Financial literacy vital when investing in funds

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By LEONG HUNG YEE hungyee@thestar.com.my

 It pays to be updated on investment knowledge

LOOK before you leap. That’s the advice experts in the unit trust industry have given to investors, either old or new, when deciding to put their money into any fund.

Their reasoning behind it is that the products being offered to investors are no longer simple and basic. With the ever growing diversity and sophistication of unit trust products, consumers have to continuously enhance their knowledge and capabilities to maximise as well as protect their investments.

Fund managers say unit trust funds offer an option to retail investors especially those looking at the possibility of earning higher returns compared with conventional savings like fixed deposits.

However, a lot of investors do not really have a good understanding on what they are investing in and they think they can simply park the investment in some funds and let it grow.

Lim Hong Tat says it is a challenge for investors to stay informed on market movements in today’s environment.

“Over the long term, education on the basics of financial planning was important for the growth of the unit trust industry,” a fund manager says.

MAAKL Mutual Bhd CEO Wong Boon Choy opines that more can certainly be done in investor education. “I am sure the Federation of Investment Manager Malaysia would have probably started working with all relevant parties who are involved in promoting financial literacy.”

Malayan Banking Bhd (Maybank) deputy president and head of community financial services Lim Hong Tat points out that one of the issues it is facing is educating its customers on unit trust investment.

He says it is a challenge for investors to stay informed on market movements in today’s environment.

“Educating our customers on unit trust investment is one of the key areas the bank is embarking on. Unit trust investments are meant for a medium to long-term investment horizon, and generally provide better returns according to the risk that accompanies the investment,” Lim says.

The dollar cost averaging concept, he says, is another focus where the bank is highlighting to customers, such as to invest the same amount of money over a period of time, especially now when market volatility is high.

“By doing so, investors avoid entering the unit trust funds at the peak or bottom of the market cycle, and hence spread out the risk,” Lim says.

HwangDBS Investment Management Bhd (HwangDBS IM) chief product officer Steve Lim says that despite the growth of the unit trust industry over the past 10 years, there is still a need to increase investors awareness and understanding about unit trusts and its benefits.

Good returns

“Many of them expect good returns, for example double-digit returns, within a year, hence defeating the purpose of investing in such instruments for retirement and financial planning. Since they have a short-term investment outlook, they tend to time the market. Many of them have a herd mentality and will continue to sell and redeem when bad news flows in.

“Also, mis-selling and lack of product understanding have been the bugbear of our industry,” Lim says.

He adds that this had resulted in losses by many investors and a prevailing misconception that unit trust investing as a whole is a highly risky and complicated venture.

“Nevertheless, we believe that with the right financial education, we will be able to address the unit trust industry issues and misconceptions as well as contributing to the growing confidence and popularity of the industry segment.”

Steve says the level of personal financial literacy today is low and with growing consumerism as well as changing customer expectations, there is a need to reinforce greater financial literacy to help people better manage their personal finances. Proper consumer education is needed if new growth engines, such as private pensions, wealth management and asset management, with their more complex and sophisticated products, are to take off.

While industry players are advocating a greater need to increase investor education, some investors do not really have a basic grasp of what a unit trust is or even why they should invest in unit trust.

Lee Khee Chuan, a Securities Commission-licensed financial adviser representative, says unit trust as an investment vehicle has distinct advantages over other asset classes of investment.

He says, for example, unit trust has better liquidity compared with land banking products.

Wide selection

“It (unit trust) can start with a minimum capital of RM1,000 but it is impossible with property or blue chip shares. Unit trust also offers a wide selection ranging from bond funds to aggressive equity funds; furthermore it gives investors exposure to multi regions. It also allows investors to invest regularly using the dollar cost averaging method with a minimum capital as low as RM100 per month through bank account deductions,” Lee says.

Lee cautions that investing in unit trust does carry investment risk; the price of units may go down as well as up.

“It is still prudent to diversify among unit trust funds with differing fund objectives even though unit trust fund sales agents may tell you that unit trust is diversified among different stocks or stock markets.

“One can also check out value-added services provided by some licensed financial advisory companies in Malaysia which offer a model fund portfolio which is effectively diversified to clients because they have an in-house fund manager to construct and monitor the portfolio of unit trust funds,” he adds.

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Investing in Malaysian unit trust industry

Investing in Malaysian unit trust industry

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High fees dampener for unit trust

By DALJIT DHESI daljit@thestar.com.my

Unit trusts are gaining popularity among investors as an important source of investment and retirement savings. But are investors getting a fair deal from the high charges being imposed by the industry and will lower charges really mean better returns for investors?

THERE is nothing that really fazes a seasoned investor. They are used to losing and making money on the stock market. They understand the game.

But if there’s one thing that irks veteran investor Jason Yap, who has been a unit trust investor for a decade, is that he already starts losing money before he has a chance to make a profit.

What irritates Yap, who is a retiree, is the high upfront fee he has to endure, and that has a profound impact on the return on his investment.

“The upfront fee of between 5% and 7% is rather high and should be lowered for us to enjoy better returns. The upfront charge one has to pay when buying into a fund will impact the returns received from the fund. It is pointless to invest in something that at the end of the day will bite into’ the returns or monies received from the particular investment.

“Many of us have taken out monies from our savings to invest in unit trusts. For unit trust to be effective in boosting retirement savings, the charges should be lowered or even abolished,” he adds.

That argument is as old as the industry itself. Since establishing its roots in 1959, the unit trust industry in Malaysia has grown steadily over the years and has really blossomed since the various periods of market turbulence, especially the Asian financial crisis in 1997/98.

Foo says a dichotomy exists in Malaysia where different rates are being charged to different entities.

One of the major qualms among investors for some time now is its high sales charges.

The main grouse has been the upfront charges, which is money people have to pay when they buy into a fund. Then there is the exit charges, which are money paid when they cash out of a fund, and the annual management fee, which is a charge imposed by the fund to manage people’s money.

The current upfront fee ranges from 5% to 6.5% on the invested amount, except for money from Employees Provident Fund (EPF) to invest in funds (under the EPF Members Investment Scheme) which is capped to 3% since Jan 1, 2008.

The exit fee may be 1% or higher but much depends on the structure of the fund. The annual management fee ranges from 1% to 1.5% and the trustee fees is from 0.5% to 1%.

A call to review sales charges

Is there a need for the industry to review its charges to make the unit trust industry more appealing to investors? Some industry observers think so.

Malaysian Financial Planners and Advisors Association (MFPAA) deputy president Robert Foo thinks front-end fees should be reduced or completely removed so that investors can enjoy higher returns.

The other purpose of such a radical but common practice in matured markets is that the whole industry can then move from a sales push culture to that of a professional advisory culture where investors can work with licensed and professional financial advisors if they so wish.

“It should be noted that in developed countries like Britain and Australia, there is a regulatory push for such financial products to be delivered on a fee for service basis rather than on a high push environment with upfront sales commissions. In Britain, the government has legislated that by Jan 1, 2013, all financial products are not allowed to have commissions attached.

“Agents or financial advisors are required to charge investors directly for services provided, therefore ensuring that their interest aligns with that of the investors,” he adds.

Foo, who is also the managing director of licensed financial planning company MyFP Services Sdn Bhd, says a dichotomy exists in Malaysia where different rates are being charged to different entities.

For money withdrawn from the EPF, people pay 3% to buy into a unit trust, but for walk-in customers, they are charged 6%.

“Does it mean that your EPF money is more valuable than your hard cash?” he asks.

“I think the upfront fee is too high and eats into the returns of investors. The average compounded rate of return of equity unit trusts in Malaysia over the last 10 years is only about 7.5% per annum, and losing 6% upfront is too high a cost for investors,” Foo says.

An industry observer says the Securities Commission should consider compelling unit trust companies to waive the upfront charges, similar to funds under Fidelity Investment, which is one of the largest mutual fund companies in the world with over US$1.46 trillion in assets under management.

Foo says it is cheaper to buy funds through the Internet, for example through www.fundsupermart.com.my or eunittrust.com.my, which imposes an upfront charge of 1% to 2%.

Much higher than regional peers

Licensed financial planner Jeremy Tan of Standard Financial Planner Sdn Bhd says the upfront fee is considered high compared with countries like Singapore and Hong Kong.

Tan says that depending on the sophistication of the product, the unfront fee in Singapore ranges from 3% to 5%, but adds that there is an alternative platform for investing in unit trusts, with upfront fees ranging from 0.75% to 2%, depending on the amount invested. In this latest alternative, there is a wrap fee of up to 1% per annum.

He says the alternative is also available in Malaysia, where the upfront fee is lower than what is currently charged by investing directly through the fund house.

He expects the industry to eventually lower the charges in line with other Asian countries such as Singapore and Hong Kong.

Foo says that due to the open nature of the Hong Kong and Singapore markets, where local funds have to compete with global fund houses at the retail and wholesale market sector, the fund companies can reduce the upfront charges to even zero. Also, there is no tied agency structure in these countries unlike Malaysia.

Lower charges, better returns?

Those arguing for lower charges will undoubtedly look at the average return of 7.5% per annum over the past decade by unit trust firms and say a lower fee will bump up returns.

Tan, however, believes lowering the sales charges will not necessary provide better returns to investor. It depends on the performance of the fund manager or the fund house in relation to the funds invested among others.

Pacific Mutual Fund Bhd executive director and CEO Gary Gan concurs. He says the performance of a fund and its relevance to investors is key rather than merely looking at charges.

At the end of the day, the basic rule of investing is making an informed decision. This means investors need to have sufficient information and knowledge of the product they are investing in, he notes.

MAAKL Mutual Bhd CEO Wong Boon Choy says any attempt to restructure the front-end and back-end charges will require very careful study and strong will on the part of the authorities to make tough changes to the rules and regulations on existing distribution channels which is dominated by a tied-agency system.

“Agent commissions have already been compressed when the EPF capped the maximum service charge to 3%. This translates to more than 50% reduction in the normal service charge. The front-end service charge is the primary means of compensating the agents for the service they provide to investors,” he explains.

Wong, who is also the president of the Financial Planning Association of Malaysia (FPAM), estimates the tied agency force to be over 60,000 at the end of last year.

Meanwhile, Areca Capital Sdn Bhd CEO Danny Wong feels the market should determine the fee structure as ultimately good performance and achievingthe investor’s objective are more important.

Tan says the upfront fees are considered high compared with Singapore and Hong Kong.

He says there are funds with upfront fees distributed by banks or unit trust companies as well as those with almost no front-end fees being solddirectly by niche fund managers or via online portals. He points out that there is no evidence of superiority of either practice as the choice of investment is left to the investors.

Lowering or abolishing sales charges, says Steve Lim, chief product officer of HwangDBS Investment Management Bhd, will provide investors a quicker path to garnering returns on their investment, but at the same time, might encourage many to make regular withdrawals.

From the perspective of unit trust management companies, the lowering of sales charge to 3% has helped change investors’ mindset and allowed them to realise that unit trust is a viable investment and pension planning instrument, Lim adds.

CIMB-Principal Asset Management Bhd CEO Campbell Tupling says the industry fee structure in Malaysia is primarily on the front-end as the back-end fees are not significant.

Alternatives

“Investors know what they are paying for. Fees are transparent and clearly stated. Investors are free to choose how they wish to be serviced. There are other means of investing at a lower cost, for example exchange traded funds (ETFs). However, investors have yet to embrace ETFs in a meaningful way,” he adds.

With high sales charges of unit trust funds, which generally are open ended funds, will it make more sense for investors to switch their investments into close-end funds or other instruments like ETFs?

iCapital.biz Bhd managing director Tan Teng Boo does not think so. Unless the fund manager has an excellent track record, he says it is hard to promote and list a close-end fund like icapital.biz Bhd on Bursa Malaysia.

Tan says any such fund has to go through an initial public offering process and is not so profitable for fund management companies to promote and list close-end funds as there are no entry fees or front-end loadings or commissions, he adds. At the same time, he says investors in Malaysia are not familiar with closed-end funds.

icapital.biz Bhd is the only listed closed-end fund in the country.

From the company’s records, icapital.biz Bhd’s cumulative returns for the five-year period (between Oct 19, 2005 and Dec 30, 2010) stood at 109%. (Note: the fund was not traded on Dec 31, 2010).

The top half of the Equity Malaysia Funds (equity unit trust funds) returns range from 84% to 196% during the five-year period (Dec 31, 2005 to Dec 31, 2010).

Wong says that in general, unit trust funds are more popular than closed-end funds. With the so-called guaranteed buy-back feature, investors can be assured that the unit trust management company will buy back their units in the event the investors need to make a redemption or liquidation.

“Unlike unit trust funds, the trading price of the closed-end fund is dictated by market force and investor sentiment. In the event the investors of the closed-end funds want to liquidate their holdings, they can only liquidate or sell through the brokers on the stock exchange where the units are subject to the market forces of supply and demand.

“Therefore, the prices can be volatile in the secondary market where investors may sell their units at a discount or premium. In this case, liquidity is one of the major concerns for investors of closed-end funds,” he says.

Foo feels investing in closed-end funds or open-end funds has its pros and cons, but much depends on the skill and capability of the investment manager to deliver the returns by taking advantage of the inherent features of the two structures.

Tan of Standard Financial Planner says more research and analysis on close-end funds is required before investing, compared with unit trust investment where the fund’s objectives of distribution policies, inherent risks, minimum investment period are clearly spelt out in its prospectus.

Every investor wants to preserve capital invested and a return corresponding with the risk taken, he explains.

Currently, there are over 580 unit trust funds in the market compared with only five listed ETFs on Bursa, namely CIMB FTSE Asean40, CIMB FTSE China 25, FTSE Bursa Malaysia KLCI ETF, MyETF Dow Jones Islamic Market Malaysia Titans 25 and ABF Malaysia Bond Index Fund.

For example, returns to date (Jan 1 to Oct 31) of FTSE Bursa Malaysia KLCI ETF stands at -0.16%. The FTSE Bursa Malaysia KLCI was down 2.71% during the same period.

Lim says ETFs can be a good choice for investors who have knowledge of the stock market and have the expertise to make investment decisions on their own. For the normal saver, however, unit trusts tend to be more appropriate as the investments are managed by professionals who have the skill sets to make complex investment decisions.

Gan, however, feels investors should consider other factors rather than solely relying on returns data. Factors like volatility of the instrument and fund size are equally important when investing in a particular fund.

Growth momentum and key challenges

With the current uncertainties in the global economy coupled by the eurozone debt crisis, is the unit trust industry able to ride out the global economic slowdown to continue its growth path?

Industry players generally think the industry will continue to grow albeit at a slower phase. CIMB-Principal’s Tupling projects a low single-digit growth for the rest of the year and anticipates the industry’s asset under management to grow about 5% to RM104bil this year.

In terms of net asset value (NAV), the investments in unit trust funds held by 14 million account holders stood at RM240bil last year compared with RM44bil in 2000, an increase of about 45% per annum.

Wong feels the market should determine the fee structure as good performance and achieving objectives are vital.

He says that new investment in equity funds has slowed but it is not a significant drop, adding that redemptions are also lower than expected.

The growing risk aversion, he says, will result in higher demand for more defensive and conservative asset classes like dividend-yielding equities and fixed income securities.

Lim of HwangDBS expects single-digit growth this year due to poor market sentiment and high risk aversion in view of the uncertainties in the global economy.

He says the main challenges faced by the industry is the need to address the question on how growth momentum can be maintained as well as to promote unit trust fund as a staple in building long-term wealth. He says there is also a need to change the short-term investor mindset.

Gan says while the current gloomy outlook may have impacted equity funds, not all can be lumped in the same boat. Funds like Islamic and money market are thriving and the factors that will ultimately attribute to industry growth is how well funds perform and deliver products that meet investor needs.

Areca Capital’s Wong expects the industry to continue growing at a double-digit rate. With investment markets getting more volatile, he says investors may find it harder to grow their investments resulting in migration of more funds into the fund management industry.

Competition from international players is the other main challenge for local players, he notes. To face the challenges, Wong adds innovativeness and excellent service standard is needed.

It is therefore important to allow different types of business models and strategies to combat that threat, especially when facing the establishedgiant international players, so that each player will continue its role and find its niche within the industry, he says.

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Investing during turbulent times

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Tips on how to invest during turbulent times

STOCK markets around the world lately gave investors that sinking feeling again, weighed down by deepening woes of Europe’s sovereign debts, an anemic US economy and new fears of a sharp economic slowdown in China.

Many investors sold shares to hold more cash, despite cash earning very little interest. In Singapore for example, six months USD fixed deposits of less than US$1mil earns zero interest in some banks.

In the United States, 10-year Treasury bonds are yielding 2.1% per annum; despite misery returns, many investors prefer the safety of US Treasuries during crisis times, while waiting for policymakers to act boldly and markets to stabilise.

At the same time, we see many economists and other pundits offer a whole host of predictions about today’s global financial predicaments. The many predictions range from the slightly hopeful to the pessimistic, right down to the disastrous and absurd.

Does it sound familiar? Did we not hear many such predictions during the 2008/2009 global financial crisis? Who should we listen to? What should one do?

No doubt in hindsight, a few forecasts will be correct; and as the dust settles, many extreme predictions will also likely be forgotten. Yet for investors today, separating much of the “noise” from facts is one of the more tricky parts of steering through these very challenging times.

Fundamentals and valuation takes a back seat during a crisis

Volatile stock markets today are driven by latest positive or negative news flow affecting sentiment. Uncertainties during a crisis causes investment risks to spike, stock investors tend to sell first and ask questions later; fundamentals and stock valuation typically takes a back seat in the short term.

No doubt many investors worry about negative impact to a company’s fundamentals in difficult times. For example, a manufacturing company’s stock with a present price earning (PE) multiple of six times can change drastically to 60 times PE if earnings were to collapse 90% because of a global financial crisis.

Similarly, a property company’s price to book value discount of 60% can easily drop to 30% if asset value is marked down by half in troubled times. Monitoring, reassessments and analysis of a company’s financial progress is obviously important during tumultuous times.

Share prices of companies (even those with good fundamentals) may continue to fall indiscriminately, due to many reasons such as panic selling, fund redemption and repatriation. Investors should tread cautiously, even if stock prices may appear to be at very attractive levels.

I relate a challenging experience from the last global stock market plunge. In 2008, I invested in the largest luxury watch distributor and retailer in China (at that time 210 stores and sales amounting to 5.5 billion yuan a year or about 30% market share).

This Hong Kong listed Chinese company sells luxury watches (such as Omega, Longines, Bvlgari) from global brand owners Swatch group of Switzerland and LVMH of France (both by the way are also 9.1% and 6.3% shareholders of this Chinese company respectively).

As the US sub-prime mortgage crisis deepens by end-July 2008, many stocks around the world plunged. This company’s shares similarly dropped from HK$2 to HK$1.50 in a matter of weeks.

We vigorously reassessed the company’s fundamentals, including visits to retail outlets in China and Hong Kong. The result was an affirmation of our conviction to invest in the company for the long-term, despite short-term price weakness.

By late September 2008, we decided to purchase more shares when valuation proved so attractive at HK$1.15 per share (at a PE multiple of eight times).

Unfortunately, as the global financial crisis worsened, the company’s shares continued to plunge and bottomed to a low of HK$0.51 by Nov 26, 2008.

This stock eventually recovered back to HK$2 per share (by June 1, 2009) and went on to exceed HK$5 per share by late 2010. The company’s share prices recovered partly because Asian equities rebounded quickly in 2009, but also reached new highs because the company’s fundamentals continue to improve with strong sales (+49%), profitability (+26%) and expansions (+140 stores to 350 stores) from 2008 to 2010.

A lesson if you will that during a crisis, one should be prepared for short-term (weeks and months) stock market volatility.

It is essential for bargain hunters to have long-term holding power, good understanding of company fundamentals and strong conviction on a company’s prospect. In the long-term, we know fundamentals and valuation does matter.

How does one invest during a time of crisis?

My approaches to investing in turbulent times are:

• Search for and invest (when valuations are attractive) in well managed companies that will not only survive but emerge stronger from crisis times;

• Be prepared to stomach stock market volatility in the months ahead;

• Have a longer term investment horizon (perhaps two to three years); once this crisis dissipates, reap the rewards as stock markets recover.

In Asia, macroeconomic fundamentals likely will remain resilient as many Asian economies have strong foreign currency reserves, coupled with more fiscal and monetary policy options to support growth.

China is also likely to withstand any fallout from Europe better than most would think. China’s economy is still growing at a strong 9.1% gross domestic product growth for the third quarter of 2011; speculations about China’s economy crashing may be somewhat premature at this stage.

Similarly, I think many established Asian companies have sufficient resources be it cash, borrowing powers or human capital, to emerge out of these turbulent times faster and stronger than before.

I believe with increasingly attractive valuation, the investing risk-reward equation (potential downside risk versus long term return prospects) favors Asian equities in the long run. I have confidence investing in Asia’s fundamentals and Asian companies for many more years ahead.

Teoh Kok Lin is the founder and chief investment officer of Singular Asset Management Sdn Bhd

What’s PNB up to a takeover bid on Setia ? Leave it to the real businessmen!

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A QUESTION OF BUSINESS By P. GUNASEGARAM  p.guna@thestar.com.my

Permodalan Nasional Bhd‘s surprise bid for SP Setia raises more questions than answers

IT must be great to have so much firepower at your fingertips. But it is also a huge responsibility. How do you get your target and keep it intact at the same time? It’s the old question of having your cake and eating it too.

That’s a dilemma that not just Permodalan Nasional Bhd (PNB) but many government-linked companies (GLCs) face. They have the money to buy over property companies but if they don’t do it right, they stand the risk of losing the people behind these companies.

If the worst happens the staff leave, the company is unable to undertake its projects, quality of houses and other developments drop, launches get less imaginative, public perception deteriorates, and, ultimately, value gets destroyed.

By seeking to own the golden goose body and soul, it is sometimes killed. Occasionally, there is in the corporate world a very thin line between protecting and enhancing your investments and making a wrong move which may send their value plummeting down, if not immediately, in time.

The latest episode (see our cover story this issue) has raised eyebrows not least because of the manner in which PNB has made its bid for one of most respected and admired property companies in Malaysia, SP Setia.

PNB already has about a 33% stake in SP Setia but is seeking to raise this stake to over 50% by offering RM3.90 a share, about an 11% premium over the closing price before the announcement of its notice of takeover. It offered 91 sen per warrant, a premium of nearly 100%.

It has had its stake of just under 33%, the point at which a general takeover offer is triggered under the takeover code, since 2008 but pushed this to just over trigger point on Tuesday and announced its intention for a takeover the following morning.

The offer is conditional upon PNB getting control of SP Setia. PNB also announced its intention of keeping SP Setia listed by ensuring a shareholding spread even if it got more than 90% of the offer shares.

Initial calculations based on 75% control and acquisition of all warrants indicate that the takeover could cost PNB over RM3 billion, a lot of money for most private investors in Malaysia but a mere drop in the ocean for PNB which has over RM150 billion under management.

It’s the second largest fund manager in the country after EPF which is twice as big with over RM300 billion in funds. But PNB is probably the largest equity investor in the country because of a much higher proportion of funds invested in equity. There is hardly a major listed company in Malaysia in which PNB does not have a stake.

The big puzzle is why has PNB launched this takeover offer which could potentially affect adversely the value of its quarry? What was PNB fearing? Was it just a matter of increasing its stake in a depressed market which undervalued SP Setia’s assets or was there something else? And why did it not consult with senior management and shareholders even after its notice of takeover?

At this stage one can only conjecture on the answers and make educated guesses.

But first, what’s wrong if PNB took a majority stake? Previously SP Setia had PNB as a major but not a majority shareholder. PNB did not intervene in management and had two board representatives. If the SP Setia board put up a proposal for shareholder approval, PNB cannot by itself stop it if other shareholders supported it. They include the Employees Provident Fund (EPF) with 13.4%, SP Setia president and CEO Tan Sri Liew Kee Sin with 11.26% and Kumpulan Wang Amanah Persaraan or KWAP with five per cent.

One must still note that the government-linked funds or GLFs already control over 51% of SP Setia. But with PNB alone poised to take over a 50% stake, feathers are being ruffled and questions are being asked as to what that means.

What would have been the ideal situation for SP Setia? Four factors would have contributed. An independent management, a good board which represented all parties, strong minority shareholders, and a diversified institutional base so that no shareholder dominated. The first three are pretty much in place but the fourth was not achieved because PNB had since 2008 been holding a stake of just under 33% and with two other GLFs, the stake came to over 50%. But was there a way of dispersing shareholding?

One deal being negotiated, it was reported, was for Sime Daby, a PNB company, to take a 20% stake through the issue of new shares in exchange for land banks. If it had come through, it would have helped to dilute PNB’s shareholding. Still, Sime is related.

The underlying problem is this. GLFs and GLCs have lots of money and not many places to put them in. Good companies attract their attention but if they take control, and especially if they take management control as well, the move can destroy value.

Some of PNB’s property purchase and privatisation acts in the past have not been particularly successful, if at all. The major reason is key staff leave after GLCs take control. That’s a phenomenon that’s happened quite a few times.

So far, PNB’s stake in SP Setia had not been a problem. PNB had its two board representatives and it was quite satisfied with its stake. A balance seemed to have been reached with senior management, especially Liew who is also a major shareholder.

But that has been thrown askew with PNB’s latest move. Part of the solution will be to convince the market that there will not be management interference unless things go wrong. But the only assurance of that is if stakes are far below 50%, perhaps not more than 30%.

PNB is primarily a passive investor. Thus its motivation should not be to stop dilution of its shareholding or moves to widen shareholding among companies it owns. Control should not be its primary aim.

Instead, it must focus on getting best value for its current stake, which may well be achieved by continuing to be clearly a passive investor. That’s better than having a bigger stake in a less valuable company. Perhaps it could have put its RM3bil in other investments. But it looks like it’s a bit too late for that.

l Managing editor P Gunasegaram is plainly perplexed by PNB’s bid to take over SP Setia. Any explanations?

Leave it to the real businessmen !

ON THE BEAT WITH WONG CHUN WAI

Questions are being raised as to why Permodalan Nasional Bhd is making a takeover bid on SP Setia, a reputable housing developer.

IT may not have caught the attention of ordinary Malaysians but it is a big story that is now the hottest topic among the business community.

Housing developer SP Setia is a reputable name that many Malaysians are familiar with because of the quality homes it builds.

It has also ventured outside Malaysia and made its presence felt in Vietnam, Australia, Singapore and even Britain.

The man at the helm of SP Setia is 52-year-old Tan Sri Liew Kee Sin, a down-to-earth bank officer-turned-developer.

Some would even say SP Setia is Liew Kee Sin and Liew Kee Sin is SP Setia.

Fiercely proud of his humble beginnings in Johor – his father was a lorry driver – the Universiti Malaya graduate wanted to study law but was offered economics instead.

SP Setia started off as a construction company – a syarikat pembinaan as conveyed in its initials SP.

Liew turned it into a big-time property developer when he injected two projects – Pusat Bandar Puchong and Bukit Indah Ampang – into the company in 1996.

Liew has faced many challenges but he is now looking at the biggest fight of his career – one that is heavily staked against him.

Permodalan Nasional Bhd (PNB), the country’s largest asset manager and owner of 33% of SP Setia, is making a bid to take over the company.

On Friday, PNB bought an additional 23.5 million shares in the open market for RM3.868 a share, just 3.2 sen shy of its proposed takeover price of RM3.90.

PNB, with a RM150bil cash chest, is seeking to raise its stake to over 50% with its RM3.90 offer, which is about an 11% premium over the closing price before the announcement of its notice of takeover.

Such a takeover bid is not unusual in the corporate world, and more so when Liew only has an 11.3% stake in the company.

Other major shareholders of SP Setia include the Employees Provident Fund (EPF) with 13.4%, Kumpulan Wang Amanah Persaraan with 5% and over 40% are in the hands of minority shareholders.

But the manner in which it was done has led to much unhappiness.

Despite having two PNB directors on the board, there was no courtesy of a verbal notification prior to the takeover move.

The general offer notice only reached the company on Wednesday at 8.30am, just before the market opened.

Some may argue that the element of surprise was for strategic reasons but there was still no call even after news broke out of the takeover bid.

In a nutshell, relations have been strained.

PNB has issued a statement saying it wishes to maintain the management team, which is known to be fiercely loyal to Liew, but no one is sure how events will unfold in the coming days.

However, questions have been raised as to why PNB is wanting to take over a company that is being run competently instead of remaining as a passive investor that is satisfied with good investment returns.

If the Government is actively pushing for the private sector to be the engine of growth, we have the right to ask why the GLCs are competing with the private sector.

Widening its shareholding base is one thing but controlling private companies will lead to speculation over its agenda, cause unnecessary concerns as well as send the wrong signals.

The whole exercise will cost PNB RM3bil, which is chicken feed to them, but there are political and economic ramifications that the country’s leaders should take note of.

It may not be such a grand scheme in the end for PNB if Liew decides to leave SP Setia and set up his own venture, and gets his senior management team to join him.

PNB may then find itself in a spot even after gaining control of the company.

No one would believe that there would not be interference from PNB, so let’s not kid Malaysian investors.

Civil servants who manage public funds should leave the business of running businesses and making money to the real businessmen.

Related articles

• Malaysian Developer SP Setia Gets Takeover Offer From PNB (businessweek.com)
• SP Setia Rises to Two-Month High on Bidding War Prospects (businessweek.com)
• Setia Eco Cascadia New Township Is All Set For Launch In Johor, Malaysia (prweb.com)
• Investing in properties beyond our shores (right-waystan.blogspot.com)
• Current Australia property market (vulcaninternational.wordpress.com)

Property loans to keep lead; Malaysia’s property mart unaffected by forays abroad

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Property loans to keep lead

BY DALJIT DHESI daljit@thestar.com.my

PETALING JAYA: Analysts expect property loans to maintain their position as a key growth driver of credit expansion with some estimating them to grow between 10% and 12% this year due to the low interest rate environment and ample liquidity in the banking system.

We believe that the full year loan growth for residential property loans will be in the 10%-12% range.- RAM Ratings head of Financial Institution Ratings Promod Dass.

While holding to this view, some feel the external environment, like the slowing US economy coupled with the sovereign debt crisis in the eurozone, could dampen demand for properties.

For the first seven months of this year, property loans remained the key growth driver, accounting for 40.6% of the banking system’s overall credit expansion, followed by working capital loans at 23.6%. Residential property loans currently accounted for about 27% of the system’s total loans.

RAM Ratings head of financial institution ratings Promod Dass toldStarBiz that the credit environment to date had continued to be accommodative for borrowers with ample liquidity in the banking system and a stable economic environment. Coupled with attractive promotional packages offered by some developers, he said residential property loans had already shown a healthy 7.1% growth in the seven months to July (or 12.1% annualised), which was more or less at a similar pace compared with the overall total banking system’s year to date loan growth of 7.5%.

“We believe that the full year loan growth for residential property loans will be in the 10%-12% range although we are closely observing the sovereign problems still brewing in Europe as well as concerns on the US economy and the consequent impact on Malaysia’s economic growth stamina, which could affect consumer sentiment in property purchases,” he reckoned.

Dass said that while there was a slowdown in loan applications for residential mortgages in the few months after the implementation of the 70% loan-to-value cap on the third and subsequent house financing, the momentum had picked up again since March.

The move to curb the third and subsequent home financing was introduced by Bank Negara on Nov 2 last year to quell speculation on residential properties.

Alliance Bank Malaysia Bhd consumer banking head Ronnie Lim said he was bullish on property loans. He noted that in Malaysia, housing loans currently accounted for 50% (or RM255bil) of total household debt (RM510bil) and would continue to be one of the key growth drivers of retail credit expansion this year and in the near future.

“One of the main growth areas for properties is Klang Valley, which accounts for close to 60% to 65% of all property transactions. In addition, the population growth in Klang Valley is expected to reach 10 million by 2020 and the demand for residential property is expected to be fuelled by residents of Klang Valley whose average age is 34 years old.

“Coupled with the shortage of land in Klang Valley, demand will always out-strip supply. The economic growth and the low unemployment rate in the country is another catalyst for housing loan growth. The recentEconomic Transformation Programme (ETP) announcement will further accelerate demand for residential properties as more affordable properties are being developed,” he said.

Lim said prices of properties in Malaysia were still one of the lowest in the region when compared with countries like Thailand, Hong Kong and Singapore. The industry’s total housing loan outstanding stood at RM255bil as of July 2011 compared with RM234bil in December 2010, he noted, adding that this represented a 14% annualised growth.

Given the positive environment and the above factors, Lim said the bank was confident the current growth rate could be maintained despite the recent global market unrest.

An MIDF Research banking analyst said property loans would hold up as a key growth driver of credit expansion this year as the persistent demand for property loans would be driven by low lending rates as well as the sustainable growth of the property market.

Local property mart unaffected by forays abroad

THE increase in foreign property investment by Malaysian housebuyers will not have much impact on the local property market, according to those in the local building industry.

“Those houses won’t be their primary home. The primary home is still here where people are used to the local environment and local condition,” says Real Estate and Housing Developers’ Association Malaysia president Datuk Seri Michael Yam.

He adds that people who invest overseas are those with spare cash who wish to diversity their portfolio of investment. They also buy for a specific reason.

“There is the emotional objective which is to be with their children studying overseas,” he observes.

He advises those buying for short-term investment or speculation to be cautious.

“Unless the capital appreciation is great, you may run into currency risks. Both objectives have to work positively in order for the property invested to be well-worth it,” Yam explains.

On the local property front, he acknowledges that prices have shot up in the last two or three years but says one of the reasons is due to a “catching-up exercise”.

“There was adverse risk from the global financial crisis earlier, so many developers chose to defer their launches. During this time, the prices of construction materials have gone up,” he elaborates.

Association of Valuers, Property Managers, Estate Agents & Property Consultants in the Private Sector Malaysia (PEPS) president Choy Yue Kwong says properties in major cities are still beyond the reach of average income earners.

“Those who earn a combined household income of RM20,000 a month (or less) are not likely to be able to afford a central London property where a 700 sq ft apartment could cost about £600,000 (RM2.8mil). Of course, the affordability is likely higher outside of central London,” he adds.

On US properties, he says that while one can find an affordable bungalow, the location “could be in the middle of nowhere”.

On the escalating prices of local properties, he says people have started diversifying their investments and put their eggs in different baskets.

“While it is true that property management overseas are very professional, buyers need to pay a price for their professionalism. In Malaysia, enforcement is not strict. We have laws against default in service charge or tenancy payments but these are not strictly enforced.”

National Housebuyers Association (HBA) honorary secretary-general Chang Kim Loong says in countries like Australia, a buyer only needs to pay 10% of the property price upon signing the sale and purchase agreement and settle the remaining 90% upon completion of the project and issuance of the Certificate of Fitness.

“The 10% is paid to a solicitors’ fidelity fund that is guaranteed by the government. It is therefore in the developer’s interest to quickly complete the project,” he points out.

“Another attraction is the guaranteed returns to be deducted outright from the purchase price. With ready tenants, the property’s yearly lease can be deducted from the purchase cost, so buyers need not pay in full”.

Related post:

Investing in properties beyond our shores

Investing in properties beyond our shores

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Stories by LIM CHIA YING chiaying@thestar.com.my

In the past, only wealthy Malaysians could afford to buy homes in London, New York and other world leading cities. Today, an increasing number of higher and middle income earners are buying properties abroad.

COMPANY director P.E. Chua bought his first foreign property four years ago, paying A$350,000 (RM1.1mil) for a house in Melbourne, Australia.

“My daughter was seven years old then and I was worried about the 6% annual inflation cost in Australian education. So I thought it would be a good idea to invest in a landed property there instead of another property in KL,” says the 44-year-old.

Chua, who has rented out the Melbourne house, says he has the option of either letting his daughter stay there once she starts her tertiary studies, which could be another six or seven years, or dispose of the property to offset her education costs.

Chua is among a growing number of local investors snapping up properties abroad, finding the prices almost at par with or even lower than those in Kuala Lumpur and Penang where prices have skyrocketed in prime locations.

Apart from Australia, Britain and the United States have also become real estate hotspots for Malaysian investors hoping to spread their property portfolio.

Real estate firms with international partners have been aggressively promoting new housing projects overseas, placing prominent advertisements in local newspapers. Every other weekend, a property showcase or seminar is taking place in the Klang Valley and the crowd that turns up is an indication of the interest shown by local investors to diversify beyond our shores.

Another investor, K. Devaraj (not his real name), says he bought a 600sf studio apartment in central London two years ago for £400,000 (RM1.9mil). He considers the invest­ment worthwhile as the price has since gone up.

“My son needed a place to stay while studying and I bought the place partially for investment,” he says. “I have no regrets as my son may just stay on even after his studies. So, it is likely I will keep the apartment for the long term.”

Like Devaraj, many Malaysian buyers are taking advantage of the current economic situation to pick up some good buys. The interest shown by individual investors is not surprising considering that our Employees Provident Fund has picked up premium British properties worth a total £634mil (RM3.1bil).

On Friday, Star Business reported that Lembaga Tabung Haji and Per­mo­dalan Nasional Bhd are also looking for premium properties for their yield, with London as their first choice, followed by Australian cities.

Henry Butcher Malaysia director Lim Eng Chong says that as local prices get higher for Malaysian buyers, overseas properties are deemed not so pricey any more.

“Apartments in London, for instance, can be quite affordable; in 2009, a unit may just cost £115,000 (RM721,041). The finishing is just as good, if not better than local properties,” he says.

“I think Malaysians have always had a disposable income but it is only in recent times that they have become more savvy.”

Jalin Realty International Pte Ltd chief executive officer Ian Chen concurs, noting that while Malaysians have invested overseas for some time, it is only in recent years that the pace has picked up.

“It makes financial sense for parents to buy a place where their children can stay while studying instead of renting a place. Some already have friends and relatives living in the foreign city, and they ask: why not invest in a unit too,” says Chen.

Established over 30 years ago, Jalin ventured into marketing overseas properties five years ago. Its core market is Australia, where it is partnering conglomerates like Lend Lease, Australand, Frasers Property and other boutique developers to market their properties.

In the United States, the credit crunch since 2008 has led to property prices plunging. With lower prices and a weakening dollar, the US property market has become attractive to foreign investors, among them Malaysians, according to international property investment firm Robert Douglas.

In some places, says its head of sales and marketing (Asia) K. Daniel, prices are so low that one can even pick up a three-bedroom house from RM150,000. A good suburb location would cost RM200,000 onwards compared to RM700,000 back in 2007.

“For that property price, you can get back a monthly rental of between RM900 and RM1,000. Most of our clients are from middle to high income Malaysians, well-educated, aware of the global economic situation, the currency market, have a good investment portfolio and are ready to diversify,” he says.

Henry Butcher Malaysia’s international real estate general manager and business development general manager Jazmine Goh points out that potential customers would usually have done some research themselves or have friends or relatives check out the site.

For first-time investors, she adds, there are rental management experts to assist in managing the property.

Chua admits to being cautious before buying any property. In his case, he relies on Jalin Realty to over­see his Australian investments as he cannot be there physically to handle them.

“Everything has worked out smoothly so far, with the rent banked into my account every month. There is also protection (insurance) against default by the tenant or damage caused and I feel I can better trust the property managers there than here,” Chua shares.

“Owners like us want peace of mind when it comes to rental returns.”

His advice for first-time buyers is that they need to know their objective and reason for investing overseas. Such investments could be made in preparation for their children’s future education or if they plan to retire or migrate, he says.

But Chua cautions against buying to speculate.

“There’s the currency (fluctuations) and other calculated risks to take into consideration and tax rates to be wary of. Buyers should also have holding power to allow enough time for a property to mature. And most importantly, get a trustworthy agent,” he says.

“It can be worth it on a medium to long-term basis, but I would advise against a short-term commitment as property disposal overseas is not that straightforward.”

Chua regards overseas investments like his as affordable so long as it’s dollar-for-dollar and one does not convert.

Another investor, who wishes to be known only as Vincent, says it can be a hassle renting out a house in Malaysia.

“Good tenants are hard to find and you have to personally deal with problematic tenants who give you a headache,” says Vincent, who owns several properties in Australia.

“With overseas properties, you have property managers to handle the lease and there’s protection for owners. Also, I don’t think rental returns here are that good anyway, even in upmarket locales.”

Chen says a huge advantage about property buying in Australia is the reliability of property management there. Property owners need only engage property managers who will help to look for tenants and manage the rental collection and renewal of tenancy agreements.

“There’s also a landlord protection insurance that protects the landlord in the event of loss of rental (delinquency in rental repayment), property damage or theft by the tenant,” he adds.

“Owners can thus invest with peace of mind knowing that the property is protected and in good hands.”

M’sians buying up properties abroad thanks to lower exchange rates

By LIM CHIA YING sunday@thestar.com.my

PETALING JAYA: More Malaysians are snapping up properties overseas as they take advantage of the lower exchange rate in countries like Britain and the United States to spread their investments or shop for holiday homes.

A check with several major agents marketing international properties here showed that the number of Malaysian buyers has been climbing steadily over the last three years, peaking in the first half of this year.

With property prices in the Klang Valley and major cities and towns here soaring, those with cash to spare are turning their attention to properties in countries affected by the global economic crisis where prices have dropped.

Among the more popular investment spots are London and its surrounding districts as well as university towns in the US where there is a market for rentals.

Australia, despite its high exchange rate, is also popular due to the good investment returns and stable property market.

Henry Butcher Malaysia director Lim Eng Chong said Malaysian investors were getting more savvy and the buying trend was now heading towards a more global outlook.

“Malaysians and Singaporeans are now the biggest overseas market after the mainland Chinese for prime properties in London,” he noted.

Between January and August this year, the company sold over 100 properties in London, mostly new apartment units to Malaysian buyers. The properties were priced from 200,000 (RM965,382) to 2mil (RM9.65mil) each.

In 2009, about 100 properties were sold while some 150 were sold last year.

“Previously, there was interest but London was out of reach for many Malaysians. Then came the collapse of Lehman Brothers three years ago. The pound became cheaper, spurring more Malaysians to invest there. Many investors would already have enough (properties) on their plates locally, so they are now diversifying,” he explained.

Jalin Realty International Pte Ltd chief executive officer Ian Chen said about 50% of his clients buy homes for their children studying overseas while another 50% buy for investment or to keep as vacation homes.

“We are seeing many young Malaysian professionals investing in Australia, mainly to diversify their investment and to achieve early financial freedom. Australian properties provide much stability and consistenty in capital growth, with about 10% annual compounding growth,” Chen added.

He said sales had shot up 100% since the company ventured into the overseas market five years ago. Most of the properties sold ranged from AUD500,000 (RM1.57mil) to AUD800,000 (RM2.5mil).

International property investment firm Robert Douglas head of sales and marketing (Asia) K. Daniel said US properties in Michigan, Florida and Las Vegas were now popular, as they yielded high returns. Michigan and Florida were attractive because of their high student population which provided a ready market for rental properties.

“Malaysians usually buy to let (for rental returns). But if they wish to stay, there are no restrictions as long as they have the necessary visa, ” Daniel pointed out.

Malaysians who want to invest are advised to consider all aspects

By LIM CHIA YING sunday@thestar.com.my

PETALING JAYA: Malaysians who wish to invest in overseas properties have been advised do their homework first.

This is because they could be subjected to high government levies and taxes in cities where the properties are located, said Real Estate and Housing Developers’ Association Malaysia president Datuk Seri Michael Yam.

Yam also cautioned against buying for speculation, saying buyers had to consider currency risks.

They must also be aware that under a Bank Negara ruling, any large sum of money outflow must be reported and buyers should not have any borrowings with local banks.

Yam is however not perturbed over the global buying trend, saying it would not have much significance on the local property market as the primary homes for these investors would still be in Malaysia.

“While we try to attract foreign investors to invest here, we should not stop and discourage Malaysians from investing overseas,” he added.

Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia president Choy Yue Kwong said properties in Britain, especially London, were now popular because of the relatively “low” pound.

“As long as the exchange rate is in our favour, Malaysians will continue to buy (properties overseas),” he added.

Don’t Get Caught Holding Dollars When The U.S. Default Arrives!

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Addison Wiggin

Greece can’t solve a problem of too much debt by taking on even more. We will note, however, that by some measures, the United States is even more deeply in hock than Greece.

Greece’s debt-to-GDP ratio is 143%. America’s is officially 97%. But the $14.3 trillion national debt, stacked up against a $14.7 trillion economy, doesn’t tell the whole story. Look at these numbers:

• $14.3 trillion: “official” national debt
• $5 trillion: Amount Uncle Sam is on the hook for Fannie Mae and Freddie Mac
• $62 trillion: Total liabilities and unfunded obligations for Social Security and Medicare

That doesn’t count the black box of bailouts.

We know how much the Federal Reserve doled out in emergency loans: $16.1 trillion between Dec. 1, 2007, and July 21, 2010. We know that because yesterday the Government Accountability Office completed its first-ever audit of the Fed, made possible largely through the persistence of Rep. Ron Paul (R.-Tex.) making that audit, however incomplete, the law.

What we don’t know is how much of that has been paid back. “We have literally injected about $5.3 trillion,” said Dr. Paul earlier this month during his questioning of Fed chief Ben Bernanke, “and I don’t think we got very much for it. The national debt went up $5.1 trillion.”

Bernanke did not challenge those figures.

“To get our overall fiscal gap under control,” writes Boston University professor Laurence Kotlikoff in Bloomberg, “the U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.”

Yep: The latest number we see bruited in Washington is $3 trillion. Whatever the final number — and there will be a last-minute deal; there always is — it will be substantially less than $20 trillion over 10 years. The can will be kicked as it keeps getting kicked in Greece.

We note here that the total of outstanding credit default swaps on U.S. Treasuries crested $4.8 billion this week. Uncle Sam has now surpassed Greece in this category.

Measured in year-over-year change, America is number one: Net notional CDS outstanding grew 109%. That means there’s double the bets out there on a U.S. default compared with a year ago.

“You may not know this, but the U.S. has actually defaulted a number of times already,” writes Chris Mayer this morning. He cites five instances:

• 1779: The government was unable to redeem the continental currency issued during the Revolutionary War
• 1782: The colonies defaulted on the debt they took out to pay for the war
• 1862: During the Civil War, the Union failed to redeem dollars for gold at terms stated by the debt contracts
• 1934: FDR defaults on the debt issued to finance World War I, refusing to redeem it in gold. The dollar is devalued 40% against gold
• 1979: A bureaucratic snafu results in interest going unpaid on some small bills.

“With the exception of 1979,” Chris says, “which was mostly due to administrative confusion — the U.S. simply ran out of money each time. The end result was the dollar had to be devalued. Meaning it lost significant purchasing power.

“My guess is that the U.S. will default again. It may not technically be called that, but the only way for the U.S. to meet its financial obligations is to print a lot of money.”

What does that mean in practical terms? In Greece, professor Savas Robolis at Panteion University in Athens reckons that by 2015, the average Greek employee and pensioner’s standard of living will have fallen 40% compared with 2008.

Even now, Americans are turning to their credit cards to pay for groceries and gas. According to First Data Corp., the volume of gasoline purchases put on credit cards jumped 39% over the last 12 months.

You don’t want to be the average American in a default scenario, whenever it arrives. Ray Dalio, the head of Bridgewater Associates, the world’s biggest hedge fund, puts that day in “late 2012 or early 2013.”

The Path to Debt in America by Addison Wiggin originally appeared in the Daily Reckoning.

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Rich Malaysians get richer!

Kuok and Ananda continue to be cream of Malaysia’s wealthiest

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KUALA LUMPUR: The 40 wealthiest Malaysians are worth US$62.1bil (RM188.32bil), up by US$11.1bil (RM33.7bil) compared with last year, according to the latest rich list published by Forbes Asia.

In a statement yesterday, Forbes Asia said the combined wealth was almost 22% more than the list in 2010.

“The better coffers come on the back of the country’s healthy economy which grew 7.2% last year, the highest rate since 2000,” it said.

The first two spots were still occupied by Tan Sri Robert Kuok Hock Nien and Tan Sri T. Ananda Krishnan, respectively.

Kuok, 87, has held pole position since 2006 when Forbes Asia began ranking the 40 richest Malaysians.

He was worth US$12.5bil (RM38bil), up by half a billion from last year.

His biggest source of wealth was his stake in Wilmar International, the world’s largest listed palm oil company.

Ananda, 72, was at No 2 with US$9.5bil (RM28.83bil), up from US$8.1bil (RM24.6bil) last year.

His Maxis Communications Bhd is Malaysia’s biggest cellphone service provider.

At No 3 is this year’s biggest gainer in dollar terms, Puan Sri Lee Kim Hua.

The 81-year-old, widow of casino magnate Tan Sri Lim Goh Tong, was one of three women on the list this year.

Her Genting shares took off when the company’s Singapore operations on Sentosa Island opened, boosting the family’s net worth by US$2.7bil (RM8.2bil) to US$6.6bil (RM20.03bil) from a year ago.

Tan Sri Lee Shin Cheng, who built IOI Group into one of the world’s biggest palm oil producers, fell down a spot at No 4 with a net worth of $5bil (RM15.2bil), up by US$400mil (RM1.21bil) from last year.

AirAsia Bhd’s Datuk Seri Tony Fernandes, budget airline pioneer and Forbes Asia’s 2010 Businessman of the Year, was ranked No 20 this year, down one spot from last year despite his wealth increasing to US$470mil (RM1.43bil) from US$330mil (RM1bil) last year.

The only newcomer this year was Chia Song Kun at No 24 with US$400mil (RM1.21bil).

The share price of his QL Resources Bhd, the seafood, egg production and palm oil company, has doubled since last year.

Datuk Tony Tiah Thee Kian at No 35 was the only returnee to the list after a year’s absence as stocks in his TA Enterprise Bhd have recovered. He was worth US$170mil (RM516mil).

Not all did well, however, as there were three this year who saw their wealth reduced, led by Tan Sri Vincent Tan at No 9.

The self-made entrepreneur, who runs Berjaya Group, saw his wealth decline to US$1.25bil (RM3.8bil) from US$1.6bil (RM4.9bil) last year.

Timber tycoon Tan Sri Tiong Hiew King was the only person who did not see any changes to his wealth. He was still worth US$1.2bil (RM3.64bil) and ranked No 10.

The rich get richer

Five more billionaires

This year’s list contains 27 billionaires, five more than the previous list. As for newcomers, there are three, with two making their debut.

While last year, a tycoon on the Main Market had to have at least RM386 million to make the rich list, this year the figure has shot up to RM524 million. Comparatively, the richest tycoon on the ACE Market is valued at RM103 million.

Interestingly, the bulk of the fortune of this year’s list lies in the Top 10, whose collective wealth of RM168.01 billion alone surpasses that of the whole of last year’s list totaling RM156.7 billion! Six out of these 10 registered increases of close to 50% and more in their wealth.

Thus it would appear that these individuals were able to return stronger in 2011 through the increase in the share prices of their companies. Even so, people close to these tycoons will attest that the road to riches is hardly a smooth one, needing guts, an astute business sense, and smart corporate maneuvering to win the confidence of investors.

Singapore-domiciled Ong Beng Seng makes his entry to the Top 10 ranks thanks to the surging valuation of his British-listed Mulberry Group Plc. His wealth doubled to RM3.98 billion from a year ago, taking him past Berjaya Group’s Tan Sri Vincent Tan who drops two rungs to 12.

Telecommunications tycoon closes in

T Ananda Krishnan, who for most years had to play second fiddle to first-placed Robert Kuok, closes the gap considerably this year. With a fortune estimated at RM45.78 billion, the telecommunications magnate is now only some RM5 billion away from Kuok’s RM50.04 billion.

The upturn in Ananda’s fortune comes following his move last year to take private three of his companies – incidentally at prices substantially more than what they were trading at in January 2010. This buyout hat trick involving Tanjong Plc, Astro All Asia Networks Plc and Meast Global Bhd had shocked the market, fuelling speculation that the tycoon was looking to exit the local scene.

However, this was not the case. Going by his track record, these companies will likely be relisted some day in the future and come back stronger, as in the case of his Maxis Bhd.

Last year, Ananda also sold his interest in Singapore-listed Overseas Union Enterprise (OUE) to Indonesian conglomerate Lippo Group.

In the case of Kuok, he could be worth more if not for China’s aggressive policy measures to cool its overheating economy, which weighed down on the billionaire’s Chinese property investment values, spearheaded through companies like Kerry Properties Ltd and Shangri-La Asia Ltd.

That aside, last year was a memorable one for the Hong Kong-based tycoon who made a quick and dramatic return to the sugar business via Singapore-listed Wilmar International Ltd’s takeover of Australian-based CSR Ltd’s sugar unit, Sucrogen.

As for banker Tan Sri Teh Hong Piow of Public Bank Bhd, a close to 20% rise in his personal value sees him displacing IOI Corporation Bhd’s Tan Sri Lee Sing Cheng from his third-placed perch.

Standing firm in their places

There were no changes in the fifth to ninth rankings. Genting Bhd’s Tan Sri Lim Kok Thay’s wealth growth may appear paltry this year but this was because of the assumption we made previously that he was the major beneficiary of the two family trust funds he created after the demise of his father and Genting founder, Tan Sri Lim Goh Tong.

Recent annual reports now reveal that he owns only one-third of one of the trusts, Parkview Management Sdn Bhd, which wholly owns Kien Huat Realty Sdn Bhd, which in turns owns 39.52% of Genting.

But even with the less than 5% rise at RM10.89 billion, Lim still retains his fifth spot.

His mum, Puan Sri Lee Kim Hua, is richer by 69% and, at RM7.42 billion, is the country’s wealthiest woman.

Hong Leong Group’s Tan Sri Quek Leng Chan and MMC Corporation Bhd’s Tan Sri Syed Mokhtar Albukhary saw almost a 50% growth in their financial worth in tandem with increases in their stockholding values. Quek is estimated to be worth RM10.75 billion while Syed Mokhtar is valued at RM8.84 billion.

Tan Sri Tiong Hiew King, who derives the bulk of his wealth from his vast timber assets, remains at number nine and is estimated to be worth 40% more following improved timber prices. The Rimbunan Hijau Group founder is worth RM4.77 billion.

Enjoying substantial gains

Back to the overall list, other tycoons who registered substantial gains in their wealth are Tan Sri Lau Cho Kun of Hap Seng Consolidated Bhd and AirAsia Bhd duo Datuk Seri Tony Fernandes and Datuk Kamarudin Meranun.

Sabah-based Lau’s wealth soared more than 200% on the back of richer valuations of his Hap Seng to propel him to number 18 from 31 previously. He is valued at RM1.77 billion, making him one of the five new billionaires on the list.

AirAsia’s chief executive officer Fernandes also strengthens his position, gaining him entry into the billionaires’ club with a fortune of RM1.043 billion, up 80% from previously. His business partner Kamarudin is valued at RM856.02 million, which moves him up nine rungs.

The bullish market sentiment over the past year also sees the five sons of Tan Sri Yeoh Tiong Lay joining the billionaires’ league. Together with the senior Yeoh, the family is worth a cool RM6.7 billion.

Declining wealth

This year we have five tycoons recording a decline in their financial worth as opposed to 2010, when everyone had registered an increase.

Berjaya Group’s Vincent Tan, whose wealth is down by some 30%, registered the biggest drop that saw him exiting the Top 10. Other tycoons with declining wealth numbers were Top Glove Corporation Bhd’s Tan Sri Dr Lim Wee-Chai, Samling Group’s Datuk Yaw Teck Seng, KNM Group’s Lee Swee Eng and TA Enterprise Bhd’s Datuk Tony Tiah.

Two tycoons were forced off the list – Tan Sri Kua Sia Kooi of Kurnia Asia Bhd and Tan Sri Rozali Ismail of Puncak Niaga Holdings Bhd. Kua’s wealth halved to RM291 million following the decline in the market capitalization of his flagship. Rozali saw his wealth drop about 20% to RM395.66 million as the impasse in the consolidation of water assets took a toll on the company’s share valuations.

Despite his wealth growing by more than 25%, CIMB Group’s chief executive, Datuk Seri Nazir Razak, does not make the cut this time around as other newcomers propelled in at a higher worth. As at Jan 21, his 0.78% stake in the banking giant is valued at RM483.52 million as opposed to RM386 million previously, and this puts him just past our cut-off point at number 41.

Welcome, the new and not so new

Of the newcomers to the list, Tan Sri Leong Hoy Kum earns his wealth from property via his flagship Mah Sing Group Bhd, while Datuk Seri Stanley Thai rides on the glove-making company he founded, Supermax Corporation Bhd.

Leong enters at 35th spot with a wealth level of RM618.40 million and Stanley Thai at 39 with a fortune estimated at RM538.73 million.

The third newcomer, Datuk Tan Heng Chew of Tan Chong Motors Holdings Bhd, is not entirely a new face, as he makes a comeback after an absence of two years. At 38th spot, he is valued at RM556.82 million.

It’s wise to invest, but invest in what you understand

HOUSING INVESTMENTS
By THEAN LEE CHENG

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IN the parable of 10 gold coins, a man of noble birth gave each of his servants a gold coin before going away to a distant land. “Put this money to work (invest it) until I come back,” he told them. On his return, he called each of his servants and asked what they did with the money.

The first said he had earned 10 times the capital given to him, the next five times. The third came and said he buried it in the ground. The master was very angry and asked him why he did not put the money on deposit to enable him to at least collect some interest. The third servant justified himself by saying that out of fear for his master, he did nothing.

Putting our savings in the bank may not be a popular option today but that aside, if the story of stewardship and investment was relevant in a simple agrarian society during biblical times, it is all the more relevant today.

The over-riding principle of that parable is that investing is not wrong. In fact, it is wise to invest.

The parable remains relevant because today, unlike before, all sorts of financial instruments are available. Although options may be limited when compared to the West, technology has allowed many to ignore national borders and many have invested globally. There is a need for wisdom and simplicity. Invest in what you understand.

Secondly, it remains relevant because the principle of investment takes into account the time element. The nobleman went away to a distant land. In those days, it takes time to travel from one place to another. He gave time to the servants to invest. It was long-term gains he was looking for. Consider the time element of your investment choices. Invest for posterity because it is a legacy that you want to leave behind.

Granted, the spectre of inflationary pressures then and today are vastly different. The world did not have seven billion hungry people. They grew their own food, unlike today where food prices are experiencing a spike. It is this volume in numbers feeding on each other in this pursuit for gains that gives the strength to this tidal wave that is just beginning to form in Asia. Be wary of mass exuberance.

Whether it is time deposit, properties, stocks or gold, we are all servants of the market. Conversely, we are also the force and strength behind the market.

We invest for three reasons to speculate, to hedge against inflation, or to arbitrage. Speculators do so to make a quick profit. They buy a house only to “flip” it when it is completed. They do not need the house or want the house for what it is. They use is as a channel to make quick gains.

Retirees and the more conservative investors hedge to preserve the value of their nestegg. That is a strong motivating factor amid today’s inflationary pressures. An investor buys a house to hedge against inflation, hoping that the value of the house will remain. He also derives an income from it for future gains.

The arbitrageurs take advantage of the discrepancies in the markets. They buy a house in London because of the weak sterling and low interest rates in the hope that currency will appreciate in future, together with better house prices. In the meantime, they use it as a holiday home.

Everyday, while someone is making money, another is losing the shirt off his back. As the FBM KLCI takes on new peaks in the coming months with expectation to surpass the 1,700 mark, and property prices continue to trend upwards, it is time to return to the parable and the simplicity it represents.

The story concluded with the master taking away the third servant’s gold coin only to give it to the first, the one who made 10 times the profit. The other servants protested, saying that he already has a lot, to which the master said: “To those who have, more will be given.”

Warren Buffet, one of the world’s greatest investor, began with little. He had an interest in saving and making money. One of his strategies is patience. Like Buffett, Microsoft Bill Gates is counted among the world’s richest because he did what he like. Both of them enjoyed their work. Likewise Jim Rogers, the other great investor of our times.

Not many of us will be able to enrich ourselves from the work we do. But we are given opportunities to invest. What is the motivating factor?

Assistant news editor Thean Lee Cheng does not think fear should be part of the equation. Remember the third servant who did nothing out of fear? But she does realise that wisdom is very much a scare commodity in today’s times.

On global gaming, Aussie dollar and SGX-ASX merger

Rising Australian dollar and national interest

WHAT ARE WE TO DO BY TAN SRI LIN SEE-YAN

JUST returned from Brisbane, Australia where I was a keynote speaker at the 2010 World Lottery Association Convention.It’s a grand affair, attracting 800 participants, mostly involved in the lottery business around the world.

It also coincided with the Melbourne Cup. Enjoying this special event by having a bet, experiencing the party atmosphere and watching the big race, has become part of Australian folklore. Mark Twain said of the Melbourne Cup in 1895: “Nowhere in the world have I encountered a festival of people that has such a magnificent appeal to the whole nation. The Cup astonished me!”

In 2010, the global gaming market attracted revenues of between US$350bil and US$400bil, with casinos, lotteries and gaming machines accounting for close to 85%. The online component is beginning to edge up to 10%. Here, the push is led by the Organisation for Economic Cooperation and Development (OECD) group, representing three-quarters of this business. The world-wide lottery business is worth about US$200bil-US$240bil, growing at below 5% a year lately. Growth is, however, uneven – 20% in Latin America & Africa; 10% in Asia (23% in China, where revenues in the first eight months of 2010 amounted to US$16bil); flat in Europe and the United States.

In addition, global casino and other regulated gaming had revenues in the region of US$150bil in 2010, with 45% in the United States, 30% in Asia-Pacific and 20% in Europe, Middle East and Africa (EMEA). But growth is fastest in Asia-Pacific, up about 20% per year in 2008-2012; while US growth is expected at 4% and EMEA, 5%. Casino gaming accounted for 90%. In Asia-Pacific, business in China (Macau) is growing the fastest, rising by 59% in the first 10 months of 2010 from a year earlier, with revenues passing US$21bil for the entire year, while Asean-5 expanded just as fast with revenues of US$7bil. Australia and South Korea have revenues of US$2bil-US$3bil each – growing much slower annually.

Conventional wisdom that the gaming industry is recession proof is a myth. During the recent great recession, the Bank of America Merrill Lynch HY Gaming Index declined 56% from early 2008 to its trough in March 2009. However, since then the index has risen 136%.

The ride has been anything but smooth. Despite growing risks, Asia will lead economic growth this year and the next. The World Bank has upgraded China’s 2010 GDP growth to 10%. Meanwhile, the OECD cut growth estimates for its 33 members to 2-2½% in 2011, downgrading the United States to 1.75-2.25%.

Growth in Asian disposable income will continue to expand; so will growth in Asian household consumption of goods and services. Since the beginning of this decade, Asia’s gaming revenues have been the fastest growing – especially in Macau and Singapore. Latest record never ceases to amaze.

Back in 2007, most analysts figured the Macau market to be worth US$13bil in 2010. Today, based on recent results, it’s worth US$21bil. I am told that in the United States, every available table and slot machine serves 250 people. In South-East Asia and India, the number is as many as 45,000-50,000. So, Asian gamers are underserved.

It is estimated that Asians spend almost twice as much on gaming as Americans do. Singapore has gone from zero to near US$5b just this year alone. By 2012, Morgan Stanley estimates that Singapore could generate revenues of US$7-US$10bil. Macau took about the same time to hit US$6bil.

Undoubtedly, Asia provides the best prospects in gaming and betting. It will utilise advances in technology to enhance its innovative and creative potential to lead in contemporary interactive gaming entertainment, in a socially responsible way. For this vibrant, exciting and colourful industry, a bright future lies ahead.

The Aussie dollar

The Aussie dollar hit a 28-year high on the back of an unexpected interest rate hike on Melbourne Cup day. It has been hovering just below parity with the US dollar for some time. The growing strength of the Aussie dollar benefited from the Fed’s continuing efforts to drive US interest rates down (it’s already near zero). But its core strength is centred on a China-driven mining boom that has boosted its exports of iron-ore, coal and other minerals. Australia’s terms of trade – its export prices relative to its import prices, have doubled in the past decade to record highs. So much so its persistent current account deficit was all but eliminated last quarter. Above all, inflation is held well in check. The Reserve Bank had kept the benchmark interest rate unchanged since May and economists had predicted that the rate would stand pat again – indeed, swap traders betted there to be only a 23% chance of a rate increase, against a 60% chance before the 3Q’10 inflation rate turned weaker, thereby giving policy makers breathing space.

Over the past decade, the central bank has raised interest rates on Melbourne Cup day four times. True to form, it raised interest rates by 25 basis points to 4.75% on Nov 2 in the face of expectations that the US Fed will add massively once more to global money supply (on Nov 3 it unveiled plans to purchase US$600bil of US government debt over the next eight months). The Aussie dollar promptly reached past parity against the greenback, recording a high of US$1.0025. Since deregulation in 1983, the Aussie dollar has never been higher. Many see it as a proxy for Asia, and its worries about inflation reflect Asian central banks’ concern as well. Regional currencies also rallied – the Indian rupee, Thai baht and the Malaysian ringgit all gained against the US dollar. The euro traded above US$1.40, up 1.1%.

The rate hike shifted the Reserve Bank’s focus to fight inflation with a pre-emptive strike, even though the rise in consumer prices in 3Q’10 was well within its comfort zone. But like it or not, inflation is an obvious outcome of Australia’s strong economic growth. In Asia, growing domestic demand and rising food & commodity prices can be expected to push inflation higher. Most forecasts place Asia’s inflation in 2011 at 4%-5%, up from 3.3% previously. India’s case is more urgent – where inflation is running at above 10%, and too obvious to ignore. Tuesday’s rate increase is India’s sixth in just over seven months. It looks like its tightening cycle is not yet over.

SGX-ASX Merger

On the controversial Singapore Exchange Ltd (SGX)-ASX Ltd merger, for most Australians, this issue is divisive as it touches lots of raw nerves. The central question – Is it in Australia’s interest to proceed with the merger? Actually it’s a takeover since the SGX will pay A$8.4bil (US$8.3bil) to ASX for it. According to the CEO of ASX, “the combined exchange will be both more regionally relevant and globally relevant than the sum of its parts.” So, we can’t see how this is contrary to the national interest.

The takeover requires the approval of both governments and regulators. For the deal to go through, the Australian parliament needs to lift the ASX’s 15% single shareholder cap following a screening process by Australia’s Foreign Investment Review Board. The deal is expected to cut costs and better place the merged exchange to fight growing competition. The takeover creates a US$1.9 trillion market to become the world’s fifth largest exchange, rivalling Japan and Hong Kong. Politicians have voiced concern over the takeover. The leader of Green Party (a member of the sitting Gillard government) is a vocal critic. Temasek Holdings, a 23.45% shareholder of SGX, has since stated publicly that this Singapore-controlled wealth fund was not involved in the governance, operations or investment decisions of SGX. Frankly, Australians are not convinced.

Australia used to have a stock exchange in every state. In 1987, these markets were consolidated into the Australian Stock Exchange in Sydney. The Victoria government made what many still consider a “crucial” error in closing the Melbourne Stock Exchange. According to Prof Sam Wylie of the Melbourne Business School, the experience of Australian stock markets is best understood as a global process involving three discrete steps – consolidation, demutualisation and mergers across national boundaries. Australia has taken the first two steps; the United States, all three, where trading is now concentrated in New York city in the NYSE and Nasdaq. Inevitably, ASX will merge with a global exchange; if not SGX, then some other exchange.

It would appear that the global process of consolidation is inevitable. Whichever group the ASX joins, it has to be run commercially, regulated to meet Australian standards and free from government influence in its effective management.

The main objections to the proposed deal are that it’s not in line with national interest as it encourages shifting the processing, technology, analytical capacity, fund management and investment bankers to Singapore, and more importantly, passing management of ASX to the Singapore government; Australia is forsaking its ambitions to become an Asian financial hub; Australia does not allow major banks to be controlled from offshore, so why tolerate this for its stock exchange?; ASX is efficient, ahead in Asia in derivatives and in innovative products (initiated the REITs market in Asia-Pacific); and that the benefits (technology sharing, co-listing of stocks and access to new pools of capital) can be enjoyed without an ownership change.

Supporters of the deal cut at the very heart of Australian capitalism. They say it’s an arms-length business deal and as long as the boards of both stock exchanges deem it to be in their best interest and vital domestic interests are protected, why not?; on pricing, a 40% premium above market price of ASX is fair enough; national interests are ultimately protected by the Corporations Act of Australia; “the attractiveness of a combined pool of listings and a combined pool of liquidity would make this combination unique”; and for ASX, merger is inevitable and SGX is a good enough suitor.

The Australian government and regulators have the final say. This simply means politics as usual, involving interaction of vested interests and self-interest. The real issue behind the fuss – as I see it – is slippage in the separation of business from politics. The final outcome? Discarding all the “noise”, anger and resentment and no doubt, assurances to protect the national interest, the key issue focuses on national identity and how closely attached Australians are to its liberal free-market system which politicians so proudly and often identify with the national good. Only Australians can tell.

● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest.