Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Saturday, 28 May 2016

New exciting technology in an ancient system

The modern banking and finance system that we all know of isn't really all that modern and tech-savvy. With a model that existed for decades or even centuries, the finance industry has one of the highest resistance to new technology. Only up till recently, with fear of how start-ups are able to disrupt their shares of the pie, they are opening up to collaborate to improve the uptake of technology into the system.

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Even so, the latest technology adoption with significant impact on consumers is mobile banking and internet banking. In terms of distribution channels, the banks are now able to spread across the country without relying on brick-and-mortar branches which could cost a serious dent in their profits. However, all these are under threat as tech giants release more services such as Apple Pay and Google Wallet which could steal transactions away from the banks.

While all these innovations alter how we interact with the banks, hence making it more convenient for consumers, it has not significantly reduced the processing time which the banks need to accommodate these advances. This is due to the fact that money is moving at a faster rate and even with the adoption of technology only being able to keep up with the movements of money. However, all these are going to change with a new technology that surfaced in the cryptocurrency - Bitcoin. The next possible FinTech disruptor could be using blockchain technology.

The blockchain technology, in simple terms, refers to a public online ledger account, where transactions and data are recorded. It is hardened against tampering, viewable to the public, hence making it transparent and also decentralised. A single unit of the blockchain is named as a block, where multiple of such forms a chain, with information such as timestamp and other important data relating to the previous one. All these data stored in the blockchain are then processed together by those with the necessary computing powers (this is called mining). This gave the blockchain technology the decentralisation function, where no one centralised party are able to affect the decisions of the group.

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The problem with the current banking method is that there is numerous reconciliation of accounts between numerous parties, resulting in time wasted on processing. By adopting blockchain, banks are now able to settle transactions at a faster rate as there is a consolidated account where it is easily viewable to all. To an industry that is plagued with honesty and trust issues, this new technology could be what will restore faith in consumers.

This new technology has also led to many different variations other than the cryptocurrency. An example is the Decentralised autonomous organization, where the first fund created has more than $100M. This fund collectively votes for certain investment or project to invest their funds without any recognisable leader. While this is entirely new, it is currently more of a social experiment of how such funds will work in the future as well as the theory of collective intelligence.

We will be coming out more exciting news on FinTech and if you have any questions or existing discussions, do comment below!
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Tuesday, 24 May 2016

Shares Risky & Bonds Safe?

Since the beginning of this year, there have been several bond issues in Singapore.
While the interest rates on these bonds are high, we think there is actually more research into not the bonds themselves but the companies that are issuing these bonds.

What are Bonds
IOUs of a company issued to you.
The company owes you money.
The company needs to pay you a stated interest every year.
The company will at the maturity of the bond, pay you back the amount you lent them.
If the company goes bankrupt, you are the first in line to collect money from its assets.

Certificate of ownership of a company.
Entitles you to the profits the company make.
Does not need you to contribute money back into the company if the company makes losses.
If the company goes bankrupt, you do not need to pay its debtors using your own money.
If the company goes bankrupt, you will lose the amount of money you invested in the company.

A lot of people around you will say that shares are riskier than bonds, including friends you have from the financial industry.
This idea is technically not wrong, but statistically misleading.

Why People say Shares are Riskier?
Shares are riskier because of 3 reasons:

1. Their price movements are more volatile
Prices can swing from +10% to -10% within one trading day.
In extreme cases like during a recession, prices drop for more than 30% and remain that low for a year or so.
On the other hand, bonds tend to have low price movements. It also has a maturity date attached to (most) bonds. Thus if you hold long enough till maturity, the company will return you the full amount you lent to them previously.
BUT! Share prices also tend to recover back up (if you bought index funds instead of individual companies' shares)
Just look at the chart below to see how S&P500 prices move since the 1950s to now for evidence.

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2. Dividends not guaranteed
While bonds WILL pay you a fixed interest during their payment dates (quarterly, half-yearly or yearly); shares might not pay you any dividend when the company is facing financial hardship or if the management decides to keep the cash and re-invest into the business.
Because of this, bonds are considered safer then shares in that you get fixed predictable income every payment date.

3. Not first in line when the company goes bankrupt
If you own a company's bond, when the company goes bankrupt, you are the first in line to collect back your money by selling their assets.
This can happen when the company goes bankrupt or miss an interest payment.
However, if the company has an insufficient asset to repay the loan, you will not get back the full amount you invested into their bonds.
If you own a company's shares, when the company goes bankrupt, you are the last in line to collect back your money after they sell their assets and pay the bondholders.
If there is insufficient assets to repay the bond holders, you do not need to cough out your own money to repay the loans. But you will not get any money back from the company.
However, if there is plenty of cash left over after repaying bond holders, the cash will be distributed to shareholders (there is a possibility that the cash distributed to you might be more than the price you paid for your shares).

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Base on the above 3 points, do you think that shares are still riskier than bonds?

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Monday, 23 May 2016

SIAS New Initiative to Improve Corporate Governance

The Securities Investors Association of Singapore (SIAS) has recently proposed a new initiative it hopes to push out: Spend $1million per year for 5 years to hire Analysts to run through listed companies' annual reports and generate questions to ask during their respective Annual General Meetings (AGM).

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The concept of getting its members and SGX to contribute money for SIAS to engage analysts to conduct research and analysis on listed companies in my view is a waste of resource and time. 
While it may seem to be the correct thing to do – having analysts put up questions with regards to the companies' financial well-being and corporate governance, the questions raised would only receive a mediocre answer from the management to “pass” the question. 
Without a strong shareholder with the support of many other shareholders pushing for change, the existing management of most companies would not make any huge changes to the company – there are simply no laws that require management to really listen to shareholders. 
Management can also dismiss the questions being asked as insignificant because of the notion “management knows best because they are managing the business”. 
Management may also agree to change as per shareholders’ wish, but if changes do not occur after a year, the management would be not held accountable.

Throughout corporate America, we have seen many examples of shareholders unable to go against management simply because they did not rally enough shareholders’ support and because management owns enough shares to silence the noise. 
In Singapore, the majority of the listed companies have management owning more than 50% of the total shares outstanding. 
I believe the Singapore market is currently working on the mantra “if you think the management is incompetent, invest your money elsewhere”, which was prevalent during the early days of US’s corporate activism.

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I think there are 2 better ways to solve the issue than engage a group of analysts to ask questions. One, we promote shareholder activism the way the US does, getting activist investors to get on the board of these companies and push for improvements for the shareholders. 
Two, we change the laws to allow minority shareholders’ votes to be able to overwrite management’s shares when certain events are triggered, events such as a buyout or change of management (especially if they are major shareholders).

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Monday, 9 May 2016

MBS Retail REIT Possible?

Marina Bay Sands (MBS), owned by Las Vegas Sands is considering selling or sub-dividing MBS when its government-imposed moratorium expires in 2017.

MBS parent Las Vegas Sands (LVS) was said to be considering selling its luxury mall either in full or partially.
Interest in buying MBS was said to be high because of its high profile and visibility in Asia.
Shopping Centre Operators, Funds, Retail REITs and institutional investors from overseas are named as participants who might be interested in investing in MBS for global/Asia exposure.
The possible price tag attached to MBS is US$4/5 billion bases on a US$150 million operating income.

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While many expect the mall to be sold in full to large investors (Institutions or Funds), we think there might be a possibility for the mall to be listed as a Real Estate Investment Trust (REIT) on the Singapore Exchange.
The benefits attached to it are pretty good
  1. LVS can continue to retain control over the mall's operations (sort of if it sets up a management team to take care of the mall) while getting back their invested capital.
  2. Average mom&pop investors can now stand to own a piece of this attractive mall as part of their investment portfolio.
  3. REIT has a structure that might reduce the tax burden of the mall.
  4. The mall will pay out a quarterly distribution to its REIT unitholders like just every other REIT, which will provide LVS with a quarterly stream of income.
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So maybe, we might be able to see a MBS REIT listed on the SGX at the end of next year?
A luxury mall in Singapore's prime location with stellar performance!

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