Portfolio looking fair

It’s been a full month, but as 2012 comes to a close, a quick look through my portfolio seems to be in order.

Last accessed 23 Dec 2012, the portfolio’s return from Oct 2011 stands at 4.84%. Everything seems ok, with exception of BNPPL1 Opportunities USA USD, which has yet to recover from its performance in 2011 and 2010.

To illustrate how badly the fund has done, Citywire ranks François Mouté (manager for the fund) at bottom of North American ranking tables over 12 months, and 36 months. 

source: Citywire.com

Each time my eyes glance past those numbers, my mind starts coming up with questions like:

“Has he lost his mojo?”

“Is he more interested in retirement than returns?”

“Is Moute french for Miller?”

It’s a risk all active funds face. The chance that a star manager, for whatever reason – be it personal challenges (i.e. life happens), or professional challenges (i.e. the ceaseless grind of the performance derby on one’s soul) – decides it’s time to cash in the chips and live off bank interest. I claim no expertise in judging the psychology of fund managers. I’ll take a look at the numbers, and decide what to do from there.

New additions: I picked up Amundi Gbl Luxury & Lifestyle SGD, for lack of a better global equity fund. I would love to see something better catch my eye. Funds on the radar include Aberdeen Gbl Opportunities or DWS Invest Top Dividend. 

Meanwhile, I wrote previously about agonizing over the decision to switch out of Legg Mason WA SEA Special Situations. Happily, or from sheer luck, both funds performed pretty much identically since roughly end-Sep 2012:

Source: Fundsupermart.com

Both funds returned around 8% in 3 months, and short of any potential slowdown, I’ll stick with Legg Mason since historically it has done well in rising markets. 

A bet on HK via Aberdeen China has finally paid off, netting about 6% returns, and I might hold that for some time more.

The fixed income segment of the portfolio looks healthy, and thankfully so, since it’s propping up my portfolio against the returns from BNPPL1 Opportunities USA USD. I’m not about to change anything on this area of the portfolio.

Real estate, via Henderson Global Property is another strong performer, returning 10% since it appeared in the portfolio.

While I’m more or less satisfied with Threadneedle Enhanced Commodities, it is pretty volatile, and I’m keeping an eye on DB Platinum Commodity RIC-C SGD Hedged if the former continues to track the latter.

Blissfully Olam Free Funds

I haven’t read anything about fund exposure to Olam, so I figure this would be blogworthy.

19 November, Muddy Waters’ Carson Block is quoted by Jesse Westbrook for Bloomberg, saying he is betting against Olam. Requote: “We think the company will fail.” And with the recent saber rattling between Olam vs Muddy Waters, I’d thought it’d be worth a little time to dig up all the end-October factsheets of the various Singapore equity funds to see if any fund managers had a position in the neck-deep-in-Muddy-Waters Olam.

Based on end-October factsheets, none of the following funds on Fundsupermart have listed Olam in their top holdings.

Olam-free Singapore Equity funds	Olam-free Singapore Bond Funds
Aberdeen Singapore Equity	Eastspring Inv UT SG Select Bd A
Amundi Spore Dividend Growth	Legg Mason WA Spore Bond Class A SGD
DWS SGP small/midCap A SGD	LionGlobal Spore Fixed Inc-A
DWS Singapore Eqty Fd	Manulife Singapore Bond A SGD
HGIF Spore Eq-A USD	PineBridge Singapore Bond Fund
JF Singapore A (dist) USD	Schroder SG Fixed Income Fd CL A
Legg Mason WA Spore Opp Trust ClA S$	United Singapore Bond Fund
LionGlobal Singapore Trust
Manulife Singapore Equity A SGD
Nikko AM Shenton Thrift Fund
Schroder Singapore Trust Cl A
Singapore Dividend Equity Fund
United Singapore Growth Fund
source: respective factsheets, as at end-Oct 2012

This doesn’t discount the possibility of being exposed to Olam; since top holdings are only updated on factsheets monthly, there’s the possibility of a fund taking a position between 1 Nov 2012 and 19 Nov 2012, which would then expose the fund to Olam’s share price movements. 

source: Yahoo!Finance, last accessed 2 Dec 2012

Looking through Olam’s 2012 Annual Report throws up a list of shareholders, with some pretty big names, as well-reported in the media.

Source: Olam 2012 Annual Report, last accessed 2 Dec 2012

As far as I’m aware, the asset management firm there with any sort of retail presence is AllianceBerstein, and parent, the AXA Group. But, as they’re not present in the Singapore equity/bond space, I’ll leave it at that for now.

Why I Choose Funds Over Stocks

Note: This article was originally written for MyPaper. Sadly, due to layout constraints one chart didn't make it.

Here’s the reality: many local investors would be better off investing in a Singapore equity fund.  Am I saying all investors would be better off? No. There’s every chance a savvy stock picker will see their portfolio performance outperform the market. But not everyone has the time or inclination to wade through years of annual reports and mountains of data, and such people are a relatively small part of the population. 

So a good number of local investors would be better off in a fund.

Here’s why.

Singapore fund beat the STI over long time periods

The Straits Times Index is the benchmark index for the Singapore stock market, and consists of the 30 largest companies listed on the Singapore Exchange. Aberdeen Singapore Equity Fund is a portfolio of equities managed by Aberdeen Asset Management Asia. The fund is one of the longest running funds in the business, having launched in December 1997. 

Disclosure: I have a position in the Aberdeen Singapore Equity Fund.

Source: iFAST compilations, in S$ terms, dividends reinvested, extracted 2 Nov 2012.

The data shows, S$100 invested in the STI and the Aberdeen Singapore Equity Fund would have seen remarkably different growth over more than 14 years. From end-97 to end-Oct 2012, $100 in the STI would have grown into $202, while $100 in the Aberdeen fund would have grown into $472. I’d wager few, if any, stocks on the STI can boast similar growth over the same time period.

Singapore fund beats the STI over good and bad market conditions

To get a clearer picture of how the fund does in good and bad markets we look at the yearly returns of the fund against the STI. For simplicity, a year that sees positive returns is ‘good’, while a year that sees negative return is ‘bad’. A fund does better when it beats the benchmark.

Source: iFAST compilations, in S$ terms, dividends reinvested, extracted 2 Nov 2012.

More often or not, the fund beats the benchmark. In 9 good years, the fund did better 6 times. In bad years, the fund did better 5 times. Again, I’d wager few, if any, individual stocks can post similar performance.

Granted, an individual stock might outperform the STI and the fund for an extended period of time. But bearing in mind many of us, the author included, are not savvy stock pickers, the question is, “What are the odds of an individual picking such a stock?”

Many Funds Beat The STI in 2012

Passive investing purists will rightly point out I’ve only considered one fund. What about the rest? 

To be fair, Aberdeen Singapore Equity is the rare fund with 14+ years of track record we can pit against the STI to show an actively-managed fund can indeed beat an index. From end-2011 to end-Oct 2012 (also termed as ‘year-to-date’), a total of 12 Singapore equity funds have posted returns greater than the 15% STI return. 

I’ll just name three, including the Singapore Dividend Equity Fund, Amundi Spore Dividend Growth, and JF Singapore, but if you’re really curious, you can head down to Fundsupermart.com, and generate a list of Singapore Equity Funds to look at.

And that’s why, in the case of Singapore equity at least, I’ll choose a fund over a stock any time.

Why Finance Needs Bloggers

Like Hugh Young says, the finance industry is essentially venal. I wish I could read the entire interview where he says it, but because the financial publishing industry covers, well, finance, the interview is hidden behind a venal paywall.

So I tend to think financial blogging is a good idea when it comes to exchanging opinions about all things financial. Singaporeans in general don’t have a whole lot in the way of unbiased financial advice. Possibly because the word advice has subverted by financial advisors, 80% at least 30% of which are well, venal.

The other side is the mainstream media, which, rather than cultivate a diversity of financial viewpoints, has focused almost exclusively on the local stock market. Sure, there is some basis for this approach, after all, it’s a safe story to write, and you know there are a ready pool of stock investors in the local market that you’ll never have to worry about no one reading about SIA’s disappointing 1H2013 or the Heineken/Thai Bev tussle over Asia Pacific Breweries.

But what you gain in safety you lose in experience, and when you cover a world as fast-moving as finance, a diversity of experience is required to keep tabs on all the innovative ways this industry works to speculate on uncertainty. How many people did you know said anything about DBS High Notes 5 prior to the Lehman Brother’s collapse? Could this have been avoided by more honest opinions and better discussions among individuals? No one really knows, but it wouldn’t hurt.

If one were to do a poll right now, and asked the average equity-only investor on the features of a managed futures is, or a fixed income fund, or a multi-asset strategy, or a hedge fund, or a macro strategy fund, or a structured product, or a foreign currency time deposit, or a finglefangledoodletwat, I think most would have better luck describing that last term.

I’m not calling for people to take a position on where the market is going or trying to bet on the next financial crisis; only to venture authentic opinions, clearly backed by evidence, logic and data where available. Like one Chan Chun Sing says, “Diversity is a survival strategy.”

And now I’m going to attempt to come to terms with quoting the same guy who made the Lanfang Republic of ancient China famous. At least his speeches have gotten better over time.

Screaming buy, 12 months later...

Approximately 1 year ago, I wrote an article, saying two markets were screaming buys if investors could hold for a year.

The date was 22 November 2011; the call was 22 November was an attractive entry point for Singapore and Hong Kong, and in Asia ex Japan equity markets. I’d like to say I did deep economic analysis of the markets, but it was based mostly on valuations.

Since 22 November, all three markets have shown 10%+ returns.

 The Hang Seng Index, representing the Hong Kong market, is up 15.81%, in HKD terms. Meanwhile, closer to home, the STI is known to be the boring sister to the HSI…

Image credit: http://finance.yahoo.com

…but that didn’t stop her from putting in 11.9% returns since 22 Nov 2011 in SGD terms.

Image credit: http://finance.yahoo.com

In USD terms, the MSCI Asia ex Japan (represented by its iShares ETF) returned 13.3%.

Image credit: http://finance.yahoo.com

Like I mentioned, there wasn't a whole lot of intelligence behind this decision – it’s essentially a look at valuations, which, at the time, were way low. Maybe it’s blind luck, but it’s always nice to know I’m right. This time anyway.

Picking The Right Horse For A Small Cap Fund

For the longest time, I’ve worried about the performance of LM SEA Special Sits in my portfolio. Finally, I’ve found the time to compare the alternative I’ve been mulling around my head as a replacement for the fund – Aberdeen Asian Smaller Cos.

As at 30 Sep, here’s what my portfolio looks like:

Despite making a bit of money in the recent upsurge (thanks QE3!), I’m still facing a loss on my China exposure, and my US exposure, which proxies for developed equity exposure, because…well…I couldn’t find a compelling global equity fund (although DWS Top Div might be an interesting proposition).

In any case, this article tracks my thoughts on whether I should change my exposure to Legg Mason QA SEA Special Sits to Aberdeen Asian Small Cos. I find writing this down gives me a point of reference for the future, so I can have a clearer idea of what in the world I was thinking when I made the decision, or to leave a digital trail to prove my sometimes questionable frontal lobe activity.

In any case I wrote about these two funds approximately a year ago, when I compared both of them against one Mr Madoff, who had delivered 10% annualized returns consistently until the day his Ponzi scheme collapsed. The funds since then have posted far more modest rates of return because the start and end-points have changed. And the Madoffs, post Ponzi collapse, have also faced a drastic change in lifestyle.

For sake of comparison, I’ve used the MSCI Asia Pacific ex-Japan index (MXAPJ:IND) as a common benchmark. The two official benchmarks are MSCI Far East (MXFE), and MSCI APJ Small Caps (MXAPJSC), which are close enough for the MSCI Asia Pacific ex-Japan index to provide a fair proxy.

Granted, neither fund uses this benchmark, but the other two benchmarks used track fairly closely, so I think it’s a reasonably (but certainly not perfect) useful benchmark.

In any case, enough yap flapping. This is how the two funds stack up:

From the above, it’s quite clear both sit on opposite sides of the spectrum – Legg Mason will do badly in down markets (like 2011) and will do well in up markets, often stunningly so, with an average outperformance of 40pp in strong bull markets. Meanwhile, Aberdeen, true to its reputation for being conservative stock pickers, does well in bear markets, but underperforms in bull markets.

So should I switch? If I do, it’ll be because I believe there’s more pain to come, and that Asian equity markets will get hammered, and from a valuations standpoint, it’s kind of middle of the road, so there’s little guidance there. In other words, markets seem rather wishy washy, and to quote the reformed broker, “Tops are a process, Bottoms are an event and Middles are a motherfucker.”

Of Fakery And Funds

What happens when a fraud spotter goes up against hedge fund star?

You get Carson Block of Muddy Waters bear versus John Paulson of Paulson & Co bull, waged on the theatre of Sino-Forest which,  reported in a BBC article, defiantly announced intentions to sue Muddy Waters, which sounds rather spiteful on the part of Sino-Forest, especially since the title of the same article is, “Sino-Forest Files For Bankruptcy Protection”.

Since then, Muddy Waters has been made out by the media to be something of a financial vigilante, publishing articles on fraudulent accounting by Chinese companies. 

Questionable accounting is not new for Chinese companies, and most investment professionals will readily agree that accounting standards in China are somewhat flexible at best. Taking a quote from Charles Li, Chief Executive Officer of Hong Kong Exchanges & Clearing Ltd, some Chinese companies listed in the US via reverse takeovers “wouldn’t have seen the light of day here.”

So what has all this have to do with the Singapore mutual fund scene? The story comes in 3 parts: Muddy Waters vs Focus Media, Bronte Capital, and Eastspring Investments.

Arc 1: Muddy Waters vs Focus Media

November 2011, Muddy Waters released a report, initiating coverage on Focus Media, which it claimed fraudulently overstated the number of LCD screens it owns. You can read the full report, “Muddy Water Initiating Coverage on FMCN – Strong Sell” here. On the day of the report’s release, 21 November 2011, the impact on Focus Media was significant.

image credit: Yahoo! Finance (note added)

Since then, Focus Media has recovered back to 23.76 as at 22 Sep 2012. But that’s just arc 1.

Arc 2: Bronte Capital

Bronte Capital is the name of the blog, written by one John Hempton, CIO (Chief Investment Officer) at Bronte Capital Management. 

Since August, he’s written approximately 16 articles around Focus Media, which is probably enough to fill a short novel of more than 10,000 words. Granted, it’ll be 10,000 words of financial storytelling which is probably a niche market at best. Still, John writes simply, and more importantly, candidly, which is fairly rare in this industry.

s/n	Bronte Capital articles re Focus Media	Date
1	Focus media revenue plausibility test: part 2	20-Sep-12
2	Focus media revenue plausibility test: part 1	18-Sep-12
3	Focus media: three interpretations, which one is right?	17-Sep-12
4	The choice of lawyers in Tortola: Focus Media counterparties edition	13-Sep-12
5	Chinese due diligence, Focus Media style	12-Sep-12
6	Focus Media: some follow up to the post about the loan from Jiang Weiqiang to the company	11-Sep-12
7	Focus media giving away cash?	10-Sep-12
8	Puzzled at the wealth of Chinese civil servants - Jiang Weiqiang and Focus Media edition	9-Sep-12
9	Focus Media: calculating losses on disposal	7-Sep-12
10	Focus Media: One strange disclosure, three interpretations	6-Sep-12
11	The mysterious case of the disappearing competitor: Focus Media edition	31-Aug-12
12	Focus media - the key post: four interpretations of the accounts	31-Aug-12
13	Focus Media - focus on movie screens	28-Aug-12
14	Focus Media - big risks and rewards for private equity firms	27-Aug-12
15	Focus Media - my new obsession (corrected version)	27-Aug-12
16	Focus Media: my new obsession - original version with annotations	24-Aug-12

Source: Bronte Capital, http://brontecapital.blogspot.sg/, last accessed 23 Sep 2012

There’s a lot of good reading in the posts, and John goes through, in some detail, the reasons why one might suspect Focus Media of over optimistic at best and outright deceptive at worst. But where my interest gets piqued is in reference to one Ashish Goyal, CIO Asian equities with Eastspring Investments.

John writes, “Finally it is being written for Ashish Goyal from Prudential Investments who is Focus Media's largest shareholder and was quoted in the WSJ stating he wanted more than $30 for his shares. [Someone please forward this to Mr Goyal. He seems a reasonable man.]”

Given I’ve had the opportunity to interview Ashish, he strikes me as a pretty conservative and experienced sort of money manager.

Looking through Eastspring’s annual reports also reveals Ashish doesn’t have any direct positions in the funds under his management, although Eastspring is listed as one of the top holders of shares.

Enter Eastspring Invesments

Turns out Focus Media helpfully compiles a list of top shareholders:

Image credit: Focus media, http://phx.corporate-ir.net/phoenix.zhtml?c=190067&p=irol-ownershipsummary, last accessed 23 Dep 2012

And right up there with 4.4% ownership is Eastspring Investments Singapore.

Based on Morningstar’s data, Ashish manages Eastspring Investments - Asian Equity Income A Inc. Meanwhile, the two funds listed by Focus media include Eastspring Investments – China Equity Fund, managed by one Nicholas Koh, and Eastspring Investments Unit Trust – Dragon Peacock whose manager is not listed in Morningstar’s database.

Not content with this, looking through Eastspring Investments’ annual reports (as at 30 June 2012) turns up several more funds that hold Focus Media, including the following table.

Eastspring Investments Funds with holdings of Focus Media
Fund name	Quantity	% of Net Assets	Valued at	Currency	Manager
Asia Pacific Equity Fund	356,000	1.78%	8,244,960.00	USD	Andrew Cormie
Asian Equity Fund	370,700	1.25%	8,585,412.00	USD	Kannan Venkataramani
China Equity Fund	696,700	3.94%	16,135,572.00	USD	Nicholas Koh
Dragon Peacock Fund	181,200	2.33%	4,196,591.00	USD	Dr Rao
Greater China Equity Fund	110,704	2.68%	2,563,905.00	USD	Nicholas Koh
Hong Kong Equity Fund	333,100	1.69%	7,714,596.00	USD	Nicholas Koh
source: Eastspring Investments Unaudited Semi-Annual Report as at 30 June 2012 manager source: bloomberg.com

As at 30 June 2012, Focus Media isn’t found in any funds directly managed by Ashish. I’m guessing the reason why he was quoted as saying he wanted $30 for Focus Media is because he is acting as a spokesperson for Eastspring Investments, speaking on behalf of the firm and quoting a price that was quoted to him.

There’s no telling who is right on this particular call. Muddy Waters has a reputation for shorting fraudsters, and the amount of material put out by Bronte Capital seems to support some sort of accounting irregularities is going on. On the other hand, Eastspring Investments is a solid fund house in its own right– some of its funds are highly rated by various rating agencies.

The difficulty is essentially identifying deception – if a company sets out to intentionally defraud investors, enrich its inner circle of family members, business partners or friends – then there are two ways to establish the truth, either via a confession, or by building a store of facts inconsistent with the story. And humans in general are monumentally bad at spotting liars.