Banker notes

Value ETF Portfolio - 11 Dec update

2007-12-11T16:04:00.000+08:00

Our ETF value portfolio is doing well! It is up 4.0% since launch in 1st November. Total value at US$10,395.

Since 1st November this year:

Emerging market ETF (ticker: EEM) up 8.3%
Real estate (ticker: RWR) up 7.3%
Non-US developed countries ETF (ticker: EFA) up 4.5%
S&P500 ETF (ticker: IVV) up 3.6%
10-year bond ETF (ticker: IEF) up 1.0%
Inflation-protected bond ETF (ticker: TIP) up 1.2%

Note that bonds are supposed to give lower but more stable return and they are important in lowering the overall risk of the portfolio.

Value ETF Portfolio - 13 Nov update

2006-11-13T22:54:00.000+08:00

This week our ETF portfolio has inched up in value, now at US$10,079, or 0.8% return since launch at the beginning of this month.

So far in November, the strongest growth (2.5%) comes from emerging market equity, followed by non-US developed market equity(mainly Europe and Japan) at 1.3%, then US equity at 0.95%. Bond ETFs also rose slightly given a slightly gloomier economic outlook in 2007. Real estate decreased by 0.17% due to the gradual cooling of the US housing market.

Congrats to Vietnam!

2006-11-12T12:02:00.000+08:00

Vietnam has officially become a member of the WTO this week. Congratulations!

Besides the good news, I've got information on two newly-launched Vietnam Funds last week alone, and also heard from a few friends in the investment community studying the country's real estate market.

Guess it's time to look at Vietnam more closely.

The country is such a, well, sentimental country (especially to the US) that everyone should've had a basic knowledge on its history. But in terms of investment opportunities, it may give you some surprises:

PROs

Strong economic growth: Since the country's gradual change from centrally-planned to market economy, GDP zooming at 7.4% in the last 10 years (2nd only to China in Asia) and Government has a 7.5-8% target until 2011.
Successful reform: the "Doi Moi" (modernization) program has been successfully privatizing ~2,500 state owned enterprises (SOEs) and encouraging numerous business start-ups.
WTO in 2007: the entry is expected to pave way for strong, healthy long-term growth.
Excellent demographics: literacy rate at a very impressive 90+% and half of the 84M population is under the age of 25. The local culture also encourages strong work ethics.

As a result, Vietnam has been attracting lots of foreign investments, propelling the growth of both exports and domestic consumptions.

CONs

Still a baby: The Vietnamese market is still at the early development stage and the illiquidity (low trade volume) may lead to high volatility. This is not a market for people with short-term investment horizon.
Single-country risk: Investing in one single (and emerging) country pose a significant risks, e.g. from possible political turmoil, sudden changes in economic policies and a large withdrawal of foreign investment.

Investment Products available

As far as I know:

Vietnam Opportunities Fund (VOF), listed on London Stock Exchange (ticker: VOF.L)
JF Vietnam Fund*
DWS Vietnam Fund*

My thoughts:

JF and DWS Funds need time to build track record: In short, they are brand new. On the other hand, VOF delivered a 54% return in the last 12 months and has been around for a number of years.
All are expensive: they command a 1.7-2% management fee plus a hedge-fund like performance fee (20% of every dollar earned when the investment return is over 8% for the year). While the higher fee is somewhat understandable due to the higher trading cost in Vietnam, emerging market funds/ETF in other regions are more affordable.

Conclusion: be careful but be open-minded! Take a close look at the performance, and why not book a ticket to Vietnam and have a first-hand observation before making a decision? The tourism industry there is booming!

* note: these two funds may not be available to investors in certain countries

If Democrats are to win the mid-term elections...

2006-11-08T17:42:00.000+08:00

The US mid-term election results will be out soon. Looks like Democrats are ahead in the polls. Who would be the likely winners and losers?

Losers

Oil Majors: Democrats may start to dismantle a number of Oil/Energy-friendly legistrations put in by Bush and the Republicans. Also, expect more regulations that would hamper domestic explorations.
Pharmaceuticals: expect that Democrats will push Medicare to directly negotiate pricing with the drugmakers, which would benefit generic drugmakers and hurt Pharmaceuticals.
Discount retailers: Democrats, leaning towards anti-China policies and protectionism, may introduce legistrations that limit imports from China and development countries. These retailers will suffer from a reduced supply of cheap imports.

Winners

Alternative Energy: In general, anti-bush/oil implies pro-alternative energy. Also, Democrats are believed to be more concerned about pollution and global warming, and this favors alternative energy development.
Metals: possible protectionist legislation will favor metal stocks, e.g. US Steel.

Can you think or other winners and losers?

Unconventional Success: a book review

2006-11-07T12:24:00.000+08:00

David Swensen has written an excellent book for individuals investors. He boldly criticizes (by name in some instances) the greed and evil of the mutual fund industry, and advocates individuals to create simple, but broadly diversified and passively managed investment portfolios with not-for-profit fund management companies. He also discuss each investment product in detail and the benefits of sticking with the core asset class.

Summary

Most fund managers try to beat the market. However, this proves so difficult to be done that most individual investors are better off using market-mimicking, passively-managed strategies.
These strategies involve picking investments only from core asset class (US/non-US stocks, US Treasuries and real estate). The proportion can vary based on the investor’s risk appetite, knowledge and personal preference for any of the investment products.
Rebalancing is very important as the action is a way to ensure “buy low sell high”. For example, the current environment favors energy stocks and shuns tech stocks. A rebalancing act would mean selling energy (at high price) and buying tech (at low price), thus achieving the “buy low sell high” principle.
Rebalancing often means a contrarian approach – only a very rational investor can do this in a consistent basis, but he believes this is one of the success factors behind his own Yale Endowment Fund.

On Mutual Funds and Hedge Funds

Active management by mutual funds and hedge funds only makes sense if the manager can deliver a superior return. Unfortunately most don’t.
He believes the Morningstar rating system of statistical, backward-looking analysis does not make sense because it encourages the tendency to invest based on past experience, a conventional (but wrong) way of investment.
Don’t pick the funds based solely on performance. The ones with best performance this year often have dismal performance in the next (e.g. internet funds).

On Selecting Fund Houses

If possible, pick the non-profit fund managers, such as Vanguard and TIAA-CREF (teacher Insurance Annuity Association and the College Retirement Equities Fund).
ETFs are good alternatives because of their low cost and passively-managed nature. The best ones are offered by State Street and Barclays. Beware of the sophisticated ETFs offered by retail-oriented banks as they carry a much higher management cost with no value.

Conclusion

Mr. Swensen's advice is so elegantly simple that even a beginner in investment can reap much benefit from reading his book.
In fact, I have constructed a balanced, diversified and easy-to-manage portfolio based on his advice. You can join my learning experience here.
However, for a financial professional like myself, I have to say I still prefer active management / stock picking for a big part of the portfolio because it has been proved successful in my case. Unlike his $14 billion Yale Fund, my portfolio is small enough for individual stocks to make a difference. Maybe this is the reason?

Introducing a balanced and easily managed portfolio

2006-11-06T15:09:00.000+08:00

I am currently reading Unconventional Success, a book written by David F. Swensen, the chief investment officer of Yale University's US$14 billion Endowment Fund. The fund has a return of 16.1% per annum over 20 years, an outstanding achievement even among the experts in the fund industry.

I will write about my thoughts on the book later, but in summary Mr. Swensen advocates the following:

Stick with the core asset class (stocks, bonds and real estate) for best risk/reward ratios
Work out the asset allocation based on your own risk appetite and be disciplined in rebalancing the portfolio based on this allocation
If not buying individual stocks and bonds, pick low-cost, non-profit fund managers or ETFs instead of the expensive (and often poor-performing) for-profit mutual funds

With that in mind, I have come up with a balanced portfolio consist of ETFs. The performance will be shown in the chart at the upper right hand side of this blog starting from today, and a weekly post will be written to explain the movement of the fund. Please join me in this learning experience!

An Equity-oriented, Broadly Diversified Portfolio

Our portfolio (starting at US$10,000) is made up of the following:

US equities 30% ($3,000): ishares S&P500 Index Fund (ticker: IVV)
Foreign developed market equities 15% ($1,500): ishares MSCI EAFE Market Index Fund (ticker: EFA)
Foreign emerging market equities 5% ($500): ishares MSCI Emerging Market Index Fund (ticker: EEM)
Real estate 20% ($2,000): Dow Jones Wilshire REIT Index Fund (ticker: RWR)
US Treasury bonds 15% ($1,500): 7-10 year T Bonds Index Fund (ticker: IEF)
US Treasury Inflation-Protected Securities 15% ($1,500): Lehman TIPS Fund (ticker: TIP)

Target investment return

Given the balanced approach, I believe a 8% return (5% above long-term inflation in US) per year is reasonable. To put things in perspective, if you are 35 and plan to retire at 60, a 8% return per annum in these 25 years will multiply your intial capital by more than 6 times, and much more if you keep putting fresh money into the portfolio.

For those who are looking for double-digit returns:

You can increase the proportion of higher risk/return investments (e.g. emerging market equities) and decrease the stable but low-yielding investments (e.g. US Treasuries). Please note that a revised portfolio may give more volatile returns.
Be realistic: a top-notch fund manager like Mr. Swensen delivers a 16% return every year. I guess it is rather difficult to expect ourselves to achieve, say, 20%.

You may also refer to our "When and How to Invest" workshop for more details.

What I will do

Daily: monitor the portfolio
Weekly: review portfolio and update chart / investment return data
Monthly: rebalance portfolio
Yearly: decide whether the asset allocation needs to be adjusted based on macro trends

I will explain the reason of picking each of these ETFs in the next post.

Surprise in non-farm payroll figures

2006-11-06T11:30:00.000+08:00

Last week the traders have been focusing on the release of one economic data: the change in non-farm payrolls.

Reason: people have been worrying about the exceptionally low increase in non-farm payroll in September (at 51K) and whether the trend will continue. If so, this is a strong signal of recession.

Result: The October data shows a 92K increase in payrolls, lower than the expected 123K but much higher than the Sep data. More importantly, the 51K number is now revised upward to 148K (!) so the earlier worry about the exceptionally low figure is unwarranted.

You know, sometimes I wonder if we should pay this much attention to economic data if the revised figure can be so much different from the original. It is better to focus on longer-term trend than short term fluctuations based on this rather misleading data points.

Phone Banking at the Next Level

2006-11-04T15:24:00.000+08:00

Have you thought about settling your bills, checking balances and transferring money via your mobile phones? It's already a reality in Japan and Korea, but it has the greatest potential in developing regions such as Africa, Eastern Europe and Asia.

There are already half a million people in South Africa using the mobile phone as a bank*. Encouraged by the uptake, banks are teaming up with mobile companies to offer mobile banking services to those who have never touched an ATM machine nor visited a bank. Meanwhile in Philippines, mobile phone banking is available locally and it has a great potential to cater the thousands of Filipinos who work abroad and remit money to their homelands on a regular basis.

Great for banks and mobile companies...
This is certainly good news to innovative banks and especially to mobile companies, which has seen mobile phone usage reaching saturating points in many countries. Think about the millions of migrant workers looking for cheap(er) ways of remittance: Eastern Europeans working in EU, Mexicans in the US, Chinese from inland provinces working in big coastal cities... According to a UN estimate, the global remittance amount is more than US$230 billion, of which 20% is lost through bank charges and fraud*. What an inefficiency (and opportunity)!

... but bad for Western Union
If mobile phone banking is a success, it would be a big, big challenge to Western Union (ticker: WU), which specializes in remitting money to remote places and charges a hefty fee (can reach 30%+ of remitted amount). The company is still enjoying a double-digit growth and a >20% profit margin, but the threat is obvious.

Not happening in mass scale yet
For mobile phone banking to take off across countries and continents, there are still a lot of hurdles, e.g. infrastructure, standard platform, security, money laundering issues and time needed for the general public to accept this radical technology. No one knows when it will happen, but when it does it is going to be huge.

* source: The Economist (Oct 28 edition)

Nintendo: with Simplicity in Mind

2006-11-03T15:28:00.000+08:00

The Economist (Oct 28 edition) has an interesting article on Nintendo.

The video game industry is a wildly innovative and fast-moving one in which current generation of consoles become obsolete every 5 years or so. The console makers have been competing for complexity: more graphics, more memory, more time needed to complete the game. Among them, Microsoft (XBOX 360) and Sony (PS3) has been neck-to-neck in the competition, with Nintendo the distant third.

However, Nintendo is trying a radically different approach to regain market share: to go simple and reach the mass market. Example: Nintendo launched the mobile console "DS" in 2004. Its most popular games include "Nintendogs" where players can pamper, teach and train virtual dogs and get them into competitions, kind of like an interactive version of tamagochi. Not surprisingly a lot of female (new) players got hooked into the game.

Another popular one which I tried and really like is the "Brain Training" games. It includes casual but addictive games like Sudoku which appeals to a new group of players beyond the traditional avid types (boys/guys in 10s - 30s). It also suits people like me who love playing but can't afford the time to finish a series of epic games.

Encouraged by DS, Nintendo is going to launch its latest console, "WII", with simplicity in mind. For example, the controller is now more like a remote control than the joypad with buttons all over the place. We can now play tennis and fishing with this motion-censored control. How cool!

Sony is still pushing for the ever sophisticated model with blu-ray, powerful chips and all that stuff. However, the complexity has caused delays and a resulting lofty price (US$500, vs US$249 for WII). I would sell Sony's stock (ticker: 6758) if I own any (I don't).

If you are looking for alternative play, Nintendo is the obvious one, although it is still a risky bet. You can also consider the big game developers such as Electronic Arts (ticker: EA) and Activision (ticker: ATVI) because publish video games for everyone, which greatly diversify the risk. However, if Nintendo does come out as the winner, these developers will also suffer slightly because Nintendo tends to develop more of its own games.

Sony claimed the top spot in the video game industry with a radically designed Playstation. Would Nintendo able to repeat the story? This is certainly an exciting industry to play and watch!

Time to hold on your bonds

2006-11-02T11:39:00.000+08:00

The ISM Manufacturing Index disappointingly fell to 51.2 in October from 52.9 last month. While this is still higher than the psychologically important 50 (<50 means a sign of slowing economy), the data indicates the US is undergoing the slowest growth in more than 3 years.

US Treasuries, the primary indicator of all bond prices, rose further to 102 14/32 (yield at 4.56%), further strengthening the market belief of an imminent slowdown of the US economy. Time to hold on your bonds!

Because of this and a number of disappointing company earnings results, DJIA, S&P500 and Nasdaq dropped 0.4%, 0.7% and 1.4% respectively.

Canadian market plunged from proposed income trust taxation

2006-11-02T11:13:00.000+08:00

Yesterday the Canadian government gave a nasty surprise to the market by imposing a new tax on income trusts. Existing trust will be taxed starting from 2011, for new one the effective date is as early as 2007.

TSX (Toronto stock exchange) dropped 2.6% and the S&P/TSX income trust index plunged 12%.

What is Income Trust?
It is an entity that is required by law to distribute almost all its income to shareholders as dividends. Because of this the entity pays almost no income tax to the government. This tax-efficient structure is becoming more and more popular in Canada, at the expense of the government (decreasing tax revenue).

REIT, the structure we discussed before, is a major form of income trusts.

Immediate impact

Energy and Telecom among biggest hit: Many of the biggest income trusts are in the energy mining sector (e.g. Canada Oil Sand Trust. Penn West Energy Trust). For telecom, stock price of two big trust-conversion candidates, Telus and BCE, had double digit drop leading to an overall 9% drop in the telecom subindex.
Foreign investors may be scared away: As income trusts are very popular among foreign investors, the surprise announcement may trigger an exodus of capital away from Canada. This will affect both the stock market and foreign exchange. (CAD/USD dropped >1% yesterday).
Bank/insurance sector benefits: Investors will likely reshuffle the capital towards banks and insurance companies, which give relatively high dividends and do not usually have trust structure.
Canadian market may lose momentum: With falling oil price and a possible slowdown of US economy, there are already signs of the Canadian stock market reaching the top (after several years of impressive growth). The negative news will likely take away the remaining momentum going forward.

Long-term impact

Only slightly negative to investors: Apparently the Canadian government is closing a loophole as the Australians have done in the 1980s. While losing the tax-free advantage, the income trust companies are not worse off than their non-trust counterparts.

Further reading

There is a good summary and background information on income trust at Wikipedia.

Latest View on Properties

2006-11-01T17:08:00.000+08:00

The manager of a highly respectable property fund came visit us a few days ago. Though you will be interested in knowing his latest views:

Key Takeaways

Contrary to my previous belief, the global property market is mostly commercial (retail + office + industrial: 71%), with residential representing only 15%.
Within commercial properties, office rental is volatile because it is highly correlated with the local economy. On a global scale, however, volatility is lower because each region has a slightly different economic cycle.
Retail (shopping mall) rental is much more stable (1-6% return, plus asset appreciation) because shopping malls have a lot more monopolistic power.
In regions where REIT market is mature (e.g. USA), the investors are “sticky”, i.e. they are long-term investors looking for stable returns. On the other hand, emerging REIT market e.g. Asia (Europe?) is more short-term focused and they treat REIT more like property stocks.
Overall, pension funds globally are planning to increase their real estate allocation from the current 5% to 10%.

What does it mean?

Don’t worry too much about the recent dismal US home-building data. Although it may indicate lowering consumption power of the Americans, it does not really affect the investment return of the commercial properties.
For those who like to buy stocks based on the economic recovery story, buy those with lots of office buildings (e.g. Hong Kong Land and Sun Hung Kai Properties in HK), and not the shopping mall operators (e.g. Westfield in AUS, Simon Property Group in UK).
Currently, the Asian property sector offers explosive but unstable investment return. However, as REITs become more popular, the sector may behave more like its US counterparts -- less volatile, and arguably more attractive as a long-term investment.
Last but not least: when pension funds (with multi-billions of capital) are looking to increase their positions in real estate… we’d better hurry and ride on the boat!

Related post: Introduction of REIT

* “Others” in the chart include hospitals, hotels and storage buildings. Data source: EPRA/NAREIT, as of Aug 2006

Lower consumer confidence points to slowing economy

2006-11-01T12:14:00.000+08:00

The US Consumer Confidence report released yesterday shows the index in Oct at 105.4, lower than the expected 108.0. With the anticipation of a slowing economy, the US treasury rose from 100 18/32 to 102 5/32 within a week (yields dropping from 4.80% to 4.60%).

Next important data to watch: Oct non-farm payrolls to be released on Friday, expected to be +125K. Note that the Sep number was surprisingly low (51K) -- if the Oct number remains under 100K it would be a clearer sign of an economic slowdown.

In general, the recent data from the US mostly point to a softening of the economy. What does it say? It means it's time to think about defensive stocks. A good example would be Citigroup (ticker: C) trading at 10-11x P/E. We can probably wait after the Christmas Rally to do the switching.

Overview of Investment Product: REIT

2006-10-27T14:57:00.000+08:00

There have been a big wave of REITs from Asia in the last couple of years, and we expect to see new ones springing up from UK to India to Israel. What exactly are they? and how are they compared to other types of investments?

What is REIT?

REIT, or Real Estate Investment Trust, was created by the US Congress in 1960 to give general public an opportunity to invest in large-scale commercial properties. The structure has since replicated in many countries around the world.
REIT is an entity set up to hold a portfolio of real estate properties (can think of it as a mutual fund). The entity makes money by receiving rental income from these properties, and to a lesser extent, selling properties for capital gain.
REIT is required by law to distribute at least 90% of its taxable income to its shareholders as dividends. In return, it pays none or little income tax.

Global development of REIT

North America and Australia are mature REIT markets with REITs capturing 95%+ of total property markets. Meanwhile, Europe and Asia are emerging, with REITs capturing 27% and 15% of total market respectively.

Fun fact: timeline of the passage of REIT legislation around the world

1960s: USA, Netherlands
1970s: Australia
1990s: Belgium, Turkey, Greece, Canada, Brazil
2000s: France, Japan, Singapore, Hong Kong, Thailand, Taiwan, South Korea, Malaysia, Mexico
Expected: UK (Jan 2007), Germany, India, Israel

REIT vs Property company stocks

Tax efficient. In general, REIT pays little income tax under the mandatory 90+% dividend payout policy. (note that while this is the case in US, it may or may not be applicable to specific countries)
Diversity: While you can only buy a couple of houses or a handful of property stocks, you can buy a unit of REIT which comprises of hundreds of property investments.
Stable income: since REIT is a portfolio of real estate properties and the income stream is mostly in the form of rents, the volatility of this investment is much lower.
But less explosive growth potential: Because of the 90% dividend payout policy, a REIT may not have enough cumulated capital to make substantial property investment for further growth, thus limiting the ability to maximize a booming property market.

REIT vs other non-property investments

Diversification: In general, REIT and other property investment have a low correlation to the other asset classes.
Inflation hedge with income: as property prices and rents rise with inflation, REIT and other property investments can protect your investments from losing value due to rising prices.

What to watch out for

We have seen a few REITS promising to pay a large dividend yield in the first 1-2 years as a way to attract investors. For example, the dividend could be >100% of its normal income stream, financed by a loan from the parent company.
While tricky, the company does fully disclose the information (using the tiniest font). Therefore, investors have to read the fine lines and see if the dividend yield promised in the first few years can be sustainable long-term.

Further reading

Reita (based in UK) provides a wealth of information on REIT.

Parkway: Best Healthcare Idea in Asia

2006-10-26T17:38:00.000+08:00

As a number of my clients / readers are in the medical profession, I guess it would be nice to write something on healthcare as an investment opportunity.

Parkway Holdings (ticker: PARM.SI), based in Singapore, operates the largest network of hospital and healthcare centers in Asia. This includes 3 hospitals in Singapore -- the venerable East Shore, Gleneagles and Mount Elizabeth Hospital, as well as the Pantai Hospital chain in Malaysia (31% ownership). In addition, Parkway has a joint venture in India, a government partnership project in Brunei and recently, a specialty medical center each in China (Shanghai) and Vietnam. Parkway is listed in the Singapore Stock Exchange and is currently trading at S$2.73.

What I like about Parkway

Focus on high-end market: Parkway is selective in focusing on the high-end, high-margin business. This is a smart strategy as there is an acute demand of high-quality healthcare services in the relatively poor region of South East Asia.
Well positioned in health-tourism: The Singapore hospitals are boasting a good proportion of foreign patients (35% of total), and increasingly capturing patients from non-traditional region such as Middle East. The company is well positioned to ride the big wave of health-tourism, and at the same time diversifying risk e.g. a repeat of the Asian Financial Crisis.
Strong fundamental: healthy operating margin of 18% and net profit margin of 11%. Return on equity is also increasing every year.
Government support: The Singapore government is eager to develop the country as the regional healthcare hub and has a number of favorable policies towards healthcare and pharmaceutical companies.
Owned by smart investors: Newbridge, one of the best private equity firms in Asia, is a major shareholder of Parkway. Looks like a big stamp of approval to me!

Potential risks

Sensitive to recession: Parkway saw its margin squeezed considerably during the Asian financial crisis. Another recession will certainly affect the profitability (although not a problem long-term).
Competition intensifies: Malaysia and Thailand are actively promoting their respective healthcare industries. In particular, Thailand, a world-class tourist destination and a substantially cheaper place to operate, has great potential to capture the health-tourism boom. Parkway has reacted by “buying out the competition”: Pantai Hospitals that Parkway bought 35% in September 2005 is the largest private healthcare provider in Malaysia.
Shortage of nursing staff: This seems to be a global phenomenon. Parkway is trying to mitigate by operating a nursing school in Malaysia.
Stock getting expensive: with 2006 P/E of 24x and 2007 P/E of 20x, it looks expensive as an Asian stock (average: mid teens). However, it is expected to give out a nice dividend at 5%.

Conclusion

Healthcare industry in Asia is one of the most attractive investment proposition because it captures (1) the general trend of aging population, (2) regional acute demand (lack of good quality service in South East Asia), and (3) increasing popularity of health-tourism.
As the largest and most established player in the region, Parkway is an obvious buy. The company is rather expensive, but considering its potential it's worth the premium.

Australia: higher CPI, higher chance of rate hike

2006-10-26T12:39:00.000+08:00

For those who own Aussie dollars and investments:

The Australia CPI data released today surprised on the upside by rising 0.9% quarter-on-quarter vs consensus of 0.8%. The biggest contribution to inflation is food (2.3% q/q), while housing cost also increased due to higher housing rates and housing price. The housing market in Sydney and Melbourne is easing but the rest of the country is still up, up and up.

Looks like another rate hike is coming. The market is currently priced in a 90% chance of 25bp rate hike in November.

For Contrarians: Apollo Group

2006-10-26T12:21:00.000+08:00

Fellow value investors and contrarians: Apollo Group is shouting for your attention!

Who is Apollo?

Apollo Group (ticker: APOL) is one of the largest for-profit companies in educational services, offering degree and career-enhancement programs for working adults. The company operates 100 campuses and 159 learning centers in the US; among them are the University of Phoenix, Institute for Professional Development, and College for Financial Planning.

Given a multi-year 20%+ earnings growth track record, the company has been a high-flyer, with share price zooming from $30 to $90+, and at one point commanding a P/E of 105x. Since mid-2004, the valuation has started to go back down to earth, stabilizing at $50 in 2006.

On October 18, Apollo announced its 4Q results (fiscal year in August). Earnings dropped the first time in many years. Investors got panic and dumped the stock. Now trading at $35.65.

Is it a good buy?

As contrarians we look for undervalued opportunities, that is, when most research reports stamp a big SELL on the stock and everyone is getting out and then ignoring it. If we believe the company is fundamentally strong and is only suffering from temporary hiccups, it would be a great buying opportunity.

Let's look at the fundamentals

According to an estimate by US Dept of Education, the US education industry is worth US$250 billion, with no major players dominating the market. As baby-boomers retire and have more time for education courses, the demand can only go up.

On a global scale, the most promising is, again, China and India: not only because of their size, but also because both cultures put heavy emphasis on education and learning. The increasing popularity of online/long-distance education is also very positive for companies planning to expand abroad.

We see that the education is quite an attractive sector. Now let's look at the PROs and CONs of Apollo Group:

PROs

Experienced in an attractive niche market: Apollo Group has 30+ years of experience in the niche of working adult education. The demand has kept increasing as the economy becomes more knowledge-based.
Strong financials: Even with the recent earnings drop, Apollo has a very respectable net profit margin of 18%, estimated earnings growth at 15%, and a return on equity of 63%.
Reasonable valuation: at 15x 2006 P/E, it is a good deal when compared to an industry average of 22x.

CONs

Sudden expense increase: it is natural to get worried about a rather sharp increase in expense, the main reason of the drop in earnings. One of the main items is bad debt expense: currently 4% of revenue is uncollectible. While not alarming, we would like to see the level going down to a normal 2%.
Uncertain if Ad spending is effective: The other major cost increase is advertising. We do not know if this is an ineffective attempt to curb a foreseeable, long-term decline in enrollment (bad spending), or a proactive approach to build reputation and further increase enrollment (good spending). We have to wait for at least a few months, look at the employment numbers, and see the results.
No dividend: if the stock price remains flat or negative, our loyalty will not be rewarded. However, no-dividend policy is quite typical for high-growth companies e.g. tech.

Conclusion

In my opinion, a break in a multi-year earnings growth is actually good news: at least management is not cooking the books.
At this point I cannot identify major problems such as fraud or significant litigation that would permanently damage the company. Given the strong fundamentals for both the company and the industry, I see the current price level a good entry point to this attractive market.

Thoughts on Telecom - still a good buy?

2006-10-25T14:38:00.000+08:00

Having been a finance person in the telecommunications industry for 7 years, I would like to share my thoughts on this very dynamic industry. The obvious question is: Are they a good buy? Let’s have a brief introduction as a start.

Once a Pearl under the Straws

The telecom industry was once considered a “strategic” asset by government of many countries. Therefore, the fee and cost structures were closely guided and the operations normally run by pseudo-governmental monopolies.

To the outside world, telecom is a stable, low-profile, if not the most boring business, just like one of the utilities. In fact, the telecom was then a ridiculously profitable business – once the copper wire is in place, the company can charge the customer forever. Without competition, innovation was unnecessary and thus the R&D/maintenance cost was very low. The companies also charged the customers at a tolerable but unreasonably expensive level. Remember how much a long-distance call cost 10-20 years ago?

A darling in the late 90s, then…
As the deregulation of industry swept through the world in the 80s and early 90s, telecom companies went public and became darlings in the investment circle because of high profitability and bright future (read: Internet in the late 90s). But of course, money, greed and pride led to stupid mistakes: many telecom companies used their big pile of cash to buy unnecessarily huge capacities and bid up the 3G licenses to outrageous level. When the market crashed, they ended up in a bunch of state-of-the-art but rather useless fiber-optic pipes, an even more useless 3G license, and a very real, big pile of debt. Many of them almost went bankrupt.

In the 2000s, they became low-profile again, working hard to reduce the debt. By end of 2003 billions of debts were repaid and most companies were back in good shape.

Question: Have they become good buys again?

Probably not in my opinion, because:

Competition means lower profitability: Now that the telecom industry is fully deregulated (in developed countries at least), new nimble players have sprung up and profitability has become a lot lower.
Internet is the killer: New, smart companies have introduced better, cooler and virtual free service via the internet. Examples: Skype and other providers of VOIP service. The traditional telecom service has become totally commoditized.
Constant innovation is tough: Facing competition and threats from new technology, telecom companies need to find even better product to survive. 3G was a big thing, but no one so far can find a “killer” application that can realize the potential of 3G technology. Now, the “convergence” (combining telephone, broadband and television/media) is the latest theme, but any big innovation involves substantial capital spending and big risk.
Market is saturating: In the past, the telecom industry has been quite successful in growing beyond its traditional products, e.g. mobile phones in the early 90s, and broadband in the late 90s. However, mobile phones markets are now saturated in developed countries (many Asian countries have >100% penetration rate), and broadband growth is slowing down. The next “thing” is supposed to be 3G, but it is a long way from critical mass.

Should I ignore the sector completely?

Well, no, because:

Everything depends on timing and price: If you get in when everyone is getting out, e.g. in 2001-2003, you will get a pretty good return.
Pick emerging markets: Telecom companies in emerging markets may still in the “honeymoon” phase, i.e. limited competition and tariff level (fees charged to customer) being protected by the government. At the same time, the emerging market has a lot of room to grow. Good examples are telecom companies in China and India, as well as Orascom, an Egyptian-based and London-listed company specializing in telecom operations in emerging markets around the world.

For other telecom ideas in the emerging markets, stay stuned to our next topic: Telecom in China.

Overview of Investment Product: Forex

2006-10-20T19:03:00.000+08:00

The foreign exchange market (also known as forex or FX) may sound mysterious to you, but it is actually the largest financial market in the world, with daily average turnover of US1.9 trillion, or 30 times larger than the US equity markets.

What exactly is forex?

Forex is simply the trading of currencies, and they are always done in pairs, i.e. buying one and selling the other simultaneously. Examples: EUR/USD, USD/JPY.

What are the characteristics?

A “true” 24-hour market
Most sensitive to economic, social and political event
85% of the transaction volume involves the “Majors”, i.e. US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar
Although forex trading is needed for normal running of multi-national business, the majority (95%) are trading for profits
Forex provides more leverage than stocks or futures, which makes forex trading attractive to many traders

What is leverage?

Leveraged trading (or trading on margin) means that you are not required to put up the full value of the position of the trade.
In forex, you can leverage up to 200 times. This is possible because the volatility of major currencies are usually within 1%. Without leverage the traders cannot capture higher returns on a the small market movement.
This is, however, risky business -- while you can have substantial gain with a small amount of capital, you can easily lose in the same magnitude. Afterall, the market is a zero-sum game.

Conclusion

Leave it to the advisors -- retail investors simply do not have the time to monitor the positions.
FX-linked structured products are available but are mostly for sophisticated investors.
However, if we are bullish on a particular currency, we can participate in forex indirectly by buying stocks and bonds. For example, if we like euro and we buy the shares of a retail business that have significant exposure in Europe, it would be a relatively safe and smart way to play the game.

Investment: why now?

2006-10-20T12:14:00.000+08:00

Simple question, simple answer:
The earlier you start, the bigger impact there will be on your investment.

Let us have an example.

You are now 35 years old. You will need the money at 60 when you retire.

Money available now: US$50,000 (or $50K)
Long-term bank deposit rate is 3.5%, slightly above long-term inflation
Long-term investment return is 8%

Note: for simplicity, the final amount is not discounted for inflation for all 3 cases, but this does not affect the comparison.

Case 1

Do nothing, i.e. money sitting in the bank for 25 years.
The $50K will turn into $114K.

Case 2

Keep the money in the bank and start putting it into investment when you are 50.
The $50K will turn into $184K (61% more than Case 1!)

Case 3

Put money into investment when you are 35.
The $50K will turn into $317K (73% more than Case 2, and 178% more than Case 1!)

The impact is more pronounced if you include the money saved every month.

Conclusion

The decision of investing early, if at all, significantly impacts your asset size in the future.
Although there are bound to be ups and downs in the investment returns throughout the years, a consistent, non-speculative investment program (set by either yourself or your adviser) will give you a much better return than the deposit rates.

I am happy to send you an excel sheet if you would like to play around with the cases illustrated above.

For related investment topics, please visit our workshop "Smart Investment for Beginners".

Daily Commentary: Oct 20

2006-10-20T10:17:00.000+08:00

Good morning.

US Treasury

10 year UST fell to 3-week low at 100 24/32 (4.78%, +0.02%) on inflation concerns. Reason: Philly Fed new order index climbed to +13,4, vs -1.3 last month, and the initial jobless claims fell to 299K, below the psychologically important 300K level.
Please note that 2 yr and 5 yr UST are to be launched shortly and traders are thought to push down the overall UST price now for better performance later. Could this be the real reason?

FOREX

Euro broke through the 1.2580 key resistant level and hit a high of 1.2642, almost touching the next resistance at 1.2650. The Euro strength is likely due to the weaker than expected stats from Leading Indicators and Philly Fed index of business conditions in the US.
Meanwhile, Yen is quiet because the market is see-sawing between the Japanese importers (e.g. oil companies, wanting to push down Yen) and Japanese exporters (e.g. trading companies, to push up Yen). As a result, Euro/Yen is also relatively quiet.

US Stocks

The Dow finally closed above 12,000 for the first time, thanks to a wonderful result from Coca Cola (KO) with14% growth in its 3rd quarter (haven't had double-digit quarterly growth for years). This is partly due to increased China sales, which is great, but also due to a one-off effect from the World Cup. Therefore, I would not expect the double-digit growth story to continue.
The story isn't as happy for commercial banks. Citigroup (C) fell 0.32 to 49.87. Similar to JP Morgan (JPM) yesterday, the actual results beat forecast's but the core commercial bank business is experiencing slight negative growth, which is a worrying sign. Wachovia and Bank of America (BA) seem to have the same issue in 3rd quarter. Meanwhile, brokerages e.g. Merrill Lynch (MER) and Lehman Brothers (LEH) are doing well.
In tech, Dell fell 6.4% to 23.12 while HP (HPQ) rose 1.4% to 39.56 as HP reclaimed the title as the world's top PC market after 3 years.

Japanese stocks

Sony's stock price dropped closer to its recent bottom level after warning its profit will drop to the lowest level in 5 years. Reason? Playstation 3 price cut and recall of millions of computer batteries... Tech business is a tough one to be in!

Hong Kong stocks

The ICBC IPO, the world's largest so far, has broken many records including the highest number of retail subscribers (~1m), highest subscription fund held in deposits (HK$420bn / US$54bn), largest number of warrants launched for IPO (40), etc. It is almost certain to be priced at the top of the range. Hearing grey market price at $3.45. Trading starts next Friday.
Interestingly, stocks of ICBC peers e.g. China Construction Bank and Bank of China rose despite the huge hold-up of capital, whereas stocks of non-China-theme banks e.g. Standard charter fell.
By now, the overall valuation of China banks is considerably higher than the venerable global banks such as HSBC and Citigroup. I wonder if people know that these Chinese bankers were not even fit for IPOs just one year ago? Don't get me wrong -- they have a bright future as an attractive business operating in an attractive part of the world, but when things get way overvalued we have to be careful.

European stocks

Nokia announced its earnings yesterday, falling almost 6% intra-day and ended up falling 3.4%. Reason: they are selling more phones with lower margin in China and India. Sounds like this is a big trend -- expect Nokia's stock price to stay at this range before any positive news.

Overview of Investment Product: Stocks

2006-10-19T17:23:00.000+08:00

Stock markets are wonderful. Stocks markets are nightmares. Should we love them or hate them?

Embrace them! but be patient and consistent. As every statistics will tell you, stocks (also known as equities) is the best performing investment products available, on a long-term basis.

What exactly is Stock?

When you own a stock or a share, it means you own a piece of a company. For public companies, you can buy and sell their stocks freely in the stock market. Depends on demand and supply (which is driven by factors such as the business model, historical earnings, growth prospect, success or failure of new products, lawsuits, political instability and many others), the stock prices move up and down.

Why stock gives the best long-term investment return?

As one of the owners of the company, it is natural to see that you and fellow shareholders capture the most upside when the particular company is successful. On the other hand, if the company is in trouble, you take the most risk. For example, if the company is bankrupt, the remaining money is distributed in the following order: customers, creditors, shareholders, i.e. you are at the bottom of the line.

As you can see, stock is a high-risk, high-return type of investment. The level of risk also depends on the nature of company itself: stock of Citigroup is less volative than, say, Yahoo.

If I am not a long-term investor, should I get into stocks?

Yes, but you can adjust the risk by adding other lower-risk investment product into your portfolio. You are safe as long as a comfortable level of cash is always available and ready. At the same time, inclusion of some stocks will give you a boost to your overall asset long-term.

Conclusion

It's true that stock markets can be like roller coasters; but stock markets, if you ride it long enough, do not bring you back to where you start -- it brings you to the next level.

Overview of Investment Product: Cash & Money Markets

2006-10-19T17:16:00.000+08:00

I guess everyone knows what cash is. Cash can also be seen as the safest type of investment product: it gives return in the form of interest income.

However, on a historical basis, interest income barely beats inflation. Therefore, a smart investor will look for alternatives.

Here comes the money market funds.

What is it?

It is a type of mutual funds that invest in USD denominated, high-quality, short-term (90 days or less) debt instruments issued by the US government, municipalities, banks and big corporations. Similar to other mutual funds, money market funds can be traded once a day.

Because money market investments are considered less volatile than individual stocks or stock funds, investors can adjust their portfolio's volatility by including a portion of money market funds. They can also "park" their money here in between investments.

As a low-risk investment product, how does it compare to cash/CDs?

PROS

Higher return: the yield is competitive with (if not slightly better than) many savings accounts and is more liquid than bank CDs.
Tax benefits: For US citizens and residents, municipal money market funds can provide state and federal tax-free income, which can be beneficial for those in higher tax brackets.

CONS

Fluctuating yields: Short-term yields have been much more volatile than long-term rates over time, while interest income from a bank gives you a more stable return.

I don't want to bear much risk. Should I invest fully in money markets?

Yes, but without any higher-risk investment products your portfolio's return may not keep up with inflation. That is, your money will worth less than today, and you will be worse off.

Therefore, most investment advisors suggest inclusion of different investment products. We are going to talk about them in the next session.

10 Excuses of Not Investing & How to Tackle It

2006-10-19T10:21:00.000+08:00

Let's continue our workshop on "Smart Investment for Beginners".

You and me have inertia; that is, we tend to procrastinate, especially when the subject in question look new and foreign to us.

However, some people are financially very successful because they win over their inertia. Do you want to be successful? Let’s tackle together the top 10 excuses of not investing. Now!

#10. I am too busy. Yes, of course. Let's see investing as a job! Investments can test your instinct, and learn more about the world. They can also be interesting conversation piece. Not a bad "job" afterall?

#9. I don’t have money. That is certainly a possibilty. You may even be negative in assets (read: debt). No worries. Take care of the debt first, and learn more about investing to get yourself prepared. You can start as little as US$50 each month.

#8. I am not a finance person. It doesn’t matter, because the most important skill is the ability to judge what is a bargin in the market, whether it is stocks, bonds, real estates, gold, fine arts, or that antique clock in the attic. Some financial knowledge is helpful, but not a prerequisite. You can also ask your friends or banker for advice.

#7. I am hopeless in math. Again, it has nothing to do with investing. Simple calculations can help in monitoring and analysis, but that’s it. In any case you can always use a calculator.

#6. I do not take risk. There is certainly risk involved in any investment, but so do anything that you deal with in daily lives. You can tailor the investment portfolio to suit your risk profile. In fact, if you do not want to take risk, you should actively monitor your own assets and make sure it matches with your appetite for risk.

#5. Investment is gambling and I don’t like it. Speculation is gambling; smart investing is not. Positive investment return is not guaranteed but you can reasonably predict the long-term trend if you do the homework.

#4. My friend got burnt in the stock market. Maybe he was speculating? Or he went for the extreme high-risk-high-reward route? Don’t be afraid of the stock market. The better you know it, the less you will get hurt.

#3. My family is not supportive. Maybe they have some misunderstanding or bad experience in investing? Show them this article and see if they will change their minds. Of course, you have to be convinced yourself first.

#2. I don’t want to deal with the investment advisers. You don’t have to! Thanks to the amazing technological advancement, all you need is a computer and an internet connection. Better yet, you can gather as much information from the web as a million investment advisers can tell you. This is a luxury unheard of 10, or even 5 years ago.

On the other hand, if a good investment adviser is available, he/she can help you track the long-term investment cycles, and introduce you to alternative investment products that could be difficult to get by yourself.

#1. You are in it anyway. Believe it or not, you are in the game before you know it. Do you own a house? Real estate is an investment. Are you working? Chances are that you have a mandatory retirement account. You can choose to ignore it, but it doesn’t mean it will disappear. It is your own money! Put it in good use for your own benefit.

Daily commentary: Oct 19

2006-10-19T10:01:00.000+08:00

This is my first attempt to provide a daily commentary. Will try my best to keep it up!

US Treasuries/Bonds

In US, the core CPI rose 0.2% in September, in line with consensus.
The Industrial production CPI, which includes energy consumption, dropped by 0.5%, which is below consensus of +0.2%.
The unsurprising reports leave the 10-year UST almost unchanged at 4.76% (-0.01%).

Forex

Yesterday there were reports on Japanese government finding ways to monitor the carry trades (which has been depressing the Yen). The Dollar/Yen shot up briefly after the news and stay at around 118.50. In my opinion, however, carry-trades are very difficult to monitor as both US dollar and Yen are freely tradable, thus I do not expect the Yen to get stronger with this single news. For short-time, expect to stay within 118.3 - 120.0 range.
Very quiet market for Euro. For short-term, expect tight range of 1.250 - 1.258.

US Stocks

DJIA rose 2.66 points to 11,992 (0.36%) and S&P rose 1.91 points to 1,365 (0.14%).
IBM rose $2.87 to 89.92 with its 3rd quarter earnings beating forecast. Same story for Apple, with stock rose $0.33 to 74.6.
Meanwhile, JP Morgan saw its stock price dropped $0.78 to 47.21 as its core business (commercial banking) delivers disappointing results. Motorola also fell 1.21 to 23.64 as its actual 3rd quarter earnings is considerably lower than estimates.
Healthcare/pharmaceutical stocks, e.g. Johnson & Johnson, Merck, Pfizer and Amgen continue to do well.

Japan Stocks

Nikkei rose 35.96 to 16688 (0.22%).
Stock prices of export companies e.g. Sumitomo and Matsushita Elec dropped slightly in light of the strengthening of YEN this couple of days. Meanwhile, domestic related stocks gained on expectation of higher earnings report in the coming weeks.

Hong Kong Stocks

Guang Da Financial (ticker: 165) rose 19% after news on capital injection (sign of imminent IPO). Be careful and don't jump into the IPO story too quickly: there are lots of China big banks in the IPO pipeline and Guang Da (being a smaller bank) may not be the favorite among institutional investors.

European Stocks

Together with the rest of the world, European stocks have been rising for most of the last 3 weeks.
In particular, EADS (manufacturer of Airbus) rose 2% to 21.7 euros as the Russian investor continues to buy the stock. However, given the uncertainty surrounding Airbus A380, expect the stock to trade at tight range of 20-25 euros.