on Sept 1 and is a vast improvement over the previous regime, which created irrevocable (trust) nominations - an area that has caused much heartache over the years.

The pitfalls of such trusts were obvious.

An irrevocable trust was created when you nominated your spouse or children as beneficiaries of your policy.

This meant you had set your policy in stone in that you could not change the beneficiaries or cash out the proceeds without the consent of all the nominees.

Many policyholders were unaware of the undesirable consequences of establishing an irrevocable trust and realised their predicament only when they were caught up in a divorce. To their horror, they found that their former spouses still had claims on their plans.

Confusing matters further, insurers allowed policyholders to nominate people other than a spouse or children as beneficiaries, such as parents and siblings, but these were not legally binding. Many policyholders made such nominations without realising that their nominees had no legal claim.

Indeed, the controversies surrounding such nominations prompted the insurance industry to do away with nominating beneficiaries in life policies in 2002. Most policyholders who still wanted to name beneficiaries were encouraged to draw up a will.

There was an exception for policies bought from insurance cooperative NTUC Income. It came under a separate Act that allowed a cooperative member to nominate such people as spouses, children, relatives and friends as beneficiaries.

The new regime allows for both revocable and irrevocable (trust) nominations. Unlike previously, revocable nominations of spouses and/or children as well as other entities are allowed. It means you can change your nomination at any time without your nominees' consent.

Policies with trust nominations incepted before Sept 1 are not covered by the new law, which is not retrospective, but if you have an existing policy with no trust nomination in place, you can now nominate beneficiaries.

Here are eight things you need to know.

1. Why making a nomination makes sense

Making a nomination is not compulsory, but the new regime provides a simple avenue to ensure that your policy proceeds are paid out to the right person at the right time and in the right amount. Compared to the alternative of writing a will - which costs around $300 or more - the new rule is a clear and affordable legal means to distribute policy benefits to your nominees.

2. Revocable nominations

Under the new law, those who take up life, accident and health policies with death benefits can create either a revocable or a trust - also called an irrevocable - nomination.

A revocable nomination means you retain full ownership over the policy, including the ability to change, add or remove nominees at any time without their consent.

Only death benefits are payable to the nominees. All living benefits such as the one that should be paid if you contract a critical illness go to you.

If you have only one nominee and he dies before you, a revocable nomination is automatically revoked. If there is more than one nominee and if one dies before you, his portion will be added to each surviving nominee's share of the benefits.

3. Trust nomination

This form of nomination - also called an irrevocable nomination - is inflexible and you should consider it only if you are prepared to give away the insurance proceeds completely to your nominees.

A policyholder relinquishes all rights to the policy, meaning all benefits, including living and death, belong to your nominees but you must still pay the premiums.

It also means that you need to get the written consent of all nominees before you can revoke the nomination, make any change, surrender or take a loan under the policy.

When a nominee dies before you, his share of the policy proceeds goes to his estate.

One advantage of a trust nomination is that the policy proceeds are protected from creditors.

4. How to nominate

You must be aged above 18 to make revocable and irrevocable (trust) nominations. The policyholder must specify the percentage share of the policy proceeds that each nominee will get. Two witnesses aged above 21 must also be present.

5. Policies excluded for nominations

Trust nominations are not allowed for policies bought under the Central Provident Fund Investment Scheme and Dependants Protection Scheme, as rules dictate that you must retain control over your retirement funds as long as you are alive.

Trust nominations also cannot be made under the Supplementary Retirement Scheme as the use of savings in this programme is restricted to products that have the potential of growing your own pool of retirement cash.

Policies with a trust nomination facility do not fulfil this criterion as you will no longer have control over the policy proceeds during your lifetime.

Both trust and revocable nominations are not allowed for annuities bought under the Minimum Sum Scheme as any residual money from the policies upon your death or policy termination must be refunded to your CPF Retirement Account for distribution.

6. Options for existing policyholders

The fact that the new law does not apply retrospectively is creating some rather complicated situations for people who already had policies in place before Sept 1.

Given this complex backdrop, the Life Insurance Association encourages policyholders to check with their insurers before making fresh nominations.

Here are some of the possible scenarios you might confront:

If you own policies bought before Sept 1 and have never made any nominations, you can now make a revocable or trust nomination under the new law.
If you named your spouse or children as beneficiaries, you have created a statutory trust under Section 73 of the Conveyancing and Law of Property Act and your nominees will continue to be recognised. The new law does not apply retrospectively, so it has no impact.
If you had named people other than your spouse or children as nominees, the new law will let you make fresh nominations in your plan.
If you had named your spouse or children and other people or relatives, your ability to make nominations under the new law will depend on the status of these nominations and the terms of your existing policy. You may have to seek legal advice.

7. If you do not make a nomination

In the absence of a valid nomination, the insurer may pay up to the first $150,000 of proceeds from a policy to a proper claimant. The balance will form part of the deceased's estate and will be distributed according to the intestate law or a will.

8. What to do before making a nomination

First, decide whom you want to name as your nominee(s). Also use the right form and specify the proportion of benefits you want each nominee to receive, ensuring that they add up to 100 per cent of the policy proceeds.

Ensure all details of each nominee are accurate and that the witnesses meet the requirements set out in the form.

And lastly, notify your insurer that you have made a nomination and send in a copy of your form.

Sunday, September 27

Genting: Market irrationality on show

Posted by Kay at Sunday, September 27, 2009 9 comments

I watched by the sidelines as the market rejoiced at the news of the Genting rights issue. As you might know, Genting proposed a rights issue to raise $1.63 billion and existing shareholders will be given the right to subscribe to a single rights share for every 5 existing Genting shares that they are holding.

Now, in the first place, a rights issue is not good news to me since there are other ways of obtaining capital without penalizing its shareholders. Shareholders will either have their current shareholdings being diluted or they will have to fork out funds to avoid dilution. Besides, it makes no sense for a company to have a rights issue when stock prices are depressed as it will be able to raise a much higher amount of capital during times when stock prices are buoyant without diluting the holdings of its shareholders. Given that interest rates are pretty low now, it makes you wonder why does Genting choose not to raise capital by taking up loans from banks unless the reason is that its financials are too weak to convince the banks to dish out any funds.

I have talked about why a rights issue is deemed to be not good generally. What about the reasons why the market seems to be euphoric over this matter ?

The reasons are pretty easy to find out actually. All you have to do is to ask anyone around what is their opinion about the prospects of Genting and the upcoming integrated resorts in Singapore. What they will probably tell you is that the prospects will be excellent since the IRs will be drawing a lot of people and the casino business will rake in huge profits for Genting. And these are assumptions made by the market in general.

Do note that the reasons above for the excellent prospects of Genting are all forecasts that are made presently and forecasts are events in the future that may not come true. However, the market seems to be assuming that these forecasts will definitely come true. Facts such as the huge construction loan taken for the IRs and the weak ability of the company to finance loans through its operations seems to be ignored by the market.

Given all the above reasons I have stated above, it really makes one wonder why is the stock price of Genting still heading up north ?

Monday, September 21

Swap-based ETFs

Posted by Kay at Monday, September 21, 2009 14 comments

Swap-based ETFs are ETFs that aims to tracks indexes by holding a basket of stocks which may be not related to the basket of stocks that makes up these indexes and it enters into a agreement with a counterparty in which this counterparty will deliver the performance of these indexes.

To explain it simply, the objective of these swap-based ETFs, as with all other ETFs, is to track the performance of a chosen index. These swap-based ETFs will hold a basket of stocks. If these basket of stocks underperforms the chosen index, another party will have to make up the difference in this underperformance to the ETF so as to allow the ETF to fulfil its objective of tracking the index. On the other hand, if this basket of stocks outperforms the chosen index, this difference will be paid to the other party since the ETF is only required to track the index. Nothing more or less.

On the other hand, cash-based ETFs are the traditional type of ETFs. Their model is simpler as compared to swap-based ETFs. Basically, they hold a basket of stocks that replicates a chosen index as closely as possible and this basket of stocks is divided into units where it is traded on the stock exchange.

Why is there a need to understand these two types of ETFs ? This is because there is an additional risk between these two types of ETFs which investors will need to know.

For swap-based ETFs, there is an additional risk which cash-based ETFs does not face and that is counterparty risk. For example, one particular swap-based ETF is tracking an index and for this specified time period, the basket of stocks which this ETF is holding on to, underperforms the index by a significant percentage. As such, the counterparty is required to pay this difference. Now what happens if this counterparty is not able to pay up ? This is one issue which investors of swap-based ETFs may have to consider. However, this counterparty risk is limited to a certain percentage of the value of the fund under regulations so the risk is not that high though it will still be there.

Furtheremore, swap-based ETFs tend to have less transparency. Investors may not know the details behind the swaps such as the value of the swaps and the collateral that are being used for the swaps.

(Taken from Barclays Global Investors)

Thursday, September 17

Rent a car instead

Posted by Kay at Thursday, September 17, 2009 No comments

Unless there is a need for you to travel long distances on a very frequent basis such as your workplace being very far away from your home, it may not be worthwhile for you to purchase a car. The money that can be saved from not buying a car can be channeled towards investment, which can reap additional profits down the road. However, some of us may wish to enjoy the perks of a car to drive occasionally, such as bringing your family out or going to a rather inaccessible place. Besides the option of buying an off-peak car, which may not be that convenient in the first place, due to the various restrictions being imposed on a off-peak car, one may consider the option of renting a car from a carpool instead.

Renting a car from a carpool has its advantages. Some of the carpools that are available in Singapore includes the NTUC Car Co-op and Whizzcar. Typically, these carpools operate a fleet of cars in car parks which are located in selected locations around the island. For a start, you will have to register with these carpools first. Subsequently, when you wish to use a car for a certain period of any day, you can book that specified period online or through the phone. Once this is done, you can go the a selected car park where these cars are parked in to collect your car and you are ready to drive. If you need to top up petrol, a card will be given to you at selected petrol stations so that the petrol that you have topped up will be charged to the carpool. At the end of the specified period that you have booked in, you will have to return the car.

The charges usually goes by the hour and with each hour, some amount of free mileage will be given to you. If you exceed this amount of free mileage, you will have to pay additional charges which often goes by per km. There may be special packages which are available such as a fixed rate for a 24 hours booking.

Thus the option of renting a car can be cheaper than buying a car if you do not use your car frequently. Furthermore, you will not have to worry about other fixed charges which are associated with buying a car such as insurance, maintenance and loan payments and still be stuck with a depreciating asset.

Wednesday, September 9

Disability Income Insurance

Posted by Kay at Wednesday, September 09, 2009 4 comments

For the majority of us, our main source of income is from work. As such, if we are not able to perform our work due to any mishaps such as medical reasons or injuries, this can be financially devastating. Now some of you may think that since they have bought some form of insurance, the insurance company should be able to cover this. However, if you have only bought life or term insurance, you must satisfy the criteria of total and permanent disability which I have covered in an earlier post here before the insurance company will make any payout and this criteria can be very difficult to be satisfied. So what happens if you are injured and you are unable to work ? Are there any insurance plans out there in the market that can cover this gap and provide you with income for the period which you are not able to work ?

The answer is disability income insurance. Currently, only Aviva and Great Eastern have disability income plans and they are known as IdealIncome under Aviva and Paysecure under Great Eastern. Typically, these plans insure 75% of your current income. In the event that your employment income is terminated if you are unable to work due to any injuries or sickness, these plans will kick in to replace 75% of your income after a period of time following the start of any disability. This compensation from the insurance company can be continued up to your retirement age depending on the type of plan that you have bought. Furthermore, if you are unable to achieve your previous income being drawn from your work prior to disability, these plans will also supplement your income after your disability if you managed to find employment.

As such, if you are dependent on your employment income, it will be prudent to take up this type of insurance policy. In my opinion, this is the most important insurance policy one should have besides your medical plan. There are minor differences between the two plans offered by the two different insurers so it will be good to seek the advice of a qualifed financial adviser, who can advise you on which plan to choose.

The opinions expressed by the author in this article is provided for your personal information only and should not be constituted as financial advice. It is recommended by the author that one should seek the advice of a qualified financial adviser with any issues or questions regarding financial matters.

Wednesday, September 2

Property Bubble

Posted by Kay at Wednesday, September 02, 2009 10 comments

A few months ago, I gave the view that the property market is likely to come crashing down soon as the property market correlates strongly with the stock market and the economy and the property market oftens lags behind the stock market.

The current property market has taken me by surprise indeed since it has only tumbled slightly not long ago and now it is near its previous peaks again despite of the economic doldrums. As such, I am of the view that the current property market is a property bubble in the making. Why is this so ? Here are some of the reasons below.

1. Divergence of the property market with the economy.

This is rather self-explanatory. The economy is still not booming yet but the property market is near its previous peaks.

2. Packed crowds at condominium launches

This is best illustrated with the example of Optima@Tanah Merah, which is a new condominium. Apparently, there was a queue waiting three days earlier of the actual launch date and they were prepared to wait there for three days.

3. Sky-high prices

With reference to the Optima@Tanah Merah, this project was sold on an average of $810 psf. Casa Merah, which is right behind it was only released at an average price of $588 two years ago. To add on, Centro Residences which is situated in Ang Mo Kio was sold at an average psf of around $1150 and this price are more typical of projects near the edge of the city.

4. Advertisements

I'm not sure if you notice it but on the last page of the Straits Times nowadays, it is always a full page graphic advertisement of a new condominium up for sales.

5. Rock-bottom interest rate

The current SIBOR rate is around 0.7% and this is very near to the all-time low rate of 0.56% back in June 2003. This makes home loan packages to be very attractive to prospective buyers.

As with all bubbles, it will burst eventually. But the question is that when will the bubble burst ? I shall make no attempt to forecast it since it is not crucial to know when it will burst and no one can forecast this accurately. A bubble can last for a very long time just like a bullish stock market can remain irrationally bullish. The most important thing is that one should not pay inflated prices which is way above the true value or worth of any assets or investments.

Thursday, August 27

Figures add up nicely for GE Life

Posted by Kay at Thursday, August 27, 2009 No comments

Figures add up nicely for GE Life
By Larry Haverkamp, For The Straits Times
Taken from the Straits Times , August 27, 2009

GREAT Eastern Life Insurance looks to be everyone’s pick for the most generous company of the year.

The company wants to help its policyholders by buying back their GreatLink Choice (GLC) structured notes. These are similar to minibonds but there are more of them. Minibonds worth $508 million were sold to 10,000 investors, while $594 million worth of GLC notes were sold to 18,000 investors.

If the notes default over the next four years, investors would lose the $594 million they had sunk in. The company says it will lose $250 million by buying the notes back. It looks generous.

Great Eastern will require its agents to pitch in too. They will return the $12 million they made in commissions from selling the notes.

This glowing story has been widely reported. On the surface, it might appear investors would be foolish to turn down Great Eastern’s offer. But that may well be wrong.

GLC comes in five tranches. GLC 1 and 2 make up one similar group while GLC 3, 4 and 5 are another. A Sunday Times report by Ms Lorna Tan correctly calculated that GLC 1 and 2 are safer investments than GLC 3, 4 and 5.

Does that mean the buyback is not in the best interests of GLC 1 and 2 investors? In a word: Yes.

Does that mean the offer would benefit Great Eastern at the expense of these investors? In another word: Yes.

Instead of helping GLC 1 and 2 investors, it would bite them a second time. The first was when Great Eastern sold GLC without disclosing the total returns of the underlying bonds. That is the standard way for structured notes to conceal risks. The public is shown only the investor yields – such as 3.5 per cent to 4.9 per cent annually for GLC. This lulls investors into thinking risks are moderate. They never see the high-risk returns produced by the note’s underlying assets of junk bonds and credit default swaps.

The second bite comes now with the offer to buy back the notes. It will take a safe 17.5 per cent return from GLC 1 and 2 investors and give it to Great Eastern.

Less generous than it appears

BY 6PM tomorrow, Great Eastern will have bought back many of its GLC notes and written them down to ‘fair value’. It says the write-down will result in a $250 million loss. That estimation could help the company sell its buyback offer. Investors see $250 million as a lot of money to turn down.

In fact, Great Eastern’s loss may be much less:

First, the $12 million clawback of commissions from agents will go entirely to the company. Investors will not get a dollar.
Second, Lion Global was the fund manager for GLC. Its management fees totalled 8 per cent to 11 per cent on the $594 million value for all five GLC tranches. Much of that was paid upfront – and unlike the clawback of agent fees, Lion Global will not be required to return its fees.Lion Global is 100 per cent owned by Great Eastern and OCBC Bank, while OCBC owns 87 per cent of Great Eastern.
Third, GLC 1 and 2 are likely to produce high profits for Great Eastern. They make up $209 million – or 35 per cent of the $594 million worth of notes sold.Just over half the investors have accepted Great Eastern’s buyback offer so far. Why so many when it is not in their interest? The current price for the notes is set at 61 cents on the dollar, according to the company website’s pop-up ad and newsletter – a buy-only price, set by the underwriter, which is Deutsche Bank for GLC 1 and 2. Investors who redeem early must sell at that price and sell only to the underwriter. This is likely to bias the price downwards. Great Eastern’s offer is valued at $1 minus the dividends already paid of 10.5 cents. So $1 – $0.105 = $0.895 – easily more than 61 cents. Investors would conclude: ‘It’s a no-brainer. I accept!’ Besides the downward price bias noted above, the 61 cent price on the website is out of date. The more recent price is 73 cents, which makes the offer less attractive to investors. It can also be found on the website, though not as easily.
Fourth, GLC 1 and 2 investors must give back 10.5 per cent in clawed-back dividends. They must also forgo the 3.5 per cent that was to be paid at the end of September and October, plus another 3.5 per cent due at maturity in 13 and 14 months. So 10.5 + 3.5 + 3.5 = 17.5 per cent – that is the ‘one year’ return investors will receive if they reject the offer and hold GLC 1 and 2 to maturity.
While that 17.5 per cent yield is high, the risks remain low for two reasons:

One, GLC 1 and 2 have underlying collateralised debt obligations (CDOs) that reference bonds rated BBB- by Standard & Poor’s (S&P). Their time to maturity is just over one year. S&P data shows the one-year default rate for BBB- global corporate bonds from 1981 to last year was only 0.6 per cent. That is less than one bond out of 100 defaulting.
Two, the rules for GLC 1 and 2 do not place them near default. Only six out of more than 100 bonds held by either tranche have suffered ‘credit events’ in the past four years. Another 11 bonds must go bad before investors lose any capital. With the improved economy, it is unlikely that 11 more bonds will go bad within 14 months.If this scenario plays out and GLC 1 and 2 do not default, investors will get back 100 per cent of their investment in little more than a year. Though there is a slight risk, that 17.5 per cent return more than compensates for it. In its automated e-mail messages, Great Eastern gives the opposite advice: ‘Do not miss this chance to accept the offer,’ it says.

Accept the buyback for GLC 3, 4 and 5

GLC 3, 4 and 5 – valued at $385 million – are different. The underwriter has priced GLC 3 at 36 cents on the dollar, and GLC 4 and 5 at 23 cents. These figures probably understate the value of the bonds for the same reasons as for GLC 1 and 2, but in this case, it does not matter. The value of these bonds is so far underwater – below the buyback price – that some degree of under-pricing won’t affect the investor’s decision.

First, the underlying CDOs of GLC 3, 4 and 5 are rated CCC- by S&P. Their time to maturity is three to four years. S&P data shows that the three-year default rate for CCC- global corporate bonds from 1981 to last year was 39 per cent. The four-year default rate was 42 per cent.
Second, the CDOs backing GLC 3, 4 and 5 reference more than 100 bonds each. The contract requires that an additional 10, seven and five bonds in GLC 3, 4 and 5 must go bad before investors lose their capital. This is more likely to happen since the time to maturity for these tranches is three times longer than for GLC 1 and 2 and their bond quality is much lower.

There is no need to feel sorry for Great Eastern. The buyback is not as expensive as it seems, even for GLC 3, 4 and 5. The notes are structured as a wager rather than an investment and work like this: Only 10 per cent to 15 per cent of the underlying bonds need to suffer credit events before investors must forfeit the other 85 per cent to 90 per cent of good bonds to ’someone’. That someone is usually the underwriter or arranger – Goldman Sachs for GLC 3, 4 and 5.

Great Eastern could simply inherit this deal from investors. Or it might reduce its risks by first entering into a hedge or re-insurance agreement with Goldman Sachs or others. Great Eastern has not said if it did this although it would not be unusual.

The company’s losses on GLC 3, 4 and 5 would be further reduced by: One, the expected profits from GLC 1 and 2; two, the clawback of agent commissions; three, the management fees earned by Lion Global; four, the profit sharing – if any – with the underwriter; and five, tax savings should losses occur.

Four years from now – when the notes have all matured – the net loss to the OCBC group is likely to be substantially less than the trumpeted figure of $250 million.

The writer is a financial columnist for The New Paper and Adjunct Professor of Economics and Statistics at Singapore Management University.