Monday, November 13

Value ETF Portfolio - 13 Nov update

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.

Sunday, November 12

Congrats to Vietnam!

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:


  • 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.


  • 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:

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

Wednesday, November 8

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

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?

  • 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.


  • 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?

Tuesday, November 7

Unconventional Success: a book review

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.

  • 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.


  • 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?

Monday, November 6

Introducing a balanced and easily managed portfolio

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

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.

Saturday, November 4

Phone Banking at the Next Level

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)

Friday, November 3

Nintendo: with Simplicity in Mind

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!

Thursday, November 2

Time to hold on your bonds

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

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.

Wednesday, November 1

Latest View on Properties

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

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.