Mapletree Logistics Trust DBS @ S$1.16 (19 Sep 2007)
- BUY S$1.16 STI : 3,477.75
- Price Target : 12-Month S$ 1.46
- Reason for Report : Company Update
- Potential Catalyst: Acquisitions in the pipeline
- Major Shareholders - Meranti Investments (%) 15.2, Mapletree Logistics (%) 7.4, Mangrove Pte Ltd (%) 7.4
- Free Float (%) 70.0
- Analyst - Zy Sew Ho +65 6398 7961
- zysew@dbsvickers.com
- Earnings Rev (%): 2007: - 2008: -
- Consensus EPS (S cts): 2007: 5.9 2008: 6.1
- Variance vs Cons (%): 2007: 5.1 2008: (1.6)
- Sector : REITS
- Principal Business: Real estate investment trust with a portfolio of 18 properties mostly in the logistics sector.
- Expanding its footprint in Asia
- Recent updates. Since our last report, MLT announced the acquisition of five warehouse properties in Singapore for a total consideration of S$47.2m. This will bring MLT’s total portfolio to 72 properties with a total portfolio size of S$2.3bn (includes properties pending completion). Given a target acquisition of S$1bn pa in FY07, MLT is on track to reach its target of S$2.4bn by year-end. Of note, 10-20% of the annual target acquisition pipeline of S$1bn will come from the Sponsor’s properties while the remaining will be from third parties.
- Visible pipeline from Sponsor. The Sponsor, Mapletree Investments, has a pipeline of developments in Vietnam, China and Malaysia worth a total of approximately S$315.0m. First on the plate is the multitenanted logistics and warehousing facility (VSIP I) in Vietnam.
Construction was completed in Jan 07 and once it is fully leased, MLT is expected to acquire this property by end 2007. Together with another logistics park, VSIP II of which construction is expected to commence in 3Q07, the total combined estimated value of VSIP I and VSIP II is S$165m.
- Venturing into new markets. Moving forward, MLT expects contribution from the emerging markets to make up of 25% of its asset value while the core markets (i.e. Singapore, Japan and Hong Kong) will make up 75% of asset value. MLT is looking to expand its presence in China and Malaysia and also to venture into Vietnam with the first property expected to be acquired in 2H07. More growth will be expected from the emerging markets in the medium term. In the medium to long term, MLT will also be exploring emerging markets such as South Korea, India, Thailand and Taiwan.
- Debt headroom. As at 30 Jun 07, MLT has a gearing of 54% with a debt headroom of around S$300m. Given that MLT has targeted to increase its portfolio of assets to S$5bn by 2010, the possibility of an equity raising exercise is high.
- Maintain Buy with target price of S$1.46. With the recent weakness in the stock price, MLT is trading at an attractive current yield of 5.1%. We are reiterating our Buy recommendation with target price of S$1.46 based on DCF valuation (assumed acquisitions of S$1bn p.a. from 2007 to 2009).
Wednesday, October 24, 2007
BT: Mapletree all set to take on the big boys
Business Times - 24 Oct 2007
COMMENTARY
Mapletree all set to take on the big boys
With mouthwatering results and growing sophistication, it's come a long way since 2000
By UMA SHANKARI
LISTED developers in Singapore now have a relatively new kid on the block to watch out for - Temasek-owned Mapletree Investments.
Under the stewardship of Hiew Yoon Khong, who took over the helm in August 2003, Mapletree has expanded its overseas presence and grown its capital management business.
And this year, the company has started going head-to-head with established developers to compete for land sites.
Mapletree's strategy has translated into solid financial numbers.
During its 2006 financial year, Mapletree's earnings crossed the billion-dollar mark for the first time - a milestone achieved by only one other property company in Singapore, CapitaLand.
Mapletree's net profit came to $1.07 billion, a seven-fold increase over the previous year.
While the bulk of the earnings spike was due to valuation gains from its newly-opened mega-mall VivoCity, operating revenue itself grew by 35 per cent to $216.6 million.
During the year, Mapletree's asset portfolio also grew from $2.97 billion to $4.53 billion.
But more significant than the improved numbers is the fact that over the last few years, Mapletree has become a much more sophisticated entity.
Mr Hiew told BT that going forward, Mapletree will continue to grow its capital management business and overseas footprint - in line with what other developers in Singapore are doing.
Big but nimble
Growing the capital management business will also allow Mapletree to go asset-light, which will allow it to move more quickly and take on bigger projects.
For example, setting up the commercial trust, which will have a portfolio of $3 billion to $3.5 billion, means that Mapletree will be able to recycle assets worth that amount, said Mr Hiew. It is quite clear that he intends to put the money to good use. Mapletree has signalled this year that it is more than just a holding company for state-owned properties by bidding for and winning a government land sales site at Anson Road/Enggor Street in July.
Mapletree's offer was a bullish 23 per cent higher than the next highest offer - a clear sign that the company is serious about building up its commercial landbank.
Last month, Mapletree also formed a joint venture with CapitaLand to offer $1.8 billion - or $1,281 per square foot per plot ratio - for a white site at Marina Bay, but lost out to Macquarie Global Property Advisors.
With the bulk of its commercial properties divested into the upcoming trust, a flush-with-cash Mapletree will no doubt be a serious contender for sites.
Mr Hiew said that he wants to grow Mapletree's exposure to the office sector in Singapore in particular.
The company has certainly come a long way since it was incorporated in December 2000 to hold the property assets transferred by PSA to Temasek Holdings.
Going forward, it will be interesting to watch Mapletree make its mark on the property landscape as it comes into its own over the next few years.
COMMENTARY
Mapletree all set to take on the big boys
With mouthwatering results and growing sophistication, it's come a long way since 2000
By UMA SHANKARI
LISTED developers in Singapore now have a relatively new kid on the block to watch out for - Temasek-owned Mapletree Investments.
Under the stewardship of Hiew Yoon Khong, who took over the helm in August 2003, Mapletree has expanded its overseas presence and grown its capital management business.
And this year, the company has started going head-to-head with established developers to compete for land sites.
Mapletree's strategy has translated into solid financial numbers.
During its 2006 financial year, Mapletree's earnings crossed the billion-dollar mark for the first time - a milestone achieved by only one other property company in Singapore, CapitaLand.
Mapletree's net profit came to $1.07 billion, a seven-fold increase over the previous year.
While the bulk of the earnings spike was due to valuation gains from its newly-opened mega-mall VivoCity, operating revenue itself grew by 35 per cent to $216.6 million.
During the year, Mapletree's asset portfolio also grew from $2.97 billion to $4.53 billion.
But more significant than the improved numbers is the fact that over the last few years, Mapletree has become a much more sophisticated entity.
Mr Hiew told BT that going forward, Mapletree will continue to grow its capital management business and overseas footprint - in line with what other developers in Singapore are doing.
Big but nimble
Growing the capital management business will also allow Mapletree to go asset-light, which will allow it to move more quickly and take on bigger projects.
For example, setting up the commercial trust, which will have a portfolio of $3 billion to $3.5 billion, means that Mapletree will be able to recycle assets worth that amount, said Mr Hiew. It is quite clear that he intends to put the money to good use. Mapletree has signalled this year that it is more than just a holding company for state-owned properties by bidding for and winning a government land sales site at Anson Road/Enggor Street in July.
Mapletree's offer was a bullish 23 per cent higher than the next highest offer - a clear sign that the company is serious about building up its commercial landbank.
Last month, Mapletree also formed a joint venture with CapitaLand to offer $1.8 billion - or $1,281 per square foot per plot ratio - for a white site at Marina Bay, but lost out to Macquarie Global Property Advisors.
With the bulk of its commercial properties divested into the upcoming trust, a flush-with-cash Mapletree will no doubt be a serious contender for sites.
Mr Hiew said that he wants to grow Mapletree's exposure to the office sector in Singapore in particular.
The company has certainly come a long way since it was incorporated in December 2000 to hold the property assets transferred by PSA to Temasek Holdings.
Going forward, it will be interesting to watch Mapletree make its mark on the property landscape as it comes into its own over the next few years.
BT: Mapletree plans to list Reits, snap up new assets
Note: Mainboard listed in July 2005. At $1.2, DPU yield at 4.2% (based on 2006 total DPU paidout of 5.05cents) or 4.7% (based on MLT forecast of 5.69cents in FY07). Not so bad. It is quite a good defensive stock with potential share price appreciation.
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Business Times - 24 Oct 2007
Mapletree plans to list Reits, snap up new assets
Commercial trust may include VivoCity; company eyes big growth overseas
By UMA SHANKARI
(SINGAPORE) Mapletree Investments intends to list a commercial trust with a $3-$3.5 billion portfolio in the next six months as it moves to grow its fee income and expand its footprint overseas, says chief executive Hiew Yoon Khong.
'Over the next four years we want to scale up our capital management business by being very active in key markets,' he told The Business Times in a recent interview.
Besides Singapore, the company is looking at China, India and Vietnam for acquisitions. And in the slightly longer term it is also interested in Taiwan, South Korea and Thailand - particularly their logistics and industrial sectors.
The plan is to bump up revenue from fee income to 50 per cent of overall revenue in the next three to five years - from just 9 per cent in Mapletree's last financial year.
To grow the capital management business, the company has opted to look abroad. Right now only about 20 per cent of its portfolio is outside Singapore. But Mr Hiew said the proportion could be as high as 80 per cent in five years.
'As a group, we hope to be able to break into one or two new markets a year,' he said. The greatest opportunities, he believes, are in China, where Mapletree is now looking at second-tier cities. First-tier cities are 'too crowded and the values are too high,' he said.
In particular, Mapletree is trying to expand its commercial presence in Singapore and the region.
'People know us as a logistics player, but as a company we are a lot more than that,' Mr Hiew said. 'Looking forward, we will be bidding for land to do development work. In Singapore, we are keen to have a bit more exposure to the office sector in particular.'
One way to do this is through the upcoming commercial trust - which the market has been waiting for.
The trust will likely contain VivoCity - Mapletree's largest asset, with a book value of about $1.6 billion - as well as other commercial properties including office buildings Harbourfront Centre and PSA Building and nightspot St James Power Station, Mr Hiew said.
Mapletree is already lining up a pipeline of assets for the trust. In a break from tradition, the company this year started bidding for commercial land sites in Singapore.
In July it won a government land sales site at Anson Road/Enggor Street in a public tender that drew other big names such as CapitaLand and Keppel Land. Mapletree's offer was 23 per cent higher than the next highest bid.
In addition, Mapletree is likely to launch a Reit based on assets in India, with its Indian property development partner Embassy Group, by the first half of 2008.
Market talk of Embassy's Reit, which will be managed through a joint-venture partnership between Embassy and Mapletree, has been around since early this year. Mr Hiew confirmed plans for the Reit.
'We will probably hold some sort of equity stake in the trust but that is not finalised yet,' he said.
Mapletree has also secured a deal to co-manage the Lippo Group's Indonesia-focused retail Reit. The prospectus for this Reit was lodged with the Monetary Authority of Singapore (MAS) last Friday.
Mr Hiew is also committed to growing Mapletree's private equity franchises. For example, the company - together with its partner CIMB - will be launching its second Malaysia fund in the next six months.
Mapletree's growing portfolio in Singapore and overseas will serve as an asset pipeline for both the existing Mapletree Logistics Trust and the new commercial trust, as well as any funds the company might set up in future.
'We are very keen to support the growth of our Reits and fund business,' Mr Hiew said.
With its asset-light strategy in place, the company will now be able to take on bigger projects and move faster on them.
Right now, assets under management stand at $2.2 billion, while Mapletree owns a further $4.8 billion of assets. Mr Hiew's aim is to grow by $1 billion or so each year.
'Four years ago we mapped out strategic initiatives for the company to enhance our value,' he said. 'When we review the programme now, we are happy with the progress to date but will look to scale up these businesses much more.'
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Business Times - 24 Oct 2007
Mapletree plans to list Reits, snap up new assets
Commercial trust may include VivoCity; company eyes big growth overseas
By UMA SHANKARI
(SINGAPORE) Mapletree Investments intends to list a commercial trust with a $3-$3.5 billion portfolio in the next six months as it moves to grow its fee income and expand its footprint overseas, says chief executive Hiew Yoon Khong.
'Over the next four years we want to scale up our capital management business by being very active in key markets,' he told The Business Times in a recent interview.
Besides Singapore, the company is looking at China, India and Vietnam for acquisitions. And in the slightly longer term it is also interested in Taiwan, South Korea and Thailand - particularly their logistics and industrial sectors.
The plan is to bump up revenue from fee income to 50 per cent of overall revenue in the next three to five years - from just 9 per cent in Mapletree's last financial year.
To grow the capital management business, the company has opted to look abroad. Right now only about 20 per cent of its portfolio is outside Singapore. But Mr Hiew said the proportion could be as high as 80 per cent in five years.
'As a group, we hope to be able to break into one or two new markets a year,' he said. The greatest opportunities, he believes, are in China, where Mapletree is now looking at second-tier cities. First-tier cities are 'too crowded and the values are too high,' he said.
In particular, Mapletree is trying to expand its commercial presence in Singapore and the region.
'People know us as a logistics player, but as a company we are a lot more than that,' Mr Hiew said. 'Looking forward, we will be bidding for land to do development work. In Singapore, we are keen to have a bit more exposure to the office sector in particular.'
One way to do this is through the upcoming commercial trust - which the market has been waiting for.
The trust will likely contain VivoCity - Mapletree's largest asset, with a book value of about $1.6 billion - as well as other commercial properties including office buildings Harbourfront Centre and PSA Building and nightspot St James Power Station, Mr Hiew said.
Mapletree is already lining up a pipeline of assets for the trust. In a break from tradition, the company this year started bidding for commercial land sites in Singapore.
In July it won a government land sales site at Anson Road/Enggor Street in a public tender that drew other big names such as CapitaLand and Keppel Land. Mapletree's offer was 23 per cent higher than the next highest bid.
In addition, Mapletree is likely to launch a Reit based on assets in India, with its Indian property development partner Embassy Group, by the first half of 2008.
Market talk of Embassy's Reit, which will be managed through a joint-venture partnership between Embassy and Mapletree, has been around since early this year. Mr Hiew confirmed plans for the Reit.
'We will probably hold some sort of equity stake in the trust but that is not finalised yet,' he said.
Mapletree has also secured a deal to co-manage the Lippo Group's Indonesia-focused retail Reit. The prospectus for this Reit was lodged with the Monetary Authority of Singapore (MAS) last Friday.
Mr Hiew is also committed to growing Mapletree's private equity franchises. For example, the company - together with its partner CIMB - will be launching its second Malaysia fund in the next six months.
Mapletree's growing portfolio in Singapore and overseas will serve as an asset pipeline for both the existing Mapletree Logistics Trust and the new commercial trust, as well as any funds the company might set up in future.
'We are very keen to support the growth of our Reits and fund business,' Mr Hiew said.
With its asset-light strategy in place, the company will now be able to take on bigger projects and move faster on them.
Right now, assets under management stand at $2.2 billion, while Mapletree owns a further $4.8 billion of assets. Mr Hiew's aim is to grow by $1 billion or so each year.
'Four years ago we mapped out strategic initiatives for the company to enhance our value,' he said. 'When we review the programme now, we are happy with the progress to date but will look to scale up these businesses much more.'
Tuesday, October 23, 2007
Investors' short memory is worrying
Business Times - 17 Oct 2007
MONEY MATTERS
Investors' short memory is worrying
Granted, the sub-prime crisis has passed. But the US economy has other major problems. So it's advisable to be prudent
By WONG SUI JAU
WHAT a difference two months makes. In mid-August, the sub-prime loans scare had just rocked markets around the world, causing them to fall for two weeks. The air was heavy with gloom. But now, it seems as if the sub-prime problem never happened. Many markets are back to their pre-crash levels and, indeed, some - including the US market as represented by the S&P 500 index - have recently hit record highs. As the accompanying table shows, many Asian markets have done very well from the start of the year up to end-September. There is reason for much cheer among investors.
While I was one of those urging calm at the time the sub-prime issue blew up, I find the short memory of many investors worrying. Before the sub-prime issue flared in the US, there was hardly anything to worry about; Asian economies were growing strongly and the rest of the world was doing decently too.
But in the aftermath of the sub-prime crash, some things are now different. Investors need to pay close attention to these developments - not just focus on the happy reality of rising markets.
The most significant thing is that the US economy has turned. As recently as the second quarter, US GDP was still accelerating in terms of growth, growing at an annualised rate of 3.8 per cent in Q2, compared with an annualised 0.6 per cent in Q1.
However, the sub-prime issue has exposed weaknesses in the US economy that are not going to go away, rising markets notwithstanding. First, the US property cycle is on a clear downward trend - and this is accelerating rather than slowing. The supply of homes has almost doubled since end-December 2005. A large number of unsold homes will put further downward pressure on prices. The sub-prime fright has also made investors much more cautious about entering an already falling market. After all, if home prices are dropping, there is no hurry to buy, because it is better to wait for prices to fall further. Thus, we may see an even steeper decline in US home prices going forward (see chart).
Second, the woes in the US property market will affect many American consumers. Americans have been consuming ever more each year, and accordingly, their debt levels have risen. The ratio of household debt to disposable income was at a high of 2.29 in March 2007, compared with 0.82 in December 1990. This means that for every dollar of income earned, the average US household has $2.30 of debt.
Previously, the rising housing market enabled Americans to take out reverse mortgages and get money from the houses they stayed in. But with prices now falling, this will dry up. Some households may even run into problems paying off their home loans. Certainly, this will affect household spending going forward. Any weakness in consumer spending - which underpins so much of what drives the US economy - will put a question mark over growth next year.
Continued volatility
Third, the US continues to do things like reduce interest rates and deflate the dollar. This may work in the short term. But over the long term, it does not solve the fundamental problem that the US economy faces - which is that it spends far more than what it generates in income, resulting in its huge twin deficits. For now, since it is the sole superpower and with the US dollar still the most important and most used currency in the world, cutting interest rates and allowing the dollar to weaken may work in the short term. But eventually the US will have to face up to its problems - and when it does, its economy is likely to be affected. A recession is quite possible.
So while the recent recovery in markets has brought much cheer and relief to investors. I would urge people not to get too greedy and overexpose themselves to risk. While we believe that, ultimately, Asian economies with their many drivers will continue to grow even amid a US recession, their growth will ultimately be affected to some extent. And certainly, markets will continue to be volatile.
As data is released in the coming months, we expect that some of it relating to the US economy will not be rosy. Companies at the epicentre of the sub-prime loans issue have had to close down entire divisions, and many banks are expected to report large provisions for loans made, which will certainly affect their earnings. For example, just recently, Bank of America, JP Morgan Chase & Co and Wachovia Corp posted profit declines as they wrote down more than US$3.4 billion. They will not be the last to report earnings hits.
In the midst of record-breaking markets, investors may have forgotten just how bleak the situation seemed just a couple of months ago. But they must be conscious of the risks they are taking in their portfolios. Try to stay diversified and not overly exposed to any particular sector or area, no matter how attractive it seems. With many investors already sitting on profits this year, it would be advisable to be prudent at this stage. Don't let short memories and greed lead to overly aggressive risk-taking.
The writer, a certified financial planner, is the general manager of Fundsupermart.com Pte Ltd, a division of iFAST Financial Pte Ltd
MONEY MATTERS
Investors' short memory is worrying
Granted, the sub-prime crisis has passed. But the US economy has other major problems. So it's advisable to be prudent
By WONG SUI JAU
WHAT a difference two months makes. In mid-August, the sub-prime loans scare had just rocked markets around the world, causing them to fall for two weeks. The air was heavy with gloom. But now, it seems as if the sub-prime problem never happened. Many markets are back to their pre-crash levels and, indeed, some - including the US market as represented by the S&P 500 index - have recently hit record highs. As the accompanying table shows, many Asian markets have done very well from the start of the year up to end-September. There is reason for much cheer among investors.
While I was one of those urging calm at the time the sub-prime issue blew up, I find the short memory of many investors worrying. Before the sub-prime issue flared in the US, there was hardly anything to worry about; Asian economies were growing strongly and the rest of the world was doing decently too.
But in the aftermath of the sub-prime crash, some things are now different. Investors need to pay close attention to these developments - not just focus on the happy reality of rising markets.
The most significant thing is that the US economy has turned. As recently as the second quarter, US GDP was still accelerating in terms of growth, growing at an annualised rate of 3.8 per cent in Q2, compared with an annualised 0.6 per cent in Q1.
However, the sub-prime issue has exposed weaknesses in the US economy that are not going to go away, rising markets notwithstanding. First, the US property cycle is on a clear downward trend - and this is accelerating rather than slowing. The supply of homes has almost doubled since end-December 2005. A large number of unsold homes will put further downward pressure on prices. The sub-prime fright has also made investors much more cautious about entering an already falling market. After all, if home prices are dropping, there is no hurry to buy, because it is better to wait for prices to fall further. Thus, we may see an even steeper decline in US home prices going forward (see chart).
Second, the woes in the US property market will affect many American consumers. Americans have been consuming ever more each year, and accordingly, their debt levels have risen. The ratio of household debt to disposable income was at a high of 2.29 in March 2007, compared with 0.82 in December 1990. This means that for every dollar of income earned, the average US household has $2.30 of debt.
Previously, the rising housing market enabled Americans to take out reverse mortgages and get money from the houses they stayed in. But with prices now falling, this will dry up. Some households may even run into problems paying off their home loans. Certainly, this will affect household spending going forward. Any weakness in consumer spending - which underpins so much of what drives the US economy - will put a question mark over growth next year.
Continued volatility
Third, the US continues to do things like reduce interest rates and deflate the dollar. This may work in the short term. But over the long term, it does not solve the fundamental problem that the US economy faces - which is that it spends far more than what it generates in income, resulting in its huge twin deficits. For now, since it is the sole superpower and with the US dollar still the most important and most used currency in the world, cutting interest rates and allowing the dollar to weaken may work in the short term. But eventually the US will have to face up to its problems - and when it does, its economy is likely to be affected. A recession is quite possible.
So while the recent recovery in markets has brought much cheer and relief to investors. I would urge people not to get too greedy and overexpose themselves to risk. While we believe that, ultimately, Asian economies with their many drivers will continue to grow even amid a US recession, their growth will ultimately be affected to some extent. And certainly, markets will continue to be volatile.
As data is released in the coming months, we expect that some of it relating to the US economy will not be rosy. Companies at the epicentre of the sub-prime loans issue have had to close down entire divisions, and many banks are expected to report large provisions for loans made, which will certainly affect their earnings. For example, just recently, Bank of America, JP Morgan Chase & Co and Wachovia Corp posted profit declines as they wrote down more than US$3.4 billion. They will not be the last to report earnings hits.
In the midst of record-breaking markets, investors may have forgotten just how bleak the situation seemed just a couple of months ago. But they must be conscious of the risks they are taking in their portfolios. Try to stay diversified and not overly exposed to any particular sector or area, no matter how attractive it seems. With many investors already sitting on profits this year, it would be advisable to be prudent at this stage. Don't let short memories and greed lead to overly aggressive risk-taking.
The writer, a certified financial planner, is the general manager of Fundsupermart.com Pte Ltd, a division of iFAST Financial Pte Ltd
Reverse stock splits: boon or bane?
Business Times - 20 Oct 2007
Reverse stock splits: boon or bane?
By TEH HOOI LING SENIOR CORRESPONDENT
AT LEAST seven Singapore-listed companies have carried out share consolidation so far this year.
Share consolidation - also known as a reverse stock split - is a corporate action through which a number of shares are consolidated into one.
Various reasons are given by companies for deciding to implement a reverse stock split.
For example, one company said in a statement that prior to consolidation, small movements in its share price represented large percentage movements that resulted in volatility.
'It is anticipated the consolidation will benefit the company and its shareholders by reducing the volatility in the share price,' the company said.
On the Singapore Exchange, the minimum bid for a stock below $1 is half a cent. So a stock trading at one cent can move up or down by half of its value - a 50 per cent swing.
In January this year, Time Watch, after completing a reverse takeover, consolidated 50 shares into one. The company said in a statement: 'Time Watch believes the share consolidation may reduce the fluctuation in magnitude of the company's market capitalisation, lower trading costs for investors and also renew market and investors' interest in the shares.'
In the trading-range hypothesis, it is suggested that stock splits regroup share prices to a preferred price range. An optimal price range is when prices attract investors big and small.
Smaller investors may be unable or unwilling to buy shares if the unit price is too high. So companies do a stock split or bonus issue.
If a share price is too low, it is an indication of poor performance and the stock is also viewed as a speculative stock. Institutions tend to avoid such shares. So companies that are willing to court small investors and large institutional ones try to have a stock price that is acceptable to both sets of investors.
Meanwhile, according to the signalling theory, management sends messages to investors via its financial decisions. A bonus share issue or stock split is generally associated with management's confidence in future performance. And so a reverse stock split sends the reverse signal, according to some studies.
Spudeck and Moyer (1985), among others, argue that reverse splits seem to be taken by the market as a strong signal of management's lack of confidence in the future stock prices.
Woolridge and Chambers (1983) even suggest that when a reverse split is impending, investors should sell their shares.
SGX-listed stocks
I've decided to look at the share performance of those stocks on SGX that have been consolidated in the past three years. Of these, only seven have had six or more months of performance since consolidation.
The companies are Integra2000, Lankom, Digiland, Wilmar (formerly Ezyhealth), Hup Soon Global (formerly Twinwood), Delong (formerly Teamsphere) and Time Watch (formerly Wee Poh).
Of these seven companies, four saw their share price underperform the SES All Shares Index by 35 to 86 percentage points in the 12 months leading up to their share consolidation. The exceptions were Ezyhealth, Twinwood and Teamsphere, which saw their share prices shoot up sharply after news of their reverse takeover deals was announced.
In general, reverse stock-split companies did not see their performance improve subsequent to consolidation.
Six months after consolidation, the median excess return of these companies relative to the SES
All Shares Index was 45 per cent. The average was -27 per cent.
And 12 months subsequent to reverse stock splits, the median underperformance widened to -58 per cent. The average was -28 per cent.
Based on the limited sample size, it does appear that share consolidation is generally not good news for investors.
Indeed, investors have had an inkling of that. Radcliffe and Gillespie (1979), Woolridge and Chambers, Spudeck and Moyer and Peterson and Peterson (1992) document that significantly negative abnormal returns surround reverse split announcements.
Ho, Nelling and Chen (2005) studied US companies listed on the New York Stock Exchange and Nasdaq that conducted reverse stock splits between 1980 and 2000. They also found that companies that carried out reverse stock splits significantly underperformed the various market benchmarks and stocks with similar characteristics one to three years later.
They said the results suggest that 'reverse-splitting firms are unable to change the pattern of post-split underperformance ... since the reverse stock splitting firms are relatively pessimistic about future prospects'.
There are, of course, exceptions. And a notable exception in Singapore is Wilmar. The stock has performed spectacularly since its reverse takeover of Ezyhealth.
It has been helped by several factors, among them the injections of assets by the Kuok family into the Singapore company, and the interest in biodiesel as a alternative fuel source.
So, for companies that did a reverse-split after a reverse takeover, ultimately, what happens depends on the quality of assets injected into the company.
The writer is a CFA charterholder.
Reverse stock splits: boon or bane?
By TEH HOOI LING SENIOR CORRESPONDENT
AT LEAST seven Singapore-listed companies have carried out share consolidation so far this year.
Share consolidation - also known as a reverse stock split - is a corporate action through which a number of shares are consolidated into one.
Various reasons are given by companies for deciding to implement a reverse stock split.
For example, one company said in a statement that prior to consolidation, small movements in its share price represented large percentage movements that resulted in volatility.
'It is anticipated the consolidation will benefit the company and its shareholders by reducing the volatility in the share price,' the company said.
On the Singapore Exchange, the minimum bid for a stock below $1 is half a cent. So a stock trading at one cent can move up or down by half of its value - a 50 per cent swing.
In January this year, Time Watch, after completing a reverse takeover, consolidated 50 shares into one. The company said in a statement: 'Time Watch believes the share consolidation may reduce the fluctuation in magnitude of the company's market capitalisation, lower trading costs for investors and also renew market and investors' interest in the shares.'
In the trading-range hypothesis, it is suggested that stock splits regroup share prices to a preferred price range. An optimal price range is when prices attract investors big and small.
Smaller investors may be unable or unwilling to buy shares if the unit price is too high. So companies do a stock split or bonus issue.
If a share price is too low, it is an indication of poor performance and the stock is also viewed as a speculative stock. Institutions tend to avoid such shares. So companies that are willing to court small investors and large institutional ones try to have a stock price that is acceptable to both sets of investors.
Meanwhile, according to the signalling theory, management sends messages to investors via its financial decisions. A bonus share issue or stock split is generally associated with management's confidence in future performance. And so a reverse stock split sends the reverse signal, according to some studies.
Spudeck and Moyer (1985), among others, argue that reverse splits seem to be taken by the market as a strong signal of management's lack of confidence in the future stock prices.
Woolridge and Chambers (1983) even suggest that when a reverse split is impending, investors should sell their shares.
SGX-listed stocks
I've decided to look at the share performance of those stocks on SGX that have been consolidated in the past three years. Of these, only seven have had six or more months of performance since consolidation.
The companies are Integra2000, Lankom, Digiland, Wilmar (formerly Ezyhealth), Hup Soon Global (formerly Twinwood), Delong (formerly Teamsphere) and Time Watch (formerly Wee Poh).
Of these seven companies, four saw their share price underperform the SES All Shares Index by 35 to 86 percentage points in the 12 months leading up to their share consolidation. The exceptions were Ezyhealth, Twinwood and Teamsphere, which saw their share prices shoot up sharply after news of their reverse takeover deals was announced.
In general, reverse stock-split companies did not see their performance improve subsequent to consolidation.
Six months after consolidation, the median excess return of these companies relative to the SES
All Shares Index was 45 per cent. The average was -27 per cent.
And 12 months subsequent to reverse stock splits, the median underperformance widened to -58 per cent. The average was -28 per cent.
Based on the limited sample size, it does appear that share consolidation is generally not good news for investors.
Indeed, investors have had an inkling of that. Radcliffe and Gillespie (1979), Woolridge and Chambers, Spudeck and Moyer and Peterson and Peterson (1992) document that significantly negative abnormal returns surround reverse split announcements.
Ho, Nelling and Chen (2005) studied US companies listed on the New York Stock Exchange and Nasdaq that conducted reverse stock splits between 1980 and 2000. They also found that companies that carried out reverse stock splits significantly underperformed the various market benchmarks and stocks with similar characteristics one to three years later.
They said the results suggest that 'reverse-splitting firms are unable to change the pattern of post-split underperformance ... since the reverse stock splitting firms are relatively pessimistic about future prospects'.
There are, of course, exceptions. And a notable exception in Singapore is Wilmar. The stock has performed spectacularly since its reverse takeover of Ezyhealth.
It has been helped by several factors, among them the injections of assets by the Kuok family into the Singapore company, and the interest in biodiesel as a alternative fuel source.
So, for companies that did a reverse-split after a reverse takeover, ultimately, what happens depends on the quality of assets injected into the company.
The writer is a CFA charterholder.
Friday, October 19, 2007
The Economist: Lessons from the credit crunch
Lessons from the credit crunch
Oct 18th 2007
From The Economist print edition
Oct 18th 2007
From The Economist print edition
Central banks have worked miracles for 30 years. Don't count on that continuing
AFTER a sudden market panic, all is well. Prices dropped precipitately, but investors have come to see that the Federal Reserve, under its new chairman, will not let the economy slide. Normality has been restored.
That was 20 years ago. Black Monday, October 19th 1987, was the day stockmarkets plunged; and Alan Greenspan, who won his central-banking spurs in that crisis, was the Fed chairman (see article). Two decades on, in the wake of this summer's subprime squeeze, stockmarkets are showing similar faith in Ben Bernanke, Mr Greenspan's successor. Despite bad news from the housing market and warnings from the treasury secretary, America's equity markets are still higher than they were in May. Amazingly, investors have been buying both on good news (don't worry, the economy is fine) and on bad (don't worry, the Fed will come to the rescue by cutting rates).
But the parallel with Black Monday does not work as well as investors might hope, for two reasons. First, this financial crisis is centred on the debt markets, not equities. Debt is more dangerous and in its current securitised form much harder to isolate. Interestingly, the money markets seem more worried about how the credit crunch may end than equity investors are. Interbank rates, though they have eased, are still high: not knowing which institutions might be on the hook for subprime losses and spooked by their own exposures, banks remain wary of lending to one another. And the repricing of mortgage-backed securities looks likely to be a protracted business. The news that big American banks, prodded by the Treasury, plan to set up a “super-conduit” in which to park instruments once valued at dozens of billions of dollars is a sign of how gummed up that market still is.
The more important flaw in the parallel concerns the role of central banks. The Fed emerged from the crisis 20 years ago with its reputation not just unscathed but also enhanced. This time round, the central banks' faults are painfully visible.
Dodgy dentists
Since the 1970s, the central banks' record has been remarkable. A generation ago, inflation around the world was high and variable. Now, by and large, it is low and stable. That has helped to foster steady growth. Central banks have done more than enough to justify the argument that monetary policy should be run by technicians rather than by elected politicians—an astonishing achievement in a democratic age. And “technicians” is the right word: central banking has become an increasingly technical business, performed by leading monetary economists equipped with ever more sophisticated theories and statistical techniques. Granted, there is still a lot of art amid all the science, but if any economists have become the “dentists” that John Maynard Keynes thought they should aspire to be, it is those in central banks.
Nevertheless, as our special report in this issue argues, the past couple of months have demonstrated the limitations of central bankers and financial supervisors (they are not always under the same roof). This is so in at least three respects: monetary policy, economic modelling and bank supervision.
Loose monetary policy is partly responsible for the mess the central bankers are now trying to clear up. Other factors contributed to the crunch, including rash lending, securitisation and globalisation: when American subprime loans went bad, banks in Leipzig (which had bought the stuff) and in Newcastle upon Tyne (which hadn't—see article) were caught out. But whichever way you look at it, central banks kept interest rates too low for too long. That is most true of the Fed, which slashed rates between 2001 and 2003, held them at 1% for a year and then raised them in slow, predictable quarter-point steps, fuelling the housing boom. The results of that are plain to subprime borrowers facing the loss of their homes and to investors who ended up with subprime debt.
The other two limitations are both related to central banks' and supervisors' ability to control a much-changed financial system. One has to do with asset-price bubbles. The macroeconomic models used by many central banks focus on short-term influences on inflation; they focus less on the supply of money and credit. Even when they do have the right tools, central banks have preferred to wait till bubbles have burst, before mopping up afterwards by cutting rates. The snag is that this can start off new bubbles (as it did after the dotcom bust).
Credit where it is due
The last restriction has to do with supervision. Central bankers certainly gave warning that financial risks were being underpriced; contrary to some of their critics, they also had an eye on the off-balance-sheet entities in which banks parked their subprime assets. But they did not appreciate what the impact on the banks would be if those risky assets suddenly lost value. Like most of the people they regulated, the central bankers did not factor in the full effects of a liquidity squeeze.
In one way addressing these shortcomings is simply a matter of learning from experience. If monetary policy was too loose, very well: central bankers will have the chance not to repeat their mistakes. Fortunately inflation, as conventionally measured, has not taken off: that inflation expectations have remained low is a sign that markets and the public still believe central banks can keep prices stable. That may become more difficult, if, say, China is truly turning into a source of inflationary rather than disinflationary pressure. But it can be done.
Central banks should also think harder about what can be done to head off asset-price and credit booms before they turn into damaging and dislocating busts. One answer would be to consider extending the definition of inflation they already aim at to include property and shares.
Alternatively—and perhaps more feasibly—they should be more willing to raise interest rates when credit growth is strong or asset prices are booming, even if consumer-price inflation is under control.
Supervision is harder—not least because over-regulation is a danger. Despite the howls from politicians, securitisation has been a boon for the world economy. That said, central banks and supervisors surely need more information not only about what banks have on their books, but also about what they may have to stump up for if liquidity dries up. One focus should be accounting: remarkably, pricing some instruments is so complicated that banks on both sides of an intricate trade have reported profits. The new Basel 2 banking regulations will force banks to recognise liabilities that until now they have been able to hide. But the Basel rules set too much store on the setting aside of capital; at times like these, what banks need is liquidity (which Basel puts less stress on).
No doubt central bankers will work at these shortcomings. But consider a paradox: the credit crunch has been caused by their successes as much as their failures. Low, stable inflation and strong, steady growth created an incentive for investors to go hunting for risk. The returns were tempting and with wise central bankers in charge, who could lose? Too many investors and bankers have outsourced risk measurement to the likes of Mr Greenspan and Mr Bernanke. Given the complexity of their job, that was truly irrational exuberance. If there is one lesson everybody should take away from the credit crunch it is that central bankers, no less than dentists, are only human.
AFTER a sudden market panic, all is well. Prices dropped precipitately, but investors have come to see that the Federal Reserve, under its new chairman, will not let the economy slide. Normality has been restored.
That was 20 years ago. Black Monday, October 19th 1987, was the day stockmarkets plunged; and Alan Greenspan, who won his central-banking spurs in that crisis, was the Fed chairman (see article). Two decades on, in the wake of this summer's subprime squeeze, stockmarkets are showing similar faith in Ben Bernanke, Mr Greenspan's successor. Despite bad news from the housing market and warnings from the treasury secretary, America's equity markets are still higher than they were in May. Amazingly, investors have been buying both on good news (don't worry, the economy is fine) and on bad (don't worry, the Fed will come to the rescue by cutting rates).
But the parallel with Black Monday does not work as well as investors might hope, for two reasons. First, this financial crisis is centred on the debt markets, not equities. Debt is more dangerous and in its current securitised form much harder to isolate. Interestingly, the money markets seem more worried about how the credit crunch may end than equity investors are. Interbank rates, though they have eased, are still high: not knowing which institutions might be on the hook for subprime losses and spooked by their own exposures, banks remain wary of lending to one another. And the repricing of mortgage-backed securities looks likely to be a protracted business. The news that big American banks, prodded by the Treasury, plan to set up a “super-conduit” in which to park instruments once valued at dozens of billions of dollars is a sign of how gummed up that market still is.
The more important flaw in the parallel concerns the role of central banks. The Fed emerged from the crisis 20 years ago with its reputation not just unscathed but also enhanced. This time round, the central banks' faults are painfully visible.
Dodgy dentists
Since the 1970s, the central banks' record has been remarkable. A generation ago, inflation around the world was high and variable. Now, by and large, it is low and stable. That has helped to foster steady growth. Central banks have done more than enough to justify the argument that monetary policy should be run by technicians rather than by elected politicians—an astonishing achievement in a democratic age. And “technicians” is the right word: central banking has become an increasingly technical business, performed by leading monetary economists equipped with ever more sophisticated theories and statistical techniques. Granted, there is still a lot of art amid all the science, but if any economists have become the “dentists” that John Maynard Keynes thought they should aspire to be, it is those in central banks.
Nevertheless, as our special report in this issue argues, the past couple of months have demonstrated the limitations of central bankers and financial supervisors (they are not always under the same roof). This is so in at least three respects: monetary policy, economic modelling and bank supervision.
Loose monetary policy is partly responsible for the mess the central bankers are now trying to clear up. Other factors contributed to the crunch, including rash lending, securitisation and globalisation: when American subprime loans went bad, banks in Leipzig (which had bought the stuff) and in Newcastle upon Tyne (which hadn't—see article) were caught out. But whichever way you look at it, central banks kept interest rates too low for too long. That is most true of the Fed, which slashed rates between 2001 and 2003, held them at 1% for a year and then raised them in slow, predictable quarter-point steps, fuelling the housing boom. The results of that are plain to subprime borrowers facing the loss of their homes and to investors who ended up with subprime debt.
The other two limitations are both related to central banks' and supervisors' ability to control a much-changed financial system. One has to do with asset-price bubbles. The macroeconomic models used by many central banks focus on short-term influences on inflation; they focus less on the supply of money and credit. Even when they do have the right tools, central banks have preferred to wait till bubbles have burst, before mopping up afterwards by cutting rates. The snag is that this can start off new bubbles (as it did after the dotcom bust).
Credit where it is due
The last restriction has to do with supervision. Central bankers certainly gave warning that financial risks were being underpriced; contrary to some of their critics, they also had an eye on the off-balance-sheet entities in which banks parked their subprime assets. But they did not appreciate what the impact on the banks would be if those risky assets suddenly lost value. Like most of the people they regulated, the central bankers did not factor in the full effects of a liquidity squeeze.
In one way addressing these shortcomings is simply a matter of learning from experience. If monetary policy was too loose, very well: central bankers will have the chance not to repeat their mistakes. Fortunately inflation, as conventionally measured, has not taken off: that inflation expectations have remained low is a sign that markets and the public still believe central banks can keep prices stable. That may become more difficult, if, say, China is truly turning into a source of inflationary rather than disinflationary pressure. But it can be done.
Central banks should also think harder about what can be done to head off asset-price and credit booms before they turn into damaging and dislocating busts. One answer would be to consider extending the definition of inflation they already aim at to include property and shares.
Alternatively—and perhaps more feasibly—they should be more willing to raise interest rates when credit growth is strong or asset prices are booming, even if consumer-price inflation is under control.
Supervision is harder—not least because over-regulation is a danger. Despite the howls from politicians, securitisation has been a boon for the world economy. That said, central banks and supervisors surely need more information not only about what banks have on their books, but also about what they may have to stump up for if liquidity dries up. One focus should be accounting: remarkably, pricing some instruments is so complicated that banks on both sides of an intricate trade have reported profits. The new Basel 2 banking regulations will force banks to recognise liabilities that until now they have been able to hide. But the Basel rules set too much store on the setting aside of capital; at times like these, what banks need is liquidity (which Basel puts less stress on).
No doubt central bankers will work at these shortcomings. But consider a paradox: the credit crunch has been caused by their successes as much as their failures. Low, stable inflation and strong, steady growth created an incentive for investors to go hunting for risk. The returns were tempting and with wise central bankers in charge, who could lose? Too many investors and bankers have outsourced risk measurement to the likes of Mr Greenspan and Mr Bernanke. Given the complexity of their job, that was truly irrational exuberance. If there is one lesson everybody should take away from the credit crunch it is that central bankers, no less than dentists, are only human.
Sunday, October 14, 2007
The Business Times: 4 strategies for an ideal retirement
Philip Loh
Wed, Mar 28, 2007
The Business Times
4 strategies for an ideal retirement
COMING up with a retirement plan to make your nest egg last for two or three decades is a daunting task. This is made worse by the fact that you cannot afford to make any critical mistakes, since it can be almost impossible for you to recover from a capital loss if you incur one in your golden years.
So to start constructing your own ideal retirement plan, make sure that there is a good balance between growth, fixed income and liquid assets.
Growth assets. These investments help you maintain accumulation potential within your portfolio so that your assets can outpace inflation and last longer than you do. Although they provide historically greater returns, they tend to carry a higher level of risk too. Examples of such assets include equities.
Fixed income assets. Such investments usually give fixed and stable overall returns. Examples include pension payments, rental income and monthly retirement withdrawals from your CPF minimum sum. Some fixed income instruments like corporate bonds and mortgage-backed assets can be subjected to interest and default risks.
Liquid assets. As these assets pose a lower level of risk, their returns tend to be less attractive too. But they can be converted into cash quickly so they are ideal for tapping for your daily expenses. Fixed deposits and money market funds are some examples of the liquid assets. Below are some useful pointers to bear in mind when putting together your ideal retirement portfolio.
Avoid investment bubbles at all costs
Remember the red-hot technology stocks of the late 1990s? Many people who bought into a technology fund at the peak may be left with 50 per cent of their original investment after seven years. Most of them were saddled with such severe losses because there is usually no warning before a bubble bursts. Generally, by the time you hear about an investment idea, the bubble is usually on its way to bursting, so steer clear of such bubbles altogether or you may never be able to fully recoup your losses in time.
Consider investing in dividend stocks
As the name indicates, dividend-paying stocks provide good dividend payout. With several Straits Times Index component stocks like banks and property counters trading at historical highs, a better place to find such cash gems may be in the second liners. Small-sized but well-run companies flush with cash are also worth considering. You can switch to other cash-loaded companies when dividend payouts from existing dividend stocks start to drop. This will ensure that you continue to enjoy a regular dividend stream year after year.
Strike a balance between bond and money market funds
Every retirement portfolio should consist of some bonds. Retail investors usually invest in fixed income instruments through a professionally managed bond fund as directly buying individual bond issues require a much bigger investment pool. But the difficulty in constructing a bond portfolio today lies in the fact that long-term interest rates are now lower or almost on a par with short-term rates.
This creates an abnormality in the sense that by buying shorter-term maturity notes, your yield may be higher than that from long-term bonds (those that mature in 10 years or longer). Hence money market funds may give a comparable or better yield compared with a typical bond fund with less risk.
The only plausible reason, then, why a retiree may find a bond fund more attractive than a money market fund is that he expects long-term interest rates to drop, which will generate capital gains for the bond fund, since the longer the duration of the bond, the sharper the price appreciation when interest rates head south. But anticipating the direction of interest rate movements can be difficult and even experts in the field often get it wrong.
Stick to equity-based unit trusts
My general rule is, stick to broadly diversified global equity or regional funds. Avoid narrowly focused country-specific or sector funds unless you know exactly what you are doing or the investment involves only a small portion of your capital. The potential losses from country-specific funds or sector funds may be much higher than the general tolerance level of most retirees. There are, however, many investment-savvy retirees that I know personally who understand fully what they are doing and have well-thought-out investment game plans. For the rest of you, it is better to err on the side of caution.
With rising longevity risks, it is important that you focus on total returns rather than how much income your investments can generate. Your total returns include the gains on your stocks, as well as dividend payments and bond interest. A sufficient portion of the portfolio should also be invested in growth assets to offset longevity and inflation risks. Meanwhile, the balance, which should be invested in fixed income, can offset some of the equity risk. Besides relying on fixed income and dividend payouts for the cash you need to live on, you can also sell shares or unit trusts systemically to fund your retirement lifestyle. Follow these time-tested principles and you can enjoy a long and blissful retirement!
The writer is a chartered financial consultant writing in his own capacity.
Wed, Mar 28, 2007
The Business Times
4 strategies for an ideal retirement
COMING up with a retirement plan to make your nest egg last for two or three decades is a daunting task. This is made worse by the fact that you cannot afford to make any critical mistakes, since it can be almost impossible for you to recover from a capital loss if you incur one in your golden years.
So to start constructing your own ideal retirement plan, make sure that there is a good balance between growth, fixed income and liquid assets.
Growth assets. These investments help you maintain accumulation potential within your portfolio so that your assets can outpace inflation and last longer than you do. Although they provide historically greater returns, they tend to carry a higher level of risk too. Examples of such assets include equities.
Fixed income assets. Such investments usually give fixed and stable overall returns. Examples include pension payments, rental income and monthly retirement withdrawals from your CPF minimum sum. Some fixed income instruments like corporate bonds and mortgage-backed assets can be subjected to interest and default risks.
Liquid assets. As these assets pose a lower level of risk, their returns tend to be less attractive too. But they can be converted into cash quickly so they are ideal for tapping for your daily expenses. Fixed deposits and money market funds are some examples of the liquid assets. Below are some useful pointers to bear in mind when putting together your ideal retirement portfolio.
Avoid investment bubbles at all costs
Remember the red-hot technology stocks of the late 1990s? Many people who bought into a technology fund at the peak may be left with 50 per cent of their original investment after seven years. Most of them were saddled with such severe losses because there is usually no warning before a bubble bursts. Generally, by the time you hear about an investment idea, the bubble is usually on its way to bursting, so steer clear of such bubbles altogether or you may never be able to fully recoup your losses in time.
Consider investing in dividend stocks
As the name indicates, dividend-paying stocks provide good dividend payout. With several Straits Times Index component stocks like banks and property counters trading at historical highs, a better place to find such cash gems may be in the second liners. Small-sized but well-run companies flush with cash are also worth considering. You can switch to other cash-loaded companies when dividend payouts from existing dividend stocks start to drop. This will ensure that you continue to enjoy a regular dividend stream year after year.
Strike a balance between bond and money market funds
Every retirement portfolio should consist of some bonds. Retail investors usually invest in fixed income instruments through a professionally managed bond fund as directly buying individual bond issues require a much bigger investment pool. But the difficulty in constructing a bond portfolio today lies in the fact that long-term interest rates are now lower or almost on a par with short-term rates.
This creates an abnormality in the sense that by buying shorter-term maturity notes, your yield may be higher than that from long-term bonds (those that mature in 10 years or longer). Hence money market funds may give a comparable or better yield compared with a typical bond fund with less risk.
The only plausible reason, then, why a retiree may find a bond fund more attractive than a money market fund is that he expects long-term interest rates to drop, which will generate capital gains for the bond fund, since the longer the duration of the bond, the sharper the price appreciation when interest rates head south. But anticipating the direction of interest rate movements can be difficult and even experts in the field often get it wrong.
Stick to equity-based unit trusts
My general rule is, stick to broadly diversified global equity or regional funds. Avoid narrowly focused country-specific or sector funds unless you know exactly what you are doing or the investment involves only a small portion of your capital. The potential losses from country-specific funds or sector funds may be much higher than the general tolerance level of most retirees. There are, however, many investment-savvy retirees that I know personally who understand fully what they are doing and have well-thought-out investment game plans. For the rest of you, it is better to err on the side of caution.
With rising longevity risks, it is important that you focus on total returns rather than how much income your investments can generate. Your total returns include the gains on your stocks, as well as dividend payments and bond interest. A sufficient portion of the portfolio should also be invested in growth assets to offset longevity and inflation risks. Meanwhile, the balance, which should be invested in fixed income, can offset some of the equity risk. Besides relying on fixed income and dividend payouts for the cash you need to live on, you can also sell shares or unit trusts systemically to fund your retirement lifestyle. Follow these time-tested principles and you can enjoy a long and blissful retirement!
The writer is a chartered financial consultant writing in his own capacity.
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