Can Unit Trusts Still Make Money for Investors?

A friend asked me recently whether it is still good to buy unit trusts given that the markets are in doldrums now. In turn, I asked him what he wants from his investment in unit trusts. As quoted in the novel 'Alice's Adventures in Wonderland' by Lewis Carroll, “If you don't know where you are going, any road will get you there.” To understand the features, risks and benefits of investing in unit trusts,refer: http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf.

Unit trusts are the best tools for diversification or even asset allocation when put together as a portfolio. It is one of the the most effective ways to gain exposure to the markets when they were to recover from this crisis. Remember March 2009 when the markets rebounded more than 50% from its low after the Great Financial Crisis (GFC)? I sure do. Investing in unit trust make sure you stay invested throughout and not miss the rally.

Again, my friend asked whether does it make sense to invest all his money at one go or in stages. With this current sentiment, if you have a sum of $100,000, you might want to do it in stages, say $20,000 a time. This would ensure that you have the ‘bullets’ to take opportunity of the market if it goes lower. Moreover, unit trusts allow us to participate in dollar cost averaging through the monthly regular saving plan. This allows investors to buy more units when the market is low and thus average out our buy-in prices.

Essentially, you pay a front-end load of 2%-5%, depending on the types of unit trusts, and the annual management fees. Just as you won't go to a plumber for diagnosis when you are sick, investing is best left to the professional fund managers. So if you insist an answer to the above question, it is an absolute 'yes' provided you use it appropriately.

How to Make Money In a Bear Market - Part II

I read with interest the article by Straits Times' Senior Correspondent, Mr. Goh Eng Yeow, on how to make the most out of the bear market now. Specifically, he urged readers to suspend the usual 'buy-and-hold' strategy, and instead adopt a more opportunistic approach to benefit from the wild price swing. On a practical note, investors should buy into blue-chip stocks when they are badly bruised and sell them off when the rebound comes.

I agree with his view, knowing that 'market timing' is one of the elements that will earn you 'alpha', which is the excess return over benchmark. The other elements being asset allocation and stock-picking skill. While you can earn excess returns through asset allocation by investing in ETF or unit trust as a portfolio, and read lot of research reports to minimise the error of picking the wrong stocks, it does require skills, experience and lots of courage to buy when the market is selling.

The way I see to mitigate risk and even make money now is through the use of options/derivatives (futures, CFDs), whether it’s a covered call to generate income or a protective put insuring a holding or pair trade. Investors should be aware that it’s no longer sufficient to hold just a balanced portfolio of 60% equities/40% bonds in this dynamic marketplace.

The reality is that clients should be empowered to do their own investing and not depend solely on their wealth managers. They should determine their risk tolerance and then choose the vehicles that fit that tolerance. Most of us have in the past been resigned to pay a manager to do just this but with the rise of these products -- derivatives, ETFs, powerful platforms and education etc. – everyone is empowered to manage and execute the plan that they have developed.

Make or Break for the Eurozone...and the World Economy

Just how bad will the European debt crisis pan out? According to economists from Citigroup, sovereign and banking crisis in the Eurozone will lead to a protracted recession. They forecast the real GDP for Eurozone to contract for 6 consecutive quarters and not get back to previous peak levels for many years to come. Specifically, they singled out non-European companies with significant revenue exposure to the region, such as Johnson Controls, Paccar, Nikon, HTC and Cochlear to be most adversely affected.

As the Continental European Banks are amongst the most leveraged in the world, further deleveraging may weigh on credit growth in Central and Eastern Europe which is most reliant on Euro Bank financing. However, US and UK Financials are believed to be able to benefit from the plight of their Euro peers. Euro exporters and Emerging Market equities will outperform as they benefit from a weaker currency and easier policy.

At this juncture of writing, European leaders are racing against time to come out with a more convincing deal to resolve the continent's debt crisis. With the fate of the members and their financial system so closely intertwined, the leaders are doing everything they can to stop the fiscal body and currency from tumbling. With so much at stake, we think it's just a matter of time an agreement will be reached, followed by a relief rally.

Singapore Property Developers & Investors Dealt Another Blow....

The Singapore government aims to take the heat off property market by introducing yet another tightening measure: additional buyers’ stamp duty (ABSD) in 8 Dec 2011. This is in addition to the Jan 11 cooling measures and is deemed harsher as it directly affects buyers’ investment margins and developers’ ability to price. The prices of luxury properties will correct at least 20% latest by next year, coinciding with the slowdown in global economy, while the demand for mass-market units shall remain steady

According to statistics, foreigners made up 19% of private home sales in 2H11 and 36% of new units sold YTD. A foreigner will now need to pay 13% more for a property while investors must be prepared to pay 6% more, with the introduction of ABSD. In addition, PRs buying their second and subsequent properties will have to pay an ABSD of 3% (6%), while Singaporeans buying their third and subsequent residential properties will also pay an ABSD of 3% (6%). First-time Singaporean private home buyers and buyers of HDB flats will not be affected.

Investors shall underweight property counters for the time being and continue to buy REITs for its dividends and defensive in nature. Meanwhile, CityDev is highlighted as the top underperform by most brokerage houses.

ComfortDelgro's New Fare Structure Impact Revenue Positively But Draws Flak from Commuters & CASE

ComfortDelgro has announced revisions to its taxi fare structure, which is set to kick in on December 2012 and coincide with the festive shopping. A surge in taxi service demand and rising costs were cited as the key drivers for the revision. The previous fare adjustment was in Dec 2007.

Specifically, flag down, distance and waiting time fares will rise 4-10%, with the flag down fare for Limousine taxis expected to jump 20% (to S$3.90). The morning and evening peak hours will be lengthened - e.g. the weekday morning peak period will start at 6am (vs current 7am) while the evening peak period will stretch from 6pm to midnight (vs current 5-8pm). The evening peak period and city area surcharges will be extended to Sundays and public holidays. Finally, current call booking fees will be lowered by 6-8% but advance booking fee will rise 54% to S$8 (vs current S$5.20). Limousine taxi booking fees will increase 13-25%.

ComfortDelgro is the first taxi operator to announce fare adjustments and it is likely that other taxi companies will follow suit, given that they are faced with the rising cost pressure too. As the leading operator in the industry (with a taxi fleet of 15k), the drop in revenue, if any, would be momentarily and short-lived.

We think that the revised fare revision will have a positive impact on ComfortDelgro’s bottom-line whereas any impact on the commuters will be dependent on their specific travel pattern. Given that this is a deregulated sector, any intervention from CASE will only moderate the increment.

More Downside To Singapore Developer Stocks - Morgan Stanley

For investors who are looking to buy into any property or property stocks might want to think twice now. According to Morgan Stanley, there is as much as 25% downside to Singapore developers' stocks, based on its view that residential prices will correct 20% over the next two years. They suggest that the property sector will only improve toward end of 2012.

The concerns over residential include slower GDP and population growth leading to supply imbalance, and has a bear case of a 40% drop in prices. It says developers are trading at around 20% discount to RNAV and still a far cry from its historical trough at around 60%.

They do not expect a draconian discount during this cycle as balance sheets are stronger, and bank system liquidity as well as end-user affordability is high. However, it says continued fears over global macro and downside risks to Singapore property prices could mean that the stocks could trade down to a 40% discount.

Though it is in our view that Singapore HDB and resale market should be quite resilient to any slowdown in economy, existing private home-owners should brace themselves for any fall in prices and rental income. Investors who want exposure to the sector can consider REIT which is defensive in nature and pays dividends regularly.

S&P threatens to Downgrade17 Eurozone Members - The Ultimatum

Patience for Standard & Poor's is wearing thin as it warned it may carry out an unprecedented mass downgrade of Eurozone countries, if EU leaders fail to deliver a convincing financial and political solutions on how to solve the region's debt crisis in a summit on Friday, according to Reuters.

It said ratings could be lowered by one notch for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, and by up to two notches for the remaining nine placed under review, including currently AAA-rated France. Cyprus was already on downgrade watch and Greece already a 'junk' CC-rating.

President Nicolas Sarkozy and Chancellor Angela Merkel told reporters that their plan included automatic penalties for states that fail to keep deficits under control, and an early launch of a permanent bailout fund for euro states in distress. Whether this is good enough to resolve the crisis and restore investors’ confidence remains to be seen but any move of advancement are likely to bring cheer to all parties.

As the rating agency was widely criticised for their inertia during the Great Financial Crisis (GFC) in 2008, they would be adamant not to repeat the same mistake again by erring on the side of caution.