Wealth 7 nov2014

SPOTLIGHT

NOVEMBER 2014

NG KOK SONGShaping the wealth

management landscape

INSURANCEJumbo policies in

wealth planning

ROUNDTABLEHow to pick

Tech winners

REAL ESTATECommercial

property perks up

PHILANTHROPYLet the spirit

of giving thrive

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CONTENTS november 2014

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SPOTLIGHT 10 Shaping the wealth management landscape Ng Kok Song, adviser and chair of global investments at GIC, is convinced of Singapore’s potential to grow further as a hub for private wealth

TALENT MANAGEMENT 14 Tackling the dearth of talent Financial institutions are making a concerted effort in training relationship managers

PHILANTHROPY 16 Let the spirit of giving thrive National Volunteer and Philanthropy Centre chief Melissa Kwee sees giving as an expression of her values and identity

TRUST MATTERS 18 Investing differently Any approach to family investing should reflect the history, goals, personalities and culture of the family

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INSURANCE 20 Good policy to plan ahead Jumboinsuranceispartof high-net-worth individuals’wealthplanningand agrowingmarket

ROUNDTABLE 22 Winners in the tech domain TechnologyIPOshavebeeninthelimelight inrecent years,butdotheymakesound investments?Ourpanellistssharetheirinsight ontechstocksandhowtopickthestars

GLOBAL OUTLOOK 28 Seeing the big picture Theworldeconomyseemssettoenjoy continuedgrowth,providingareasonably healthybackgroundforstocks

JAPAN OUTLOOK 30 What’s next for Japan? Theworld’sthirdlargesteconomyhas itsshareofproblemsandasitsrecovery storyunfolds,therepercussionswillbe felt globally

EMERGING MARKET OUTLOOK 31 Manoeuvring the bumps Anyprolongedmarketweaknessis achancetogainexposuretoemerging marketequities

ASSET MANAGER 32 Taking stock of dividends Schroders’LeeKingFueigiveshisinsight onthesignificance ofthissourceof returnsinAsia

VIEWPOINT 33 Preempt and prepare Investorsshouldthoroughly researchstrategiesthat involve morecomplicatedinstruments


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REALESTATE 34 Commercial property beckons Withlimitedsupplybackedbypositive business sentiment,strata-titledcommercialproperty showsitspromiseforinvestmentpotential

LIFESTYLE 36 Being Santa for a day Banks,exclusivemembers-onlyfirmsand conciergeservicecompaniesareheretohelp thetimepoorbutresourcerichdelivergiftsto theirlovedones

ULTRAWEALTH 38 Tomorrow’s super-yachting hotspots Assuperyachtdemandwarmsup,countries fromEuropetoChinavietobethenext MonteCarloandSt Tropez

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Editor’s note

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WEALTH is published by The Business Times, under Singapore Press Holdings. All rights reserved. Nothing herein shall be reproduced in whole or in part withoutthe express permission of The Business Times.

Printed by Times Printers Pte Ltd© The Business Times, 2014

COVER ARTWORK JENNIFER CHUAPHOTOARTHUR LEESpotlight: Ng Kok Song

SPOTLIGHT

NOVEMBER 2014

NG KOK SONGShaping the wealth

management landscape

INSURANCEJumbo policies in

wealth planning

ROUNDTABLEHow to pick

Tech winners

REAL ESTATECommercial

property perks up

PHILANTHROPYLet the spirit

of giving thrive

Managing editor Alvin TayEditor Genevieve CuaCreative editor Yvonne PohArt director Jennifer Chua

Writers Genevieve Cua, Mark Haynes Daniell, Leonardo Drago, Rahita Elias, Giles Keating, Stephanie Lair, Mark Matthews, Alice Tan,Tara Loader Wilkinson

N 2002 a working group of top finance industry professionals proposed the development of Singapore as a regional hub for wealth management.

At that time that much had to be done: trust laws needed to be brought up to speed, as well as the

tax treatment of some assets. Today it would seem that Singapore has surpassed even the original committee’s vision in terms of wealth management.

A survey by PwC found that wealth management practitioners expect Singapore to eventually surpass the traditional wealth centres of London and Switzerland.

Ng Kok Song, adviser and chair of global investments at the Government of Singapore Investment Corporation (GIC), had a key vantage point more than a decade ago in the remaking of Singapore as a wealth management hub. He was tasked with looking into a major challenge – the training of much-needed client advisers and wealth managers. At a time when poaching was rife, the lack of a broad and deep bench of talent was a bottleneck to growth. He helped to found the Wealth Management Institute (WMI), with the backing of GIC and Temasek.

In this edition, we cast the spotlight on Mr Ng, founding chairman of WMI. He shares his take on the challenges that the Singapore wealth sector has weathered in the recent past. The 2008 financial crisis, for instance, has left a major impact on the industry which today still grapples with its aftermath in terms of client risk aversion and a lingering mistrust of financial advisers.

Still, Mr Ng is confident that the sector will continue to grow. In 2013, the asset management industry – of which private banking is a part – managed over S$1.8 trillion in assets, compared to around S$570 million a decade ago. “As long as there is global economic growth, there will be wealth creation in addition to existing wealth

which has to be managed properly,” he says. A disproportionate amount of new wealth is likely to be created in Asia, he adds.

He offers insights as well into the important issue of retirement security, and the outlook for emerging assets.

In this edition, we also look into insurance for the high net worth, where there is growing demand for jumbo life insurance in the form of universal life policies. Instead of income replacement, these policies serve a different set of objectives for the wealthy. One objective is the creation of liquidity upon death. The policies may also be used as a wealth structuring tool should a wealth owner desire to equalise his or her bequests for the children. And of course, the policies may serve to create an philanthropic gift.

In our Roundtable, experts share their views on technology stocks, which have been in the limelight of late, thanks to the outsized response to Alibaba’s initial public offer. Stuart O’Gorman, director of technology investment at Henderson Global Investors, says tech stocks have dramatically outperformed non-tech stocks over the last 20 years. Technology, he adds, historically trades at a premium to the overall market. The current premium is low relative to history, and presents value, he argues.

In real estate, Alice Tan of Knight Frank writes that commercial property demand is well supported and the stock of properties with a relatively smaller investment outlay remains tight. Despite this positive backdrop, the imposition of the Total Debt Servicing Ratio has been a dampener and this is reflected in declines in transaction volumes. Still, she says there may be early signs of a pick-up in interest in this sector.

In our Asset Manager column, we speak to Lee King Fuei, Schroders Singapore head of Asia equities, on the sustainability of dividends in Asia.

Investing in stocks that pay dividends, he

explains, brings a host of benefits. Dividends are paid out of cash generated by earnings; they therefore signal growth and prudent capital management. Dividend returns, he says, are highly correlated to growth in Asia. The trend among companies to pay dividends is sustainable, he argues. New tax laws in South Korea, for instance, are aimed at getting companies to pay more dividends.

Meanwhile on a lighter note, Rahita Elias looks into the options for those looking for bespoke Christmas presents for their loved ones. It’s not too early to begin speaking to your choice of a luxury concierge service, particularly if you seek something unique. Elsewhere, Tara Loader Wilkinson, Wealth-X editor in chief, has her pulse on the market for superyachts, where demand is picking up. Which superyacht hotspot is likely to vie with Monte Carlo and St Tropez?

We hope your wealth journey remains rewarding.

By Genevieve Cua

NOVEMBER 2014Wealth

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EALTH manage-ment is an integral part of Singapore’s financial land-scape today. But 10 to 12 years ago its

success was not a sure thing.A dearth of experienced bankers was a

vexing issue. And of course there was keen competition from Hong Kong. Today, regional and global competition remains a stiff challenge, as is the need for talent. Yet Ng Kok Song is optimistic. The former chief investment officer of the Gov-ernment of Singapore Investment Corpo-ration (GIC) is convinced of Singapore’s potential to grow further as a wealth man-agement hub. He is a key advocate for the education and training of wealth manage-ment practitioners. He is currently adviser and chair of global investments at GIC. He is also founder chairman of the Wealth Manage-ment Institute (WMI), which celebrates its 10th year this year. “Singapore’s growth as a financial centre was not thwarted by competition. Having Hong Kong as a competitor was very good. It kept us on our toes. Hong Kong made us better and the reverse is true. “As long as there is economic growth, there will be wealth creation. That’s in addi-tion to the existing wealth which has to be managed properly. If Asia is going to be a higher growth region compared to the rest

Shaping the wealth management landscape

10 | wealth

spotlightNG KOK SONG

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Ng Kok Song, adviser and chair of global investments at GIC, is convinced of Singapore’s potential to grow further as a hub for private wealth

By Genevieve Cua

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of the world, then of course a dispropor-tionate amount of new wealth will be cre-ated in Asia.” Certainly the asset growth to date is heartening. In 2004, the asset management industry – of which wealth management is a subset – recorded assets under manage-ment (AUM) of over S$570 million. In 2013, the sector’s AUM exceeded S$1.8 trillion, a compounded growth rate of over 10 per cent. Growth, however, was not a straight line. The 2008 financial crisis was a watershed in ways that few anticipated. In 2008, the industry AUM dipped by 21 per cent to S$864 million. That recovered nicely in 2009 to S$1.2 trillion. The crisis, he says, unleashed two “short-term dampeners” that have hit wealth managers’ profitability. “The first is that we now have a period of repressed interest rates and monetary conditions, and extremely low volatility – historically low volatility in financial assets. “There is also a certain uneasiness on the part of wealthy people to take risk because they feel that current conditions, which are favourable for risk assets, are temporary. So you have an extremely high level of caution which has resulted in many investors and owners of wealth unwilling to take risk. That has tempered the profit-ability of wealth management businesses. If customers keep most of their money in cash, you don’t make good profit margins.” The last few years have tested banks’ resilience and commitment. A number of smaller private banks have been acquired. Most recently, DBS completed its acquisi-tion of Societe Generale’s private banking business in Asia.

The second consequence was engen-dered not just by unethical bank practices, notoriously in the sub-prime securities market, but also by the pressure to crack down on tax cheats. “There was a flood of

new regulations not only to guard against money laundering and terrorist financ-ing, but also to move against tax evasion. So there is a whole slew of new regulations which increases considerably the cost of compliance. In fact, you can’t find enough people to fill compliance jobs. “In the short term the two forces will be with us for a while. But the key point is that they are not permanent long-term inhibitors of growth. I think beyond a three to five-year horizon, the world will resume its longer-term growth trend. The Asian growth dynamo will come into play again, so it’s important not to get too pessimistic because of short-term negative factors.”

Bank practicesSingapore itself had its share of mis-selling, notably the Minibond scandal where com-plex structured notes linked to the failed Lehman Brothers were sold to unsophisti-cated investors. As many as 10 banks were censured in that debacle in 2009. Since then, has Singapore shored up the loss of confidence in bank practices? Says Mr Ng: “The crisis was in some respect a moral crisis. Therefore, we would not have made enough progress unless something is done about the morality of bank practices.” In the US, he says, there has been regu-lation such as the Volcker rule and Dodd-Frank Act, as well as punitive fines for the mis-selling of mortgage securities. “Banks have been fined, but few bank-ers have gone to jail. In the area of regula-tion, a lot has been done to make explicit what is illegal and unacceptable to society, but regulation is always a step behind bad practice. “If we are to restore trust in banks among investors, it is not sufficient to say – here are the laws that banks have to comply with. How do you bring about change in mindset and values where people operate

not just by the letter of the law, but by the spirit of the law? Here we enter the moral dimension.” To a degree, he says poor practices could be partly attributed to ignorance. “If you think back to the pre-Lehman collapse, some of the structured products sold over the counter were very complicated. Some of the people doing the selling probably didn’t understand the risks well enough. I think the creators of the products – the mathematicians – some were aware of the risks lurking and they said it was based on probabilities. But no one could envision a situation where Lehman – one of the names in the products – would go bankrupt and the product’s value would drop to nothing.” On the part of investors, there was also the willingness to believe in the proverbial free lunch – that one can earn a higher return at little or no risk. “Over time, educa-tion and training can mitigate some of that. But I think it will take a long time for the banking industry as a whole to redeem its trustworthiness.” Training seems an obvious area for banks to focus a good part of their resources on. But a decade ago, the field of education needed a distinct push. “We didn’t have a big and deep pool of talent to service what I thought would be a very vibrant indus-try. That immediately caused me to think – why isn’t the marketplace finding a solu-tion for that? “Normally you’d expect that if the demand is there, supply will come espe-cially when it is something profitable.” Banks’ emphasis then was on training for retail and commercial banking, and not on private banking or asset management. “I felt that not enough was done to train raw talent fresh out of university. The pres-sure of business and for short-term prof-itability tended to push banks to poach and hire from competitors. But the pool wouldn’t get bigger that way; there would

only be a faster circulation of people.” While banks still bemoan the dearth of experienced talent, WMI, Mr Ng’s brain-child, has made strides. It has to date trained over 7,000 in the fields of private banking, asset management and priority banking. About 480 have graduated with a Master of Science degree in wealth management. WMI is backed by GIC and Temasek Hold-ings, which put up seed funding for its establishment. Today it is self funding. “My hope is that the 480 (Master’s degree holders) will be future leaders of the industry,” says Mr Ng. Of the gradu-ands, 80 per cent hail from as many as 20 countries, and the majority have stayed on to work in Singapore. But what the industry needs, if it is to thrive and maintain its momentum, is Singaporeans in top positions in financial institutions, he says. “One area I feel we need more emphasis on is how do we create more leaders for the industry, who are indigenous to Singapore. That’s vital for Singapore if we are to expand the wealth management business. That’s because there is greater success in anchor-ing a global business in Singapore if a suf-ficient number of top management in the organisation are Singaporeans who want to live in Singapore... I feel the next stage of development as far as expertise is con-cerned is grooming talent for leadership.

“We have to look into the underlying reasons why multinational companies have no difficulty in Singapore finding mid-level talent, but they have difficulty finding Sin-gaporeans to take on very senior regional or global business responsibilities. Partly this is because Singapore is a very comfortable place to live.” n W

wealth | 11

‘There is greater success in anchoring a global business in Singapore if a sufficient number of top management in the organisation are Singaporeans who want to live in Singapore... I feel the next stage of development as far as

expertise is concerned is grooming talent for leadership.’

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spotlightNG KOK SONG

EMERGING markets have endured a sell-down and fund outflows over the past two to three years. But Ng Kok Song, adviser and chair of global investments at the Government of Singapore Investment Corporation, is “quite optimistic” that the emerging mar-kets will regain their footing in terms of growth. Those economies seen to be most fragile may well eventually outperform in the medium term. “We need to look beyond the next two to three years. If China resumes its growth path with some success in reform, if India makes some progress under (Prime Minis-ter Narendra) Modi and if Jokowi (Indone-sian President Joko Widodo) in Indonesia is able to do something, I can see that the emerging economies in Asia will resume their growth path. Valuations in these mar-kets have come down considerably already, and in many cases are selling at lower valu-ations than the developed markets. “There is good potential for the outper-formance in emerging markets to reassert itself. But it will not be immediate. The big-gest, best performers will be those fragile emerging economies that can undertake successful reforms. I’m quite optimistic, really.” China unveiled an ambitious plan for structural reforms last year, as its economic growth slowed to single digit after years of expansion at a double digit clip. Mr Ng is confident China will be able to avert a financial crisis. “The question is how long it will take for them to undertake reforms so the economy can grow at a 7 to 8 per cent rate on a sustainable basis. While China is undergoing this reform process, it affects negatively some of the emerging economies which are quite dependent on it.” Yet another factor causing a re-think of emerging markets as an investment destination is the prospect of a normalisa-tion of interest rates. Mr Ng says emerging markets have performed “extremely well” over the past decade. “There is a tendency to extrapolate that into the future, but con-ditions have changed. Once interest rates normalise and begin to rise, the inflows

of money which had propelled the rise of some emerging stock markets and local currency bond markets may reverse. “Those economies that run current account deficits such as Indonesia and India – their macro economic stability requires capital inflows. If instead there are outflows, they will have problems. They have to do what they can in terms of reforms to make themselves attractive.” He says the world remains in a “delev-eraging environment” which is risky for the global economy. “Too much debt was created, leading to the financial crisis, and clearly that was not sustainable. Debt deleveraging has been going on in the US, Europe, Japan and now it’s happening in China... Unless the deleveraging process is managed properly we can very easily lapse into recession.” Central banks have tried to cushion the contraction in spending and investments by cutting interest rates. “What they try to do is to bring rates down to a very low level so that people who have borrowed or want to borrow can benefit. That sort of helps to achieve a soft landing. As long as the nominal growth of the economy is higher than the rate you pay on existing debt, then debt is being reduced because you earn more than what you pay in interest.” In this way, he says, central banks seek to create a wealth effect. “The problem is that wealth tends to be owned by the top 10 per cent, and their propensity to consume is lower. So it takes a considerable amount of monetary stimu-lus to generate the wealth effect to offset the deflationary impact of deleveraging. But I think we’re seeing light at the end of the tunnel.” The US, for one, is leading the way as its economy is set to expand at a real rate of 2.5 to 3 per cent. Japan, he says, has a “rea-sonable” chance of coming out of deflation. Europe, however, remains a challenge. n W

Emerging markets:Back on the

growth path

12 | wealth

Ng Kok Song, GIC adviser and chair of global investments, speaks on the CPF, which has been the subject of some debate in recent months.

An advisory panel has been set up to look into some key areas: how the Minimum Sum should be adjusted after next year; the enabling of lump sum withdrawals; and providing flex-ibility for those who want higher returns through private investment plans and annuities.

FUNDAMENTALLY the CPF is more a savings plan, not really an invest-

ment plan. It pays you a fixed interest which is no doubt generous in today’s

environment. But it’s a savings plan and relatively simple. The government didn’t want to impose investment risk on the broad spectrum of members. The main investment feature was property and remains so. Can you imag-ine if property prices had not gone up, how desperate the situation would be? The CPF needs to be looked at. It may well be that we go down the road of a private industry like in Chile or Swe-den. Basically, you want to find a solu-tion along the lines of a collective DC (defined contribution) system. If you can pool the money together, it gives you economies of scale and helps to bring down the cost of investment. With interest rates so low and returns so low, a good part of returns will be eroded by costs. So the challenge

is to find a model which creates enough scale to lower costs, pool the risk and offer life cycle solutions for people of different demographic profiles. It’s quite clear that given that future rates of return on invest-ment products will be lower than in the past, if you look for the same amount of retirement benefits in the future, you will need to save more. This is basic arith-metic and not rocket science. But it needs to be explained to people because the tendency is to look to the past and believe that it’s representative of the future.

Interest rates are so low that the real rate of interest is negative. If you put

your money in cash, it’s as good as saying you’re not able to protect your savings against inflation. I’m not saying this will be a permanent state of affairs but it does indi-cate that we need to look into retirement security more carefully. People should not be misled into thinking they have enough when they don’t.

The current debate in Singapore about retirement security is welcome because it heightens people’s consciousness. Understanding the problem is the beginning of finding a solution. n W

CPF: Knowing the problem is the start of finding a solution

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RGWINDOW OF OPPORTUNITYAnother factor causing a re-think of emerging markets as an investment destination is the prospect of a normalisation of interest rates

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14 | wealth

INDUSTRY players often bemoan the dearth of experi-enced relationship managers in Singapore’s thriving wealth man-agement industry.

But that lack has spawned a silver lining as banks are increasingly chary of relying on just poaching staff: Training has become a concerted effort among institutions, with some awarding their staff diplomas and even post-graduate degrees that are portable.

This means the qualifications are likely to be recognised by other institutions – a sign that the industry has progressed far beyond a decade ago, when training was seen to be synonymous with just product training. The programmes are generally accredited by the Institute of Banking and Finance, which serves as an industry-endorsed mark of quality.

Says Cynthia Teong, Wealth Manage-ment Institute (WMI) chief executive: “Private banking is not short of people, but it’s short of experienced people with assets under management. Because of banks’ KPI (key performance indicators), they zoom in on the same people covering Asia. But over time we will be able to nur-ture more experienced people, which is key. The number must increase. You have to contain costs and salaries to make this business sustainable.”

UBS was an early bird in making a commitment to training. In 2007, it set up the UBS Business University Asia Pacific Campus at the historic Command House. This year, it ran over 1,600 training pro-grammes attended by nearly 32,000 par-ticipants.

Earlier this year, Credit Suisse launched its Wealth Institute as its training hub in Asia. It will run more than 250 programmes this year to benefit over 3,500 staff. DBS has also set up its Wealth Academy, as the growing number of “middle rich” – those with between US$1.5 million and US$5 million in assets – drives demand for wealth services.

WMI, which celebrates its 10th year this year, is seeking to nurture a sustain-able pipeline of talent. Ms Teong says: “One of the things the industry has expressed is that we need to create a ready pipeline of wealth managers. We have to start training at a much earlier stage. Private bankers are at the top of the wealth management continuum. But banks don’t really take in young people; they want bankers with experience, knowledge and customers.

“Relying on just the ready pool of expe-rienced people is not sustainable as it drives up costs. What we have done, together with a think tank of industry leaders, is to create a learning continuum.”

Earlier this year, WMI launched its Advanced Wealth Management Pro-gramme-Affluent. The programme starts with training for priority bankers, who can then speed up learning through a bridging module towards a private banking qualifi-cation. This saves time and costs.

WMI started in 2004 with a Masters of Science in Wealth Management (MWM) programme. Last year the programme was ranked by Financial Times as the second best globally. The degree is offered under the auspices of the Singapore Manage-ment University (SMU). The survey found that SMU MWM alumni earned on average US$85,800 three years after graduation, making them the second highest paid in the marketplace among five institutions.

To date WMI has trained around 7,000 people. About 480 were masters degree holders.

UBS’s Campus runs an internal certifi-cation programme towards a wealth man-agement diploma, which is compulsory for all UBS client advisers. The diploma is accredited by the State Secretariat for Eco-nomic Affairs of the Swiss government.

It has also launched a Master’s pro-gramme, developed

with Rochester-Bern

Executive Programs. Graduates obtain a dual degree – a Masters in Science in Wealth Management from Simon Business School at the University of Rochester, and a Master of Advanced Studies in Finance from the University of Bern. Last year, 22 senior staff from Hong Kong and Singapore joined the first Asia-Pacific intake for the two-year part-time programme.

At Credit Suisse, a key part of the training is a programme to “grow your own” – that is, to attract the right talent early, train and retain them. There are three such pro-grammes, for which 70 trainees have been picked from more than 5,500 applications in the last three years from Singapore and Hong Kong.

DBS says it has close to 600 relation-ship managers (RMs) in Singapore; about a third of them are private bankers. The bank seeks to provide “career progression” for its RMs from consumer banking to wealth management. Lawrence Smith, DBS group head of learning and talent development says: “The time taken to move up the seg-ments depends on several factors, but it generally takes one to three years to pro-gress from mass market to mass affluent segments, and up to five years to progress to the high net worth segment.”

Bank of Singapore (BOS) has its own Wealth Management Programme in place since 2012. It currently has close to 300 RMs. Topics in the programme range from risk management and compliance to client-book development. Upon com-pletion of the course, bankers undergo an objective assessment by a panel of asses-sors from BOS’s learning and development unit and an independent third party pro-fessional.

Adrian Chow, BOS head of learning and development, says: “Having our own bespoke, proprietary wealth management programme allows for training to be contextualised to BOS requirements and yet ensure alignment with the industry’s benchmarks on values and code of conduct.” n W

Tackling the dearth of talentFinancial institutions are making a concerted effort in training relationship managers

By Genevieve Cua

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talent management |

‘Relying on just the ready pool of

experienced people is not sustainable as

it drives up costs. What we have done, together with a think

tank of industry leaders, is to create a learning continuum.’Cynthia Teong, Chief Executive, Wealth Management Institute

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16 | wealth

MALL acts of kindness among her family made an indelible impres-sion on social activist Melissa Kwee.

“It wasn’t the big endowments or gifts that I remember, though those were perhaps the more publi-

cised. Rather it was the small acts of kindness my grandparents would show towards their friends and neighbours.”

Her grandfather would regularly invite friends and neighbours for dinner “just because he was interested in their families and their well being”. He would help them with jobs, school fees or even investments for their businesses.

Her maternal grandfather, George Aratani, was philanthropist and founder of Kenwood Electronics and Mikasa Chinaware. He was one of thousands of Japanese-Americans who were incarcerated during World War II. He survived, founded his businesses, and set up the Aratani Foundation in 1994 in Los Angeles to support non-profit organisations that serve the Asian American community.

Those early seeds have taken root and Ms Kwee, eldest daughter of property tycoon and Pontiac Land chairman Kwee Liong Teck, has made a name for herself in social services. Recently, she took on the role of chief execu-tive of the National Volunteer and Philanthropy Centre (NVPC), the national body which seeks to nurture the spirit of giving in Singapore through

volunteerism and philanthropy across all sectors.

It is a role for which her expe-riences appear to have honed

her. In 1996, for instance, she founded Project Access, a

leadership education pro-gramme to inspire and spur young women to become role models. Between 2006 and 2009,

she was chairman of the youth leadership organisation Hal-ogen Foundation, an educational charity focused on building young leaders and entrepre-

neurs. She was also pre-v i o u s l y president of UN Women S i n g a -

pore. She has won various awards for leadership and service, such as the Singapore Youth Award in 2007 and the Asean Youth Award in 2008.

Says Ms Kwee: “I see giving as a way to express my values and identity. I want to be known not as a person who took things all her life, but as one who gave back and paid my blessings forward. “I want to be a multiplier of all that God has allowed me to have.”

She takes instruction, she says, from her 95-year-old grandmother who on her 90th birthday shared her insight into a long and happy life. She recalls that her grandmother said: “I just want to be a grateful person.”

“(Grandmother’s) life lesson taught me to remember and give thanks for small things... Our #GivingTuesdaySG campaign this year is entitled ‘Small Things. Great Love’ after Mother Theresa’s famous quote that ‘I can do no great things, only small things with great love.’. To me that’s what I constantly try to remind myself.

“Everyone has something to contribute. It may not be grand. It may not be noticed by many, but if I can do even something small to benefit one person around me, then why resist this?”

#GivingTuesdaySG is spearheaded by the NVPC in Singapore. #GivingTuesday is a global campaign founded by the United Nations Foun-dation and 92nd Street Y in New York to promote giving. “A friend recently reminded me that resistance (to giving) is an indication of a lack of relationship. In volunteering and giving, per-haps the greater application is that we need to build stronger and deeper relationships with one another – between donors and recipients, vol-unteers and non-profit organisations, and even amongst volunteers, donors and non-profits.

“In the end I believe we will have a culture of contribution when strong relationships of pur-pose are built.”

GenerosityNVPC surveys show that the spirit of giving is thriving in Singapore, and lower income earners give relatively more than higher wage earners. The Individual Giving Survey in 2012 found that one in three people volunteered, and nine out of 10 people made donations.

Those who earned below S$1,000 gave the highest proportion of their income at 1.8 per cent. Those who earned S$5,000 to S$5,999 donated the smallest proportion at 0.5 per cent.

“We think higher income earners with greater monetary means could be encouraged to follow the lead of the lowest income earners, and give more,” she says.

In the corporate sector, NVPC’s study of cor-porate giving illustrates the potential to do more. The Corporate Giving Survey of members of the

Singapore Business Federation in 2012 found that 52 per cent of respondents wanted informa-tion on non-profits such as their volunteer and donation needs. Forty-six per cent wanted more talks to encourage employee volunteerism, and 35 per cent wanted best practices manuals on corporate giving. Three in five respondents did not have formalised giving practices.

All these suggest that employers and senior executives in companies should start or con-tinue to improve their employee volunteer pro-grammes.

And then of course there is the segment of ultra-wealthy individuals. Forbes Singapore’s 50 Richest List found that the aggregate wealth of the tycoons on the list was S$96.9 billion.

“There is a great opportunity for philan-thropic foundations and grant- making institu-tions to engage our locally based millionaires and billionaires to help raise awareness of social causes and issues...” she says.

The Community Foundation of Singapore (CFS) has found that many donors want to see the impact they bring to communities. CFS is an independent, non-profit, philanthropic organi-sation that builds a collection of funds from donors to serve communities’ current and future needs.

“Giving, when purposeful and planned for, can create bigger social impact and become sus-tainable,” says Ms Kwee.

Ultimately the goal is surely to persuade more individuals to give not just money but also their time and skills. Studies have shown links between giving and a greater sense of well being. The Subjective Well-being Survey found that 66 per cent of givers in Singapore have high levels of subjective well being – defined as those who are satisfied and happy with their lives – compared to 45 per cent of non-givers. The survey was part of NVPC’s 2012 Individual Giving Survey.

Ms Kwee says giving is also a good way to bond families. “We want to encourage families to volunteer together and share their interests and values as a way to build stronger bonds and understanding within families. Giving helps us to be less self-centred and more compassionate towards others. It is a value that many families share and want to expose their children to at a young age, so it becomes second nature and part of who we are.”

For Ms Kwee, giving is a family value. “It is something we do because we are members of a community.

“My personal view is that we need to restore our sense of community and ownership of our common future... My goal is to move giving from a ‘have to’ experience, to a ‘want to’ experience, and then make it an aspiration.” n W

Let the spirit of giving thriveNational Volunteer and Philanthropy Centre chief Melissa Kwee sees

giving as an expression of her values and identityBy Genevieve Cua

‘Giving helps us to be less self-centred and more compassionate towards others. It is a value that many families

share and want to expose their children to at a young age, soit becomes second nature and part of who we are.’

S

philanthropy |PH

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SWITZERLAND LUXEMBOURG MALTA ITALY MONACO FRANCE PANAMA URUGUAY BAHAMAS BAHRAIN HONG KONG SINGAPORE

Swiss bankers since 1873

MAKE A BANK

Knowledge and experience drive our choices. The Asian financial crisis of 1997-98, the Nasdaq crash, and the global financial crisis have changed the way we look at the world. In particular, the GFC dented the banking sector’s credibility, especially that of the larger banks and prompted many of Asia’s high net worth individuals (HNWIs) to re-evaluate the kind of banking relationships they want.

With the “too big to fail” notion disavowed, many investors have developed a stronger appreciation of risk and an understanding of what smaller private banks – at least those with proven capital strength – can offer them compared to the larger “banks-within-banks” with capital spread across a variety of risks.

“Boutique banking” commonly describes smaller banks but for me this only reflects size – which is subjective – rather than the focus on the kind of relationships inherent to traditional private banking. Increasingly, clients are recognising the importance of tailored advice over a transactional broker relationship. The result is a much more competitive environment among all private banks regardless of size. And smaller banks punching above their weight.

The natural tendency to value deep personal relationships within Asian cultures has been an emotional influence on this transition in thinking; but equally importantly, the region is now populated by experienced Asian relationship managers who have grown with the sector. Interestingly, I’ve found that the kind of relationship managers who thrive in a boutique private bank are generally very different to their counterparts comfortable within the environment of a larger bank.

Smaller banks need thoughtful and dynamic personalities – hunters almost – because success is built on establishing strong networks. If you have market knowledge but limited networking skills you can be successful in a larger bank where there is an organic inflow of business and much of it managed in a methodical, though highly competent manner. The individual delivers the competence but the

brand can very often be relied upon to communicate the credibility and integrity. In a smaller bank, it is each relationship which establishes that credibility, integrity and confidence; in both the private banker and the bank itself.

Trust is critical to a sustainable private banking relationship. For smaller banks, it’s the lifeblood because they don’t have the brand visibility that will get many new clients simply knocking on the door. They primarily rely on referrals and without the depth of relationship and absolute trust of their existing clients they won’t get very many new ones.

All private banks – large or small, part of a broader financial institution or independent – profess to offer tailored advisory services. What truly differentiates them is the AUM point, more crudely called “share of wallet”, at which they are willing and able to do so. Bigger financial institutions face greater pressure on all sectors of their business – which can mean more focus on tactics that will impact quarterly earnings than on a strategic, long-term approach. The knock-on effect ultimately can reach their private banking clients, especially if there is an opportunity to cross-sell a product from elsewhere within the organisation.

Large banking institutions certainly do offer truly bespoke relationships but only at a certain ultra-high net worth (UHNW) level is this kind of relationship viable. Smaller banks, while still having UHNWs on their client roster can afford to aim lower, initially at least. The emphasis is more on people than product or process and the smaller bank is prepared to wait until the client is comfortable paring back multiple relationships to entrust just one or two banks with their assets.

The future win-win for clients and their banks must be based on deeper relationships and greater trust: On Asia’s growing acceptance of the roots and traditions of private banking – where service not size matters in a dramatically changed world.

About BSI

BSI Asia is one of the oldest banks

in Switzerland and specialises in

private wealth management.

It has a strong focus on Asia and a

significant presence in Hong Kong

and in Singapore, the largest BSI

operation outside of Switzerland.

In this viewpoint, Raj Sriram the

Deputy Chief Executive Officer, BSI

Bank Limited of BSI Asia, discusses

what makes a bank boutique.

www.bsibank.com

WEALTH OFOPINION

NOT SIZEPEOPLE

“BOUTIQUE”

HERE are many reasons why modern investors may consider develop-ing a new and different approach to long-term investing.

The lessons from 2008 onwards, the complex context in which we operate, and the need to align family values with family investment all come together to create an opportunity to rethink our approach to in-vestment.

As family wealth management differs from institutional investing along many dimensions, families are free to consider longer-term investments that would not benefit from exposure to quarterly perfor-mance targets or even public market scru-tiny of profit and loss statements.

These investments include agricul-tural and forest land, wine, olive oil, private banking, property including high-end re-tail assets in a trophy location, and luxury goods. Beyond these traditional areas of investment focus, there are a number of other approaches to family wealth manage-ment that can be applied across sectors and across time, which can increase the likeli-hood of long-term success.

These approaches, set out below, may be well worth considering, adapting and applying to a family’s wealth management.

• Structured and managed for multiple purposesAs substantial family wealth that may serve more than one purpose is normally intended to last for more than one genera-tion, its structuring and oversight should reflect clearly these different purposes and support the realisation of a family’s long-term financial objectives.

Families may choose to allocate their assets into separate groupings or legal en-tities to ensure specific objectives are met.

They can also engage in planning and structuring which often include trust and corporate structures, multi-jurisdictional approaches, tax management, and fam-ily law planning. Careful design can help ensure that family wealth is successfully

protected and preserved across many gen-erations.

• Goals-based approachOne lesson from the crisis is that a more practical and human approach to invest-ment may be more suitable for an investing family than a pure portfolio theory-based approach. This family-centric orientation is commonly called Goals Based Wealth Management (GBWM). It assumes that the true definition of risk is the potential inabil-ity of a family to achieve its goals, and looks beyond market volatility. This approach is driven by a family’s specific goals (usually multiple in nature), the mathematics of investment, risk and distribution, and the principles derived from historical lessons.

• Managed by horizons, not headlinesPrecisely because the churn of events and flow of information seem to be speeding with each passing year, it is necessary to impose a more thoughtful order on a cha-otic and endlessly interconnected series of world and capital market events.

There has always been more volatil-ity in the price of assets than the drivers of value creation themselves. Good investors consistently reject the belief that successful investment requires a focus on the day-to-day price-focused market system. They pay attention to long-term fundamentals rather than Wall Street and popular media’s short-term hype and gloss.

Unlike institutional investors whose performance is scrutinised on a quarterly basis, families are able to be long term in their investment horizons. Yet, possibly due to emotions and the self interest of the family’s financial eco-system, families far too often fail to use this inherent long-term thinking and investing edge to their own advantage.

• Fully global in seeking opportunityHistorically, families tended to fo-cus their investments within their own home country and currency. This now needs to change as the best opportuni-ties for capital growth and income gen-eration can arise anywhere, while diversifi-

cation principles and family priorities can lead to participation in an expanding world of asset classes and geographic areas.

• Sustainable and principled investingDefining and implementing a principled approach to investing, in line with the fam-ily’s vision and values, is one of the most important elements of the new paradigm. Going beyond philanthropic contribu-tion and a negative screen on individual investment – for example, not investing in tobacco, alcohol, gaming or firearms – and undertaking a principled approach will have an impact on each stage of the family wealth management process.

There is a whole new vocabulary crop-ping up in this area which includes such terms as impact investing, venture phi-lanthropy, social capitalism, philanthro-capitalism and other similar labels for an emerging fusion of “doing well” and “doing good”. In these models, financial return tar-gets are not lowered to accommodate so-cial returns, but investors simply integrate wide-angle social issues into their financial and operating planning in order to drive a balanced approach, aligned with both fam-ily values and financial aspirations.

• Integrating family business into family wealthA family business is often the largest source of family wealth.

The incorporation of a family business into the asset allocation model can have a fundamental impact on decisions relating to the family’s overall wealth strategy, in-cluding issues of capital and income con-tributions, cash and debt drawdowns, risk, cash flow, leverage, currency, sale timing, family role definition and other considera-tions common to all assets in the portfolio.

• Defining and managing riskRisk management is one of the central

goals of a family wealth strategy. Managing risk is

difficult at the best of times, but there is now evidence that the nature of risk is evolving. It also seems that the probability of negative out-

comes and the scale of potential impact will

increase. Unfortunately, the set of risk manage-

ment tools most com-monly used in the past have not done the job as expected – or as needed – in the

recent financial crisis.

Even the defi-

nition of risk may need to be revisited to supplement the single variable of volatil-ity with a more nuanced and tailored view. Family investors are searching for a new way to think about risk and ways to protect themselves and their capital going forward. There are many different definitions of risk – volatility, permanent impairment of capi-tal, underperformance, absolute loss, loss of purchasing power, and failure to protect capital.

• Fully aligned, effective and efficienteco-systemThe family financial “eco-system” is the combination of family, internal family resource, external suppliers, and the web of advisers and influencers who make up the interconnected system that shapes and defines a family’s wealth management strategy.

One of the greatest disappointments with the external advisory component of an overall eco-system relied upon by many wealthy families was the extensive profi-teering by their private bankers, along with other advisers and asset managers, which became abundantly clear during the global financial crisis. Rising markets from 2003 to 2008 in particular made it relatively easy to mask a disturbing level of financial “pro-ductisation”, leverage and high-fee models adopted by financial institutions and ad-visers.

Much, if not all, of investors’ available alpha was eaten up by high aggregate fees, exacerbated by generous carry arrange-ments, high water marks, commitment and placement fees, commissions and profits embedded in structured notes and other in-house vehicles. And they were often opaque from the family’s perspective and undis-closed by advisers. These arrangements re-mained intact despite painfully poor results in the portfolios under management.

• Pulling it all togetherThere is, of course, no one right answer to investing and the broader aspects of family wealth management. Each family is unique, and each approach to family investing needs to reflect the unique history, goals, personalities and culture of the family for whom the investments are being made.

Despite the need for a unique approach, many common principles and elements of an approach to investing may be extracted from the past experience – good and bad – of other families around the world and as-sessed to see if they might be useful in help-ing investors set out their own approach to investing today. n W

Mark Haynes Daniell is the founder and chairman of the Raffles Family Wealth Trust. He also chairs the Cuscaden Group, his family’s own private office. He has authored eight books on family wealth management, strategy and legacy planning

trust matters

Mark Haynes Daniell Founder and ChairmanRaffles Family Wealth Trust

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18 | wealth

Any approach to family investing should reflect the history, goals, personalities and culture of the family

Investing differently

PHOTO: ISTOCK

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31263AIA_PlatinumSuite_280x350_BT Suppl_P.indd 131263AIA_PlatinumSuite_280x350_BT Suppl_P.indd 1 21/10/14 9:53 AM21/10/14 9:53 AM

OU may think that wealthy individuals who own millions of dollars of assets would hardly need insurance.

But insurance for high-net-worth in-dividuals (HNWIs) is actually a growing market. The objectives that such insur-

ance serve, however, differ somewhat from the objectives that individuals with less wealth may have.

The size of the death benefit is also markedly larger. Policies sold through Willis Global Wealth Solutions, for instance, carry a death benefit of US$10 million on average. Willis GWS earlier this year acquired Charles Monat Associates (CMA), one of the largest insurance brokers in the high-net-worth space. CMA was founded by Charles

Monat, who began advising on high-net-worth policies more than 40 years ago.

Odd Haavik, Willis GWS Asia chief executive, says the firm has historically seen annual growth of between 20 and 25 per cent, except for the 2008-09 period of the financial crisis. “We were helped in some respects by the crash. In 2008 from the investor point of view, equities and fixed income together should have provided balance, but everything was down.

“The overall net worth of clients declined, but the values of life insurance policies remained stable.”

Lee Woon Shiu, Bank of Singapore (BOS) head of wealth planning (trust and insurance), says wealthy clients are increasingly taking up policies with higher face values or cover. BOS has helped clients secure policies with face value of as much as US$100 million.

Chris Gill, deputy president of Life Insurance Association, says growth has been rapid in the HNW space over the past few years as banks and other advisers offer insurance options as part of wealth planning. “This growth has often outstripped the average market growth rate and we expect strong growth to continue as Singapore affirms its position as a wealth management hub.”

There are broadly two types of policies that may be taken up by the HNW clientele. One is universal life, a form of permanent life insurance where rates of return are accrued through a crediting rate. Today, crediting rates range between 3 and 4.5 per cent. Major providers in this space include Transamerica and AIA.

Another type of policy is unit-linked where high-value term assurance is bundled with investment funds of the client’s choice. This, however, subjects policyholders to market volatility which may affect the sum assured and cash values.

In Asia, the preference is for universal life as such policies may have some forms of guarantee, such as a minimum crediting rate or a guarantee on the cost of insurance. Clients should note, however, that guarantees are not free. But more on that in a while.

What objectives might large life policies fulfil? Less wealthy individuals typically use insurance to cover the risk of income loss upon death for their loved ones. This may not be the case for the wealthy.

One typical objective, says Mr Haavik, is to cover the need for liquidity upon death of the wealth owner. “For our clients, insurance is a genuine liquidity planning tool. At the point that the estate is transferring, they need liquidity.” Proceeds may be used for family expenses or to pay down debt.

Large policies also serve a number of purposes for those who run businesses. One is that they may serve as a proxy for cash. Banks may be more willing to extend financing for business owners if they see there are assets that can be liquidated to pay down the loan.

They may also be used as part of buy-sell arrangements for companies in the event of a policyholder’s death. How this works is that a policy may be taken up by a business partner up to the expected value of his partner’s share in the business. When the partner dies, the proceeds go to the surviving family members as consideration for the shares of the business. This ensures business continuity.

In terms of family wealth planning, jumbo policies may serve as a wealth equalisation tool, says BOS’s Mr Lee. A family’s core wealth may comprise its business, he says. Dividing the family business’ shares equally among

Good policy to plan aheadJumbo insurance is part of high-net-worth individuals’ wealth planning and a growing market

By Genevieve Cua

20 | wealth

insurance |

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‘For our clients, insurance is a genuine

liquidity planning tool. At the point that the estate is transferring, they need liquidity.’

Odd Haavik,Chief Executive Officer (Asia),Willis Global Wealth Solutions

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| insurance

beneficiaries may not be the best solution as it may create friction if not all members are involved in the business; or if there are opposing visions for the company.

“A far better manner of distribution would be to distribute the controlling stake to the family scion who has the primary responsibility for the business, while tapping a mega (universal life) strategy to create huge cash reserves that would ensure that members who are not receiving the business shares are equitably treated through the huge cash payout from the policy.”

Wealth creation is another objective. Mr Lee says families who may have been badly hit by the financial crisis have relied on universal life solutions to recreate part of their wealth pie.

The policies may also be used to create a philanthropic legacy for the charities of the wealth owner’s choice.

Tax planning is yet another objective. Even though es-tate taxes have been abolished in many parts of Asia, in-cluding Singapore, there are jurisdictions with significant death taxes. These include the US and the UK where es-tate or inheritance taxes run as high as 40 per cent. Mr Lee says there is also the “whisper” of imminent estate duties in countries such as Thailand, which may impose a 10 per cent tax, and China. The latter is said to consider a 50 per cent estate tax. n W

‘A far better manner of distribution would be to distribute the controlling stake to the family scion who has the

primary responsibility for the business, while tapping a mega (universal life) strategy to create huge cash reserves

that would ensure that members who are not receiving the business shares

are equitably treated through thehuge cash payout from the policy.’

Lee Woon Shiu, Head of Wealth Planning(Trust and Insurance), Bank of Singapore

Making sense of universal life policy

Estate equalisation: A case study

Without AIA Platinum Legacy (Universal life policy): Unequal distribution

Mr Lim has three children. Only his eldest son is interested in running the family business. His assets comprise US$9m in the family business; US$8m in other assets and US$4m in freehold property.

Mr Lim purchases an AIA Platinum Legacy, a universal life policy, which provides an immediate estate of US$12m with a single premium of US$3m. This boosts the total value of his assets, and facilitates the equal distribution of US$10m to each of his three children from the insurance proceeds.

First son� Family business US$9m

Daughter� Freehold property US$4m� Other assets US$2m

Second son� Other assets US$6m

Total assets without AIA Platinum Legacy US$21m

With AIA Platinum Legacy (Universal life policy):Equal distribution

First son� Family business US$9m� Insurance proceeds US$1m

Daughter� Freehold property US$4m� Insurance proceeds US$4m� Other assets US$2m

Second son� Insurance proceeds US$7m� Other assets US$3m

Total assets with AIA Platinum Legacy US$30m

US$21m

US$30m

First son

Daughter

Daughter

Second son

Second sonFirst son

*

*

Source: AIA

* US$3m of other assets used forinsurance premium

DEMAND for universal life insurance policies appears to be on the rise, as more of Asia’s wealthy choose to bank and have their wealth managed in Singapore.

Universal life policies are among the key instruments in a wealth manager’s toolkit, for risk management, wealth structuring and legacy planning purposes.These are traditional life policies where cash values are accrued through a crediting or interest rate. There may be some guarantees such as a minimum crediting rate, but guarantees typically carry a cost which may not be obvious to clients.

Here are some things to note about universal life policies.• Premiums and flexibility: Sources indicate that the average death benefit subscribed for among private clients is US$10 million. Clients typically pay a single lump sum premium, which may be around US$2.5 million for a 45-year-old. One of the advantages of a universal life policy is said to be its flexibility. Policyholders are able to draw on its cash value as loans, for instance.• Crediting rates: The minimum crediting rate typically starts at about 2 per cent. The current crediting rate ranges between 3 and 4.5 per cent, says Odd Haavik, Willis Global Wealth Solutions chief executive officer (Asia). Willis GWS earlier acquired Charles Monat Associates, one of the larger insurance brokers in the high-net-worth space.

The crediting rate is a key determinant of how much premiums are required to fund the policy. The higher the rate assumption, the lower the premiums required. But while the policy will specify a minimum crediting rate, the policy is quoted based on its current rate. A drop in the rate raises the chance that the client may have to top up the policy so that its death benefit is not compromised. This is particularly so as the policyholder ages and the cost of insurance rises.• Strict underwriting: With such large policies, clients typically are required to submit to a medical checkup whose costs may or may not be borne by the insurer. As the average age of the policyholder is around 45 to 50, there is a risk that health issues may make a client uninsurable.

But in addition to health, there is also financial underwriting. Life Insurance Association deputy head Chris Gill says some factors examined include insurable interest, affordability, moral hazard and source of funds in line with anti-money laundering rules. “The amount of information required on each category depends on the client as all policies are unique and there are also

instances where some policies do not have underwriting criteria.”

Mr Haavik says the possibility of moral hazard comes under scrutiny. “Every dollar of insurance has to be justified. There has to be a need... The issue in many cases is moral hazard. The underwriter will look at your income, liquid assets and liabilities and assess whether the (insurance) amount requested would make you worth more dead than alive.

“There is also the question of affordability. Or, are you over-insuring and possibly giving someone an incentive to collect?”

Particularly for large insurance cases of over US$50 million, the broker or adviser has to make a strong case to underwriters. Clients prefer to place a large policy with a single insurer rather than multiple insurers.• Premium financing: Banks may offer to finance the premium payments for a universal life policy. On a US dollar plan, the interest charged may range between 2 and 2.5 per cent.

As with any form of leverage, there are risks to this. Bank of Singapore’s (BOS) head of wealth planning (trust and insurance) Lee Woon Shiu says: “The key risks in offering such services relate to any increase or spike in the financing interest rate, as well as fluctuations in the cash value of the insurance policy, which may have an impact on the collateral value.”

He adds that BOS is able to help mitigate the risk with the help of a portfolio structuring team that can help clients to design a portfolio with a stable fixed income or high dividend yield.

Coutts head of wealth planning, Wong Lee, says clients should be aware of a number of risks when tapping premium financing. The policy, she says, will be assigned to the bank as collateral. “If (clients) should default in loan repayments, the bank may enforce against the policies and that will affect their intended liquidity plan.”

Clients are also exposed to credit risk of the insurance carriers, she says. “If the credit rating of the insurance carrier in question drops significantly, the bank may reduce the loanable value of the policy and that may result in a margin call.

“In general, leveraging any type of investments will compound all the risks associated with such investments.” n W

PHOTO:BANK OF

SINGAPORE

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22 | wealth

Charles Morris is Head of Absolute Return at HSBC Global Asset Management. Charles oversees the Wealth Opportunities Fund, a US$2 billion multi-asset fund he founded in 2002. Prior to joining HSBC in 1998, Charlie was an officer in the Grenadier Guards, British Army. He is a competent sailor and plays squash at his leisure.

Stuart O’Gorman is Director of Technology Investment at Henderson Global Investors. Stuart is lead manager of the Henderson Horizon Global Technology Fund, Henderson Global Technology OEIC and a segregated mandate. He has 17 years of industry experience. He enjoys playing cricket and spending time with his two young children.

Winnersin the tech

domain

Technology investments have always intrigued, particularly as many of the biggest stocks such as Apple and Google are now household names. How attractive are tech stocks as an investment and how should investors go about picking win-ners? Our panellists share their views.

Genevieve Cua: Over the past two to three years, there have been a number of technology initial public offerings such as Facebook (2012), Twitter (2013) and more recently Alibaba. In terms of tech stocks, what are the metrics you look into that will tell you a stock may be a good buy?

Stuart O’Gorman: We value IPOs using exactly the same methodology that we use to value any technology compa-ny. When valuing technology companies we focus on two main things. Firstly, we evaluate the value proposition of the technology offered by the firm to their customers both in absolute terms and relative to their competition. This al-lows us to scale the addressable market and the opportu-nity the firm has.

Technology IPOs have been in the limelight inrecent years, but do they make sound investments?

Our panellists share their insight on tech stocksand how to pick the stars

roundtable |

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Genevieve Cua, BT Wealth Editor, poses questions to four wealth experts for their views on technology stocks

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Charles Morris is Head of Absolute Return at HSBC Global Asset Management. Charles oversees the Wealth Opportunities Fund, a US$2 billion multi-asset fund he founded in 2002. Prior to joining HSBC in 1998, Charlie was an officer in the Grenadier Guards, British Army. He is a competent sailor and plays squash at his leisure.

Frederic Fayolle is Director and Technology Specialist at Deutsche Asset & Wealth Management. Frederic joined Deutsche Bank Group in July 2000 after 10 years with Philips Electronics in the US with responsibilities in R&D management, internal consulting, strategic planning and market research.He enjoys outdoor exercise, art shows and museums.

Carey Wong is Investment Analyst at OCBC Investment Research. Carey has over 15 years of experience in the financial industry. Carey is part of the award-winning research team with OCBC Investment Research, where he picked up five consecutive StarMine awards between 2009 and 2013. He is also consistently ranked among the top three analysts on the BARR (Bloomberg Absolute Return Rank) list. Carey is a firm believer in the healthy paleo lifestyle.

roundtable |

wealth | 23

Secondly, and just as importantly, we assess what bar-riers to entry the company has. This determines how prof-itable a company is likely to be. Technology is usually the most important, but there are other factors such as scale, distribution, brand and customer inertia. Probably the most important barrier to entry is the network effect – that is, if everyone uses Facebook it is hard to attract users to an-other social networking site.

With respect to Alibaba, we were early to see the oppor-tunity, and established a position in Yahoo a long time ago as a listed proxy. Alibaba does have a dominant position in the e-commerce market in China and we believe they are likely to maintain that dominance. However, at current val-uations we believe this opportunity is fully factored into the share price. Therefore, we have exited our long-term posi-tion in Yahoo and sold our shares in Alibaba.

Charles Morris: What differentiates Internet companies from more traditional businesses is the powerful contribu-tion from the network effect. When the first telephone was built, there was no one to call, but as more phones came off the line, the opportunity for people to communicate with one another grew exponentially; a phenomenon known as Metcalfe’s law.

Social media enables strangers to interact in a way that wasn’t previously possible. Facebook, for example, has over a billion active users which means there are 500 quadril-lion possible connections between them. Twitter has 271 million active users; the number of connections is a more modest 36 quadrillion. The stock market seems to under-stand this relationship as Facebook has a market capitali-sation of US$200 billion whereas Twitter’s is US$14 billion.

The difference in connections is 32 times whereas the difference in capitalisation is 15 times and customers, four times. Facebook is on a forward PE of 40 whereas Twitter is on 140. They could both be overvalued. But looking at earn-ings and the network effect, Twitter is somewhat expensive relative to Facebook and not the other way around.

Where there is no network effect, there is room for com-petition, but where there is, the winner takes all. We are wit-nessing the creation of a new group of monopolies, all capa-ble of earning super-normal profits for a prolonged period.

Alibaba is slightly different, as it is more like Amazon than Facebook, but the network effect still applies. There are 250 million users that generate US$23 billion of free cash flow that has grown at a rate of 65 per cent per annum. The shares trade on a forward PE of 30. Should this growth continue, that is an undemanding price to pay. The risk, of course, is that it doesn’t.

Frederic Fayolle: We use a combination of metrics which typically includes EV (enterprise value)/sales, P/E (for the current and the next two fiscal years), EV/Ebitda, (EV/

sales)/(revenue growth rate). We also use EV/Ebitda with Ebitda calculated assuming long-term target profitability is reached. We also like to study a DCF (discounted cash flow) model, performing sensitivity analysis on the key variables (sales growth, long-term margin, margin trajectory, etc).

Carey Wong: As with any investment, an investor’s aim is to generate returns that are commensurate with the risk taken.

In the case of tech stocks, the perceived risk is generally higher, sometimes because their technologies or products are new (or in some cases, unproven); or the companies have a short operating history (which poses execution risk).

For some of these tech companies which are just starting to enter the market, they may not be profitable and may take some years to become profitable. Hence, investors are gener-ally unable to use conventional finan-cial metrics such as price to earnings (P/E) ratios to determine the value of these companies.

But there are two key ratios that can be used to examine high-growth companies such as public Internet companies.

The first is Enterprise Value/Forward-Year Revenue, which allows us to compare non-profitable com-panies against their peers. Enterprise value (theoretically what a company is worth to an acquirer, generally calculated as market capitalisation plus debt less cash) can be calculated whereas forward-year revenues would need to be estimated.

The second ratio is Price/Earnings-to-Growth, or PEG, again using forward-year earnings. This ratio gives an in-sight into the degree of over-pricing or under-pricing of a stock’s current valuation. A value less than one indicates that earnings per share (EPS) growth is likely to surpass the market’s current valuation, suggesting that the stock price is undervalued; and vice versa.

But a valuation exercise is more than just plugging in numbers into formulae – investors would also need to have an understanding of the underlying business as well as the addressable market (that is, the potential customers that will buy a company’s products or services). Hence, due dili-gence is important.

In the case of Alibaba, easily the largest online e-com-merce company in the world, it saw a strong debut on NYSE on Sept 19. Its share price jumped some 36 per cent to US$92.70 versus the initial IPO price of US$68 per share. Alibaba is now the fourth most valuable tech company in

the world, even ahead of Facebook. Based on Bloomberg consensus, there are seven “buys” and one “hold” on Ali-baba, with a 12-month target price of US$100.71.

Genevieve: What is your outlook on the TMT sector broadly (tech/media/telecom), on a near to medium-term basis. What are the prospects of an upward (or downward) re-rating?

Stuart: Firstly, my remarks are with respect to the technol-ogy sector rather than TMT. While there will be some stock-specific winners, the telecom and media industries are

overall losers in the technology revo-lution. Telecom companies are faced with ever growing data demands on their network, and there is constant price pressure driven by technology. Media companies are gradually seeing their advertising markets attacked by the Internet.

Overall technology stocks have dramatically outperformed non-technology stocks over the last 20 years. Why? In a world where most things seem to get worse and more expensive, technology is one of the few things that consistently get better and cheaper. Obviously this has meant that rational beings have diverted an increasing percentage of their expend-iture to the technology sector.

We see no reason for this to change as technological in-novation continues apace. For this reason technology has tended to trade at a premium to the overall market. Current-ly the premium is low relative to history, so we believe that relative to other equity investments the technology sector still represents good value. In addition, technology compa-nies are among the most cash generative in the world and technology companies’ balance sheets are generally rich with cash, enabling strong dividend growth, buybacks, and mergers and acquisitions, further supporting technology valuations.

Charles: Near term, there is room for caution. The US bull market is five years old and complacency is setting in. Valu-ations are high, but a long way short of the dotcom days. For a start, the TMT companies make huge profits, whereas 15 years ago, they didn’t. While the sector could be overvalued, the memory of that era will prevent what we could fairly de-scribe as a bubble of historic proportions. If this is a bubble, it’s a small one.

In fact, there are many doubters, perhaps too many. One reason TMT has done so well is that the sector hasn’t been

‘What differentiates Internet companies

from moretraditional businesses

is the powerful contribution from

the network effect.’Charles Morris,

Head of Absolute Return, HSBC Global Asset Management

THE BUSINESS TIMES’ WEALTH ROUNDTABLEGenevieve Cua, BT Wealth Editor, poses questions to four wealth experts for their views on technology stocks


24 | wealth

roundtable |

‘Media companies with popular, differentiated content should be

well positioned in ourview, as content remains king in a

digital world.’Frederic Fayolle,

Director and Technology Specialist,Deutsche Asset & Wealth Management

embraced by the masses. Fifteen years ago, most investors ended up in technology. Today, few people are banging the drum.

What is happening is real, but prices are most probably ahead of themselves and there may be a better opportunity to buy when the market cools off.

Frederic: We are constructive on TMT overall, although more positive on technology and media than on telecom.

Technology stocks have strong balance sheets and cash flows, trade at low historical relative valuations versus the overall market, and their revenue growth is benefiting from a slow but sustained global economic recovery, driving steady (though not high by historical standards) IT spend-ing growth. We do not think technology sector margins are at risk, even though they are at a historical high, because there is no sign of a pick-up in wage inflation and tech com-panies can continue to offshore more of their costs, now including not only production but increasingly research and development. Wage inflation is key for tech margins as wages are the largest cost component for the sector.

Media companies with popular, differentiated content should be well positioned in our view, as content remains king in a digital world.

Telecom is for us less attractive than media or technol-ogy, as many telcos risk being turned into “data utilities”, depressing their revenue growth and constraining margins. In this context, we would look for opportunities from con-solidation.

Carey: We think the TMT sector holds promise as technol-ogy has always been about innovation which could lead to the next big thing. With a game changing technology, pay-offs to innovative companies and their shareholders could be huge.

However, business or product cycles in the TMT sector tend to be quite short-lived, especially for those companies that cater to the “increasingly more fickle” consumer mar-ket. Hence, the challenge is to try to spot the “next big thing” and after that, determine when to cash out on one’s invest-ment.

However, note that even business cycles cannot escape the influence of the bigger economy, especially since a lot of these tech products fall under the consumer discretionary segment – that is, buying tends to slow during bad times.

Based on the current economic outlook, China – the second largest economy in the world – appears to be splut-tering in terms of growth. But the rest of the world is not exactly in the best of health either. In June, the World Bank pared its 2014 forecast for world gross domestic product (GDP) from +3.2 per cent to +2.8 per cent, but largely kept its forecasts for 2015 at +3.4 per cent and 2016 at +3.5 per cent, as it expects economic growth to pick up later this year. Similarly, the IMF in July shaded down its 2014 global growth forecast by 0.3 percentage points to +3.4 per cent; but has left its projection for 2015 intact at +4 per cent.

So at least in the near term, the overall outlook could re-

main somewhat muted. As such, a big re-rating is unlikely to be on the cards.

Genevieve: Which sub-sectors of TMT are you most positive or negative about, and why?

Stuart: We have been overweight the Internet sector for the last 10 years as the Internet has, and will continue, to take market share as it disintermediates old economy competi-tors given its radically lower-cost business model. Demo-graphic factors are also positive for the sector as older “digi-tal refugees” are replaced by tech savvy “digital natives” who view technology as a necessity and spend a much greater percentage of their time online.

Our fund (Henderson Global Technology Fund) is un-derweight in the software and IT services sectors. Intense competition and pricing pressures from cloud computing versus legacy software have made the sector unattractive. Within IT services, our largest underweight has been IBM where it has seen pressures in its hardware and commodity outsourcing segments.

Charles: Software has been repackaged as software-as-a-service (SAAS). In the past, buying a new software package was a capital expenditure decision that had to be agreed to by the chief technology officer. Today, SAAS is likely to be managed in the cloud and so has a lower impact on a company’s systems. The decision to buy is more likely to be made by sales, marketing or a design team. Decentralised systems are gaining traction.

Hardware is more negative. It is capital intensive, com-petitive, soon-to-be-obsolete and has lower profit margins. The growth in the cloud means there is less need for com-panies to upgrade their equipment. According to Kleiner Perkins Caufield & Byers (KPCB), in 1992 it cost US$569 to store a gigabyte of data whereas today, it costs two US cents. That’s great for mankind, but less so for an investor.

Frederic: We are positive on Internet due to superior rev-enue growth which should continue as the Internet further increases its penetration of retail and advertising spending and as it enables some efficient and differentiated business models which should be very profitable. Many Internet companies however – including the largest ones – are in “re-investment” mode, which limits their margin expansion and need to be watched.

We are positive on software as an increasing portion of the value added by technology resides in software, and suc-cessful software companies have high operating leverage and profitability.

Finally, we are cautious on hardware due to the com-moditisation impact of cloud-based technologies on tradi-tional enterprise hardware product lines (for example serv-ers and storage) and the decline in printing volumes due to digital imaging (affecting printers and printer supplies).

Carey: For now, we believe that the social media theme will continue to remain relevant, as more and more people get connected. Recent studies show that people are also stay-ing online for longer. We feel that companies such as Face-book, Twitter and up-and-coming Chinese players such as Alibaba and Tencent Holdings that can leverage this growth should do well.

We also believe that the demand for crowd-sourced content will grow and this may pave the way for innova-tive companies to tap this trend. We highlight that some of the tech giants have also noticed this trend and made some large acquisitions. Recently, Amazon paid US$970 million for Twitch, a website that hosts live-stream gaming-relat-ed videos, where its one million broadcasters have made Twitch the fourth most-trafficked site behind Netflix, Goog-le (including YouTube) and Apple.

Market watchers say Twitch not only offers a big en-gaged audience of young people for Amazon to tap, but could also further Amazon’s ambition to move into the me-dia business. They note that Amazon already offers Netflix-like streaming of shows and movies with its Prime service.

On the other hand, this may spell doom for the tradi-tional Pay TV operators who are already suffering from in-creased competition from OTT (Over-the-Top) operators such as Netflix, if they do not innovate and revamp them-selves to cater to changing consumer behaviour and needs. Cable operators such as StarHub have started to offer paid content on mobile devices, but the high cost of data con-sumption could limit demand.

PHO

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The leading Swiss private banking group. Since 1890.

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145708_280x350_e_K_BJB_Adv_George_Asia_Business_Times_Wealth 1145708_280x350_e_K_BJB_Adv_George_Asia_Business_Times_Wealth 1 16.10.14 10:4016.10.14 10:40

Genevieve: What place does TMT equities have

in an investor’s portfolio?

Stuart: Technology is impact-ing more and more of the economy. From transport to factories, machinery is be-coming increasingly rich in semiconductors, sensors

and software. Productivity has been massively improved

– can you now imagine a world without the Internet,

e-mail, or mobile connectivity? Just

as those “digital refugees” who have failed to adapt to the new economy are increas-ingly becoming second-class citizens, investors who fail to understand how technology is impacting the world are go-ing to find it harder to thrive.

To avoid investing in the technology sector is to ignore one of the most dynamic and fastest growing sectors in the economy. One caveat – investors often forget that investing is full of pitfalls, and it is easy to get carried away with the excitement of the technology sector. Technology, like any investment, needs to be part of a balanced portfolio – be-ware the siren song of getting rich quick – it rarely ends well.

Charles: Amara’s law states that we tend to overestimate the effect of technology in the short run, but underestimate it in the long run. Long-term investors should consider investing in technology, but as always, value matters. This sector isn’t cheap, but provides growth at a time when many other sectors do not. Whether the world economy booms or slows, vast quantities of data will find its way into the

cloud. For an investor, this is a comforting thought.The rule for bull markets is to buy on the dips. The

technology sector is one of the few areas where growth is assured. But bear in mind that this bull market has come a long way, so prices could come under pressure over the medium term. If and when they do, an investment will be a great opportunity.

Frederic: TMT equities can contrib-ute effectively to outperformance of an equity portfolio. This is par-ticularly true for technology stocks at the two ends of a value/growth barbell, where tech stocks have his-torically tended to outperform the overall market (while tech stocks which are “in the middle” have not outperformed). Technology business models change faster than in other sectors, creating risk. But this is also an opportunity for investors who can perform good analysis; the quantita-tive evidence of this is that technol-ogy has the highest dispersion of re-turns among all equity sectors.

Carey: Low-beta stocks such as utili-ties and consumer staples tend to be more defensive in nature and usually offer lower returns as compared to high-beta stocks such as tech and commodi-ties where their businesses are more cyclical in nature and come with higher risk/reward profiles.

For most of us, a “balanced” portfolio probably works best where the low-beta stocks give some stability both in

terms of earnings and dividends, while the high-beta ones offer us the opportunity to get some higher returns in ex-change for taking on incremental risk. The allocation be-

tween the two segments would then depend on our individual risk appe-tite, investment horizon and some-times market opportunities.

Therefore, we think that TMT equities can feature in an inves-tor’s portfolio. For example, telecom stocks are generally considered to be quite defensive and offer pretty decent and stable dividends, which would allow them to fall into the “low-beta” basket. Interestingly, some of the tech stocks, especially those involved in B2B manufacturing such as Venture Corp, also pay pretty decent dividends every year as they generate very strong operating cash-flows.

On the other hand, investors seeking higher returns can look at tech companies with strong growth potential, either driven by new tech-nologies or products. However, the risk is significantly higher as some of these companies may not be profit-able yet or are marginally profitable but may still need to spend a lot of

money to develop their products or markets. Nevertheless, investors can still ride on these compa-

nies’ growth potential, but they must be nimble enough to get off once the growth slows – usually when the hype is over or when valuations get out of hand – and move on to the next big thing. n W

26 | wealth

roundtable |

‘Business cycles cannot escape the

influence of the bigger economy, especially since a lot of these tech

products fall under the consumer discretionary

segment – that is, buying tends to slow

during bad times.’Carey Wong, Investment Analyst,

OCBC Investment Research

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Seeing the big pictureThe world economy seems set to enjoy continued growth,

providing a reasonably healthy background for stocksBy Giles Keating

VER the last few weeks, global stock markets saw significant short-term volatility. Should investors use declines as opportunities to add

to longer-term equity exposure? Or should they keep away in expectation of further falls? To help answer this question, this ar-ticle aims to address two key issues. First, do global developed-economy equities of-fer value, or are their prices still inflated by quantitative easing and zero interest rates? Second, will the world economy keep grow-ing over the next two to three years, provid-ing further support to stock prices, or is it at risk of slowing back towards recession? The ratio of equity prices to earnings (based on consensus estimates for profits over the next 12 months, averaged across the US and other major developed mar-kets) is close to its 25-year norm. So, this very widely used metric suggests that de-veloped equities are close to fair value. How can this be, after a five-year bull market that has seen a tripling of US stock prices (measured by the S&P 500 index) and smaller but substantial rises else-where? The answer is that on this measure, equities were deeply undervalued at the low-point in March 2009, so the bull mar-ket has been a recovery to the norm, not a surge into over-valuation. Some well-known alternative valu-

ation metrics give a more pessimistic conclusion. The ratio of prices to sales is high, reflecting wide profit margins that some people see as unsustainable. A simi-lar message comes from the “Schiller” or “cyclically-adjusted” price-earnings ra-tio, which aims to iron out the variation of profits across the cycle by comparing today’s prices with a 10-year average of profits. This measure stands well above its long-term norm, though not as high as during the dotcom bubble. However, this metric has its critics. It uses the profit definition from government statistics rather than company accounts. Moreover, it includes the very poor profits from the 2008-2010 recession which were the worst in over 70 years and seem un-likely to be repeated soon. By contrast, valuation measures that compare the returns on equities with those on bonds give strong support to the optimists. For example, the earnings yield (that is profits as a percentage of market capitalisation) for blue-chip companies in the US Dow Jones index is close to re-cord highs against bonds, suggesting that stocks are very cheap. Some valuation measures are close to fair value, some above and some below. Thus, there is no overwhelming case to see equities as either very cheap or very ex-pensive. The best interpretation is proba-bly that they stand close to fair value. How

should investors react? A good economy will tend to push stock prices above fair value and raise fair value itself. And con-versely for a bad economy. This brings us to the economic outlook. The big picture is familiar to investors: The US and the UK seem to be expanding at a reasonable if not stellar rate that allows for a cautious monetary tightening next year. The eurozone and Japan are sluggish but are probably just being held on a positive trend by monetary expansion. China is in adjustment to a growth trend that probably lies below the current 7.5 per cent target, while countries in the rest of Asia-Pacific and beyond are seeing divergent trends according to whether they depend on the slowing commodity sector or on the more buoyant industrial and consumer sectors.

Looking ahead Overall, it is a world economy with sig-nificant spare resources and still very easy money, which seems set to enjoy contin-ued but not rapid growth for at least sev-eral more years, providing a reasonably healthy background to stock markets. This is broadly the consensus, and as always there are risks. On the downside are the overhang of public debt, the impact of rising US rates and geopolitical uncertainty. However, there are also upside factors. For over five years, the world has been suffering from inadequate supplies of oil, copper

and most other raw materials vital to the modern economy. Reflecting this, since 2010 oil prices have traded around US$100 a barrel or above, roughly triple the pre-2008 norm, with a similar picture for copper. This extraordinary shortage of key commodities has been good news for their producers, but it has almost certainly been a major drag on global growth. The good news is that it is at long last starting to ease. Major investment in new mines and oil wells in recent years, combined with softer growth in China and elsewhere, is bringing supply and demand into a better balance and putting downward pressures on prices. For oil, this has been obscured by the supply outages due to political and secu-rity issues in Libya, Nigeria and elsewhere, which have broadly offset the extraordi-nary boom in US production. Now at long last, some recovery in supply from these troubled areas is allowing oil prices to fall significantly below US$100 a barrel. If this goes a bit further, it could give a major stimulus to developed economies over the next two years. That should provide an ad-ditional upward impetus to stock prices, on top of that implied by the analysis of valuation that has been given here. n W

Giles Keating is Global Head of Research, Private Banking and Wealth Management, Credit Suisse

28 | wealth

global outlook |

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HEN pro-busi-ness LDP stal-wart Shinzo Abe was elected as prime minister of Japan almost

two years ago, it ignited the country’s ani-mal spirits. Combined with the nomina-tion of the super-dovish Haruhiko Kuroda as Bank of Japan governor in March 2013, it sent the Nikkei up 80 per cent in less than a year. But Japanese stocks have been basi-cally unchanged since then. Recently I visited Japan and came back thinking that it is still a good place to be in-vested. Japan is unique in Asia in having a stock market that correlates inversely with its currency. In other words, when the cur-rency is weak, the stock market is strong. It is difficult to see why the yen should strengthen. Industrial production fell 1.5 per cent in August over the previous month versus the expectation of a 0.2 per cent fall. The Bank of Japan hasn’t really provided any guidance for three months now, but Mr Kuroda’s 50 trillion yen (S$584.34 billion) annual quantitative easing programme will almost certainly be continued, while the Fed would have ended its own programme by the time this article is published. As for Mr Abe’s famous “Third Arrow”, it is so gradual that it doesn’t catch the eye of investors. That’s because, for every per-son with great vision, there is a person who doesn’t like changes. One can understand why when visiting the country. It is a very nice place, because it is so totally Japanese. In this age of glo-balisation and homogenisation of cultures through the virtual world and easy access to travel, Tokyo as a global financial centre somehow just doesn’t ring as true as it did 10 or 20 years ago. Tokyo might not regain its stature as a global financial centre, but the important thing is that Mr Abe controls both houses of parliament and so has the votes to push things through. It just takes a long time for them to be implemented, as

the wheel turns very slowly in Japan, and those without Mr Abe’s vision can make it turn even slower. Take for example integrated resorts. The Casino Bill will almost surely be enacted in the Diet by mid-December, as Mr Abe con-trols both the upper and lower houses. But with all the debating, studies, consultations and committees that can be thrown up by those who seek to stop, delay or water down the integrated resorts, it probably won’t be until 2020 that construction on them can proceed. When they are eventually up and running, they will be big. Pachinko – the current Japanese gambling market – had US$185 billion in revenue last year. By means of comparison, Macau’s gaming rev-enue was US$45 billion. And Japan’s mobile games market is 50 per cent larger than that of the US, and twice as large as China’s. There are other things that make the Japanese story an appealing one. The 2020 Olympics will put the country on the map for the several generations of people who were not born yet, or too young to know it in its heyday. That alone makes infrastructure an in-teresting sector, and three ring roads are be-ing constructed, which will be finished by 2020 to allow traffic to bypass Tokyo. A Mag-lev line will link it to its airports in a much faster way than they are linked today. Air-port extensions are being built, and there is a goal to raise the 10 million tourist arrivals the country received last year to 20 million by the Japan Olympics. This is not an un-realistic goal, given that the yen has lost a third of its value to the dollar now. There is also new construction of the ordinary Shin-kansen (bullet train) lines as well. Contractors have about 50 trillion yen of projects on their books today, and poten-tially another 60 trillion yen could be forth-coming in the next five years. Labour is very tight, meaning wages should rise. For every 100 job applicants, there are 110 job offers. Land prices in Tokyo are rising; they are up about 20 per cent from their lows. However,

the prices compared to rents, and prices compared to incomes, are the lowest by far among major countries. Nuclear power will most probably be re-started, in Kyushu first in November. Even-tually, 25 of the 90 nuclear power plants should become active again. That will help solve many of the energy problems and reduce the trade deficit. All the plants have been made very earthquake proof. Al-though most Japanese opposed restarting them when asked by survey-takers, former prime minister Morihiro Hosokawa ran on an anti-nuclear platform for Tokyo gover-nor, and lost in February, showing that the Japanese are also pragmatic people.

Regulatory reform While the bureaucracy is slow to remove obstacles to regulatory reform, the private sector has already started doing this. It is still cautious about economic growth and not taking big risks, but it knows where growth is and where it is not. Too many Japanese companies make similar products, and many are divesting their unprofitable divisions to focus on what is profitable. Some “old names” are reforming. For example, Hitachi is scaling back many businesses, merging others, and focusing on the two core businesses of rail-ways and turbines, as well as “smart” pro-jects that reduce costs for their customers. Panasonic is exiting plasma televisions and smartphones and focusing on mak-ing equipment for energy-efficient homes. Sharp is also moving away from televisions to focus on small screens, of which there will be much demand as the “Internet of Things” takes off. For example, the Inter-net in not just smartphones and tablets, but also in infrastructure, medicine, au-tomobiles and home appliances. Toshiba is scaling down in consumer personal computers. Sony recently acknowledged it wouldn’t be a major player in smart-phones going forward. And there are also many entrepreneurial companies in Japan

– Softbank and Uniqlo being just two. The stock market is not really important to politicians, because retail investors only have about 10 per cent of their savings in it, compared to over 20 per cent in Europe, and over 40 per cent in the US, although that is slowly changing. Six million new re-tail accounts have been opened since Mr Abe introduced tax exemptions on equity ownership, and those accounts have made 20 trillion yen of equity investments. Corporate profits are beating expecta-tions and should be about 10 per cent this year. This is admittedly small compared to last year’s 50 per cent rise, but if it is repeat-ed next year, the 15x price-to-earnings ratio that the Nikkei is on today would be 12.4x. Mr Abe has noticed that Germany’s corporate tax reduction in the last decade to stem the loss of jobs to other countries, made a big difference to German Inc’s com-petitiveness on the global stage. He has proposed meaningful corporate tax cuts to be staggered over the next three years. The economic and industry ministries, and the local governments, are opposed to corpo-rate tax cuts, but Mr Abe has the political clout to push them through. While it is true many Japanese companies don’t pay tax, a reduction of that size would surely encour-age some of them to make investments they otherwise would not have done. Lastly, tensions between Japan and China appear to have died down. Perhaps it is just a coincidence, but now that Chinese President Xi Jinping has his power base set-tled, there may be less need to pick fights overseas. At least, that is a theory mooted in Tokyo. In sum, Japan’s story is no big miracle. Rather it is a good story that is slowly hap-pening and for an economy of its size, this is important. We should not forget that for all its problems, it is still the third largest economy in the world. n W

Mark Matthews is Head of Research Asia, Bank Julius Baer

The world’s third largest economy has its share of problems and as its recovery story unfolds, the repercussions will be felt globallyBy Mark Matthews

30 | wealth

japan outlook |

W

What’s next for Japan?

PHOTO: ISTOCK

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MERGING markets (EM) have been trad-ing at a steep discount relative to histori-cal value and to developed markets (DM) for more than three years as companies over-invested, profitability declined and momentum stalled.

Despite limited rebalancing in the EM economic model so far, several significant catalysts, such as lower US bond yields, accommodative financing measures, and political developments (in Brazil, India and Indonesia), have boost-ed the valuations of and investment interest in EM, mainly in Asia and Latin America.

The return on equity of EM has fallen to a five-year low, but corporate profitability has started to expand on capex and cost discipline, as well as productivity improvement. Downward earnings per share (EPS) revisions for 2014, 2015 and 2016 among EM have slowed, and in some cases, it has seen encouraging improvement.

From a global perspective, the macro outlook remains mixed, especially in Eastern Europe, where Purchasing Manager Indices have been under pressure. The conflicts in Ukraine and the economic slowdown in the eurozone are likely to continue to weigh on emerging Europe, and we re-main cautious on Russia. Brazil has benefited from strong fund flows despite weak fundamentals, but we see increas-ing macro headwinds.

Emerging Asia, particularly the Asean market (with the exception of Malaysia), has generated a spectacular set of results year to date (YTD). We expect certain countries in Emerging Asia to experience further medium-term re-rating and the valuation discount between Emerging Asia and Global Emerging Market (GEM) to narrow as improved growth momentum and political reforms should help to boost performance.

In Emerging Asia, we are currently overweight South Korea, Taiwan and Thailand. For Thailand, we believe fur-ther infrastructure development, faster disbursement of ministry investment budgets and greater efficiency in tax collection to be the priorities of the military government, which should continue to drive further improvement.

We expect 2015 to be a positive year for Thailand as the economy recovers from social/political unrest. Current valuation is fair at 13.2 times forward price-earnings ratio (P/E), but upside could potentially come from further infra-structure investment as well as economic reforms (includ-ing liquefied petroleum gas and compressed natural gas price changes).

For Taiwan, we believe that it has one of the best earn-ings momentum and earnings quality among Emerging Asia, and is a direct proxy to the momentum of interna-tional trades. Over the past 10 years, the Taiex Index and S&P 500 have shown strong correlation due to the US being Taiwan’s biggest trade partner. We do note that there could be some short-term headwinds on Taiwan equities due to the lower-than-expected ramp-up of Apple supply-chain companies and election complications. However, the fun-damental backdrop of Taiwan remains one of the strongest in the Emerging Asia universe.

South Korea has underperformed by 5 per cent YTD against the MSCI AC (All Country) Asia ex Japan Index as a weak domestic economy and a strengthening external en-vironment have pushed up the won and hurt many compa-nies. As a result, valuation in many companies has fallen to levels seen during the global financial crisis. A lot of nega-tive news could have priced into a large part of the market. Also, Bank of Korea cut interest rates in August and the gov-ernment introduced various reform and stimulatory meas-ures. The important thing to watch is forex stability, which could potentially lead to earnings upgrade and improved equity returns.

Our bullish call on China (now moving to a more neu-tral stance) has worked very well since the end of Q1 2014. While valuation remains attractive versus other regions and the market’s historical trading range, we believe the mag-nitude of expectation of stimulus and reforms that drove the rally will likely falter in the face of reality in the coming quarters. Third quarter results, which will be announced in November, are likely to show negative earnings growth, which was pre-empted by the poor macro data recently re-leased.

All these, coupled with the H-share premium to A-share counterpart, could cap potential upside on Hong Kong-listed Chinese stocks. As the market has been increasingly positive on China and we have seen a strong surge of fund flows into China equities over the past few months, the “at-tractiveness” of China is muted in the near term. But we do note that there are still plenty of trading opportunities on selective counters.

India and Indonesia Both India (Sensex up 25 per cent YTD at point of writing) and Indonesia (Jakarta Composite Index up 17.9 per cent YTD) have had a great run so far. After the strong perfor-mance, we are moving Indonesia to a neutral stance.

For India, new administration under Modi is likely to make several important initiatives to bolster India’s eco-nomic growth. Revival of India’s investment cycle is the key driver; key proposals could potentially include the removal of red tape, changes in labour laws, and land acquisition rules refinement. Technically, we are neutral on India at this juncture partly due to the substantial out-performance YTD. Fundamentally, we still believe India’s story remains compel-ling and in light of a potential Fed rate hike, we believe any negative impact to India is likely to be lower compared to other EM.

For Indonesia, there has been heightening “noise” on the ground that reforms (including fuel subsi-dies removal) would take place as early as November this year, which brings with it a mixed picture. Histori-cally, fuel subsidies removal had been characterised by a depreciating In-donesian rupiah, rising inflation, as

well as a potential correction in the equity market. We also have a relatively neutral to underweight stance

on Malaysia. Progress on the ongoing government-linked corporate restructuring, potential initiatives to balance its budget, and further reforms, are key events to monitor. However, we believe that the Goods and Services Tax (GST) implementation in early 2015 and concerns over expen-sive valuations (consensus 12M forward P/E of 15.5 times) could potentially cap further upside.

To recap, the YTD rebound of EM has been fuelled by rapid valuation expansion due to an improving macro out-look, structural changes, political reforms and the valuation appeal. In the immediate near term, however, we do see some short-term pressure on GEM.

Firstly, relative valuation compared to DM is not as at-tractive as that at the beginning of the year. Secondly, the re-emergence of fund flows into EM over the past several months suggests that the sentiment on EM has already nor-malised. Finally, if we look at the impact of monetary policy, we do note that EM equities have found it harder to outper-form in a rising US yield environment than during periods of declining yields.

Also, a sharper and more disruptive than expected rate hike environment may have different degrees of impact on different countries. Fitch’s recent studies suggest that Hun-gary, Mongolia and potentially Turkey are more vulnerable as compared to countries such as India, Vietnam and Brazil. The underlying reason for the potentially negative impact on EM under a rate hike scenario is straightforward. Any-time the US decides to raise the interest rates, it would lure investors around the world to shift their funds and invest-ment. Therefore, countries with strong current account and macro fundamentals should weather the changes better.

Empirical evidence suggests that there were very few safe havens in EM during past episodes of rising US yields. Although we believe that US interest rates are not the dominant influence on EM equities and that rate hike ex-pectations have been well managed so far, rising US yields ahead of an expected rise in the official Fed Funds target in Q2 2015 could be a mild headwind for relative EM perfor-mance on both currencies and asset values.

Despite this, we maintain our relatively more positive bias and view any extended weakness as an opportunity to gain exposure to EM equities, par-ticularly on selective countries in Emerging Asia.

Stephanie Lair is Head of Investment Services, BNP Paribas Wealth

Management Asia Pacific

Any prolonged market weakness is a chance to gain exposure to emerging market equitiesBy Stephanie Lair

| emerging market outlook

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Manoeuvring the bumps

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WITH cash in the bank still earning next to nothing, dividends continue to exert a powerful pull on investors. Such income payouts not only enhance total return, but they also serve as a cushion for market volatility. Lee King Fuei, Schroders (Singapore) head of Asia equities, is a veteran fund manager with about 15 years’ experience investing in Asian equities. He looks after US$7 billion in assets. He shares his views on the significance of divi-dends in Asia.

Q: You have been at the forefront of investing with a view to dividends. Please share with us why dividends are important and do you think the appetite for yield is here to stay?

Despite market obsession with share price appreciation, the truth is that investing for dividends is vital in Asia. Almost two-thirds of long-term equity returns have historically come from dividends. And unlike share price appreciation which is affected by a myriad of non-fundamental factors such as sentiment, dividends represent actual cash that can only be paid out of earnings which are in turn driven by the economy. Dividend return is therefore highly correlated to the multi-decade Asian economic growth story, a key secular trend that continues to lure investors to the region.

Because managers of companies have better information about their future prospects and loath cutting dividends, corporates often only pay high dividends today if they have reasonable comfort that their future earnings are strong enough to sustain the dividends. This means that when one is investing for dividends in Asia, one is, in reality, also investing in companies with faster future earnings growth.

In a region laden with corporate gov-ernance landmines,

focusing on dividends has the added benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money away in value-destructive investments while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds. And because dividends can only be paid out of real earnings and real cash flows, focusing on dividends helps investors avoid companies with “fake” earnings as these companies are unlikely to have the actual cash required to make dividend pay-ments.

While the current pursuit of yield in the region is partially attributed to the low-yield environment that continues to afflict the general investment landscape, the many structural benefits of investing for dividends in Asia mean that this appetite is likely to persist over the long-term.

Q: What trends in Asia, if any, tell you that the dividend culture is growing among companies?

The dividend culture has been steadily growing in Asia over the last decade, and this looks set to continue. Much of this cultural shift started with the corporate restructuring that

followed the Asian crisis. This led to higher cor-porate profitability, burgeoning cash flows and

low debt levels that eventually gave way to the higher dividend payouts we see to-day. Regulatory changes, such as the anticipated new tax laws in South Korea targeting corporate cash-hoarders, and improving corporate governance stand-ards have also added impetus to the

trend. With increasing shareholder de-mand for dividends, companies in Asia are likely to continue paying more dividends over the next few years.

Q: Given the chase for yields, what are the warning signs that

some stocks may be overvalued?

An excessive chase for yields can manifest

negatively in two ways. Firstly, it can cause stocks to become overvalued, which will be visible in a severe narrowing of the gap between the dividend yields of the stocks and the local long bond rates. It can also create unhealthy incentives for corporate managers to cater to current dividend demands by paying out more dividends than the underlying earnings can support, or by delaying growth projects that are otherwise beneficial to the long-term value-creation of the companies. Careful, in-depth analysis of the sustainability of a company’s future dividend stream will reveal these shortcomings.

Q: Please share with us how you pick stocks, and your sell discipline.

We like to focus on companies with sustainable and growing future dividend streams when we pick stocks, and we typically classify the stocks that we hold into three categories: dividend cows, dividend growers and dividend surprises. Dividend cows represent large companies with big market shares and generating steady cash flows that are used to pay stable dividends. Dividend growers are companies seeing fast-rising dividend streams on the back of their strong earnings growth, while dividend surprises are companies that are increasing their payouts as they improve their capital management.

We will look to sell our stocks when the value of their future dividend streams are already reflected in their share prices, or when the sustainability of the future dividend streams are impacted due to changes in industry dynamics and management strategies.

Q: Asia isn’t a favoured region at the moment. How justified is this view and what is your outlook for Asian equity over the next one to three years?

The long-term prospects of the region look bright. The structural drivers of urbanisation, industrialisation and positive economics continue to underpin the Asian eco-nomic growth story over the next decade, with these trends unfolding not just in China but in many countries across the region such as India and Indonesia.

With the longer-term dividend trend continuing to play out, investors who are in for the long haul should use any correction over the few months as an opportunity to buy. n W

Taking stock of dividendsSchroders’ Lee King Fuei gives his insight on the significance

of this source of returns in Asia

asset manager

When one is investing for dividends in Asia, one is, in reality, also investing in companies with

faster future earnings growth.

32 | wealth

EN-YEAR Spanish bond yield just hit 2.17 per cent per annum as I write this. This is the lowest borrow-ing costs the country has experienced in the last

200 years, when Europe was led by mon-archies and Napoleon was plotting his conquest of Spain.

In October, yields on short-dated two-year government bonds in many European countries went negative. This means that as an investor, you are paying the French and Dutch government for the dubious honour of holding their govern-ment bonds for the next two years.

An even more dubious privilege is to be found in Ireland, where two-year gov-ernment bonds also have a negative yield. To put things in perspective, two years ago Irish two-year government bonds were yielding more than 20 per cent per annum.

Negative yield also occurred in the depths of the 2008 financial crisis, where two-year US Treasuries briefly yielded below zero. This was understandable at the time, as investors feared the insolvency

of most financial institutions, and the only perceived safe haven was short-dated US Treasuries. Investors did not mind pay-ing a small fee in exchange for the safety of their savings, given their concern over a complete meltdown of the global financial system.

So why are so many European short-dated government bonds priced at a nega-tive yield, especially since we are not in the depths of a crisis, and instead many equity markets globally trade near all-time highs? Inflation is falling fast across Europe and more worryingly this is also happening in its two largest economies, Germany and France.

While Europe offers many examples due to its weak economy, government yields have been falling in other countries as well. US and Japan bond yields have fallen sharply this year, despite a consen-sus at the beginning of this year that yields could only move in the opposite direction.

Japan in particular has been an inter-esting case study, as 10-year government bonds are at all-time low yields, despite all the efforts of “Abenomics” to reverse the country’s deflationary spiral.

The major government bond yields are sending a clear message of global defla-tion. Equity markets are cheering this economic outlook, based on the hope that this leads to continued central bank quan-titative easing, and low interest rates for

longer than investors are expecting. 2014 has been a perfect year as long as investors were fully invested in financial markets, with equities, bonds and even gold all posting gains. Even the perennial under-performer, China equities, has started to show signs of life in the last few months.

Since wide-spread inflation does not appear to be an imminent risk, one of the primary objectives would be to protect the equity gains from the last two years. The simplest is to take money off the table by realising some of the large gains particu-larly in US equities and raising some cash.

Investment strategies More experienced investors who are famil-iar with such strategies can consider diver-sifying into investments that are expected to perform well in times of equity market stress. There are many strategies like this available, from US long-dated government bonds (even despite their bubble-like low yields), to trend following and volatility overlay strategies.

There are a number of possibilities for speculators that, while not easily available to investors, can offer interesting ideas. Investors should thoroughly research the pros and cons of these strategies as they involve instruments that are more com-plicated than conventional equities and bonds.

With the renewed convergence of Euro-

pean government yields, investors can position for a worsening of French yields versus German ones at a cost of 0.5 per cent per annum. Even more interestingly, a worsening of Spanish versus German yields costs just slightly more at one per cent per annum. Markets are effectively pricing in the expectation that the horrible state of the Spanish government finances and high unemployment in the country only warrant an additional one per cent annual yield for the next 10 years. The last time investors saw such a convergence in European yields was before 2007, when investors were able to put on such trades on Greece versus Ger-many for similar low costs.

While Greece has spent half of the last 200 years in default, Spain holds the record for the most number of defaults in the last two centuries. Ominously similar low yields as we see now have precipitated these defaults in the past. At the very least, the European Central Banks’ resolve is very likely to be tested again in the not too distant future. Investors have the oppor-tunity to prepare for such an eventual-ity now to protect their investments, and potentially turn a crisis into a profitable opportunity. n W

AL Wealth Partners is an independent Singapore-based company providing fund management and advisory services to accredited investors

Investors should thoroughly research strategies thatinvolve more complicated instruments

Preempt and prepare

T

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Leonardo DragoCo-founder AL Wealth Partners

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IEWED as a coveted asset in the spectrum of property segments, commercial property in Singa-pore presents robust investment opportunities that are backed by the Republic’s stable business environment and employment market, rising stream of business

establishments and steady consumer demand. These factors have largely supported the demand for

commercial property, which saw healthy island-wide oc-cupancy rates of 90.4 per cent for office space and 94.1 per cent for retail space in Q2 2014.

In land-scarce Singapore, the stock of commercial properties with smaller investment outlay remains tight, as most commercial spaces are owned by property and business conglomerates, real estate investment trusts (Re-

34 | wealth

VAlice TanDirector and Head of Consultancy & ResearchKnight Frank

LOOKING UPDemand for commercial

space is poised to rise

Commercial property beckons

PHOTO: YEN MENG JIIN

real estate

With limited supply backed by positive business sentiment, strata-titled commercial property shows its promise for investment potential

wealthkfrank_Nov_pg34-35.indd 2 18/10/2014 12:18:46 AM

its), private funds and government-related organisations. This makes strata-titled commercial properties the next best bet for a bigger pool of investors.

Seasoned investors and high-net-worth individuals seek to achieve recurring income through long-term ownership and leasing of strata-titled commercial properties. These investors make eventual capital gains either through direct or en bloc sales after holding the properties for at least three to five years. Some other investors acquire strata-titled units in bulk, with a strategy to sell down the units individually at a later stage depending on property market trends.

Interest in commercial property is rising among the wealthy. According to the Knight Frank Wealth Report 2014, 53 per cent of the bankers and wealth advisers sur-veyed said that their Singapore ultra-high-net-worth cli-ents expect to raise their investments in commercial real estate in 2014 compared to just 33 per cent for residential properties.

Retail property garnered the highest interest among Asian UHNWIs in 11 types of commercial properties. In fact, 42 per cent indicated more interest in this sector com-pared to just 30 per cent in 2012 and the global average of 24 per cent. This is followed by the office market and devel-opment land.

Traditionally sought after by sophisticated investors such as family offices, private funds and property/busi-ness groups, strata-titled commercial property has received more attention among investors and even the general pub-lic in the recent two years.

Underpinned by Singapore’s economic recovery and population growth in the last five years since the 2008 global financial crisis, demand for strata-titled commercial properties increased markedly, as seen in the significant rise in transaction volume and prices. To a greater extent, due to the host of property cooling measures in the private residential market, investors have switched their focus to commercial properties.

This sector remained unscathed from the property cool-ing measures to date, with both local and foreign purchas-ers exempted from Additional Buyer’s Stamp Duty (ABSD), Seller’s Stamp Duty (SSD) and restrictions on foreigners’ ownership – all of which impact the residential market. Thanks mainly to more new launches of strata-titled com-mercial projects, the total transaction volume of strata-ti-tled offices rose by 248 per cent from 2008 to hit 734 units in 2013. The strata-titled retail segment saw a whopping 385 per cent increase within the same period with 1,071 units being transacted in 2013.

The influx of more investors have spurred much hype in the strata-titled commercial market especially from mid-2012 to 2013. However, the imposition of the Total Debt Servicing Ratio (TDSR) framework since June 29, 2013 has put the brakes on this market in the past year. Small-time retail investors are impacted by mortgage loan limits with

the TDSR requirements, and are ever more constrained by the higher medium-term interest rate of 4.5 per cent for loan repayment assessment of commercial (that is, non-residential) property. The non-utilisation of savings in the Central Provident Fund (CPF), and the Goods and Services Tax (GST) payable for commercial property purchase fur-ther increase upfront cash outlay for these investors.

Since the TDSR ruling, transaction volume of strata-titled offices, retail and shophouses took a beating with declines of 19 per cent, 68 per cent and 69 per cent respec-tively, from Q2 2013 to Q2 2014. Despite weakness in the strata-titled commercial market over the past year, the recent revival in prices in the third quarter this year could indicate preliminary signs of a return in interest for this market.

Strata-titled office: an emerging bright spotComparing the general market conditions and trends for each commercial property segment, the strata-titled office segment showed the most resilience in prices. Over the one-year period since the TDSR, average prices for strata-titled offices fell marginally by 0.1 per cent year-on-year in Q2 2014, and posted a rebound of 5.3 per cent quarter-on-quarter to reach about S$2,300 per square foot (psf). Resale office units saw higher price recovery of 5.8 per cent q-o-q in Q3 2014.

The sustained interest in strata-titled office spaces has been largely propelled by rising office rentals especially in the Central Business District (CBD). Based on Knight Frank Research office rental analysis, prime Grade A gross effec-tive office rents in Raffles Place averaged S$10.45 psf per month, an increase of 5.6 per cent year-on-year (y-o-y) in Q3 2014. Office rents of Grade A buildings in Shenton Way/Robinson Road/Tanjong Pagar precinct increased by 1.1 per cent y-o-y to average S$8.20 psf in Q3 2014. Overall prime office rents in the CBD are expected to increase by 10 per cent y-o-y in Q4 2014.

The bullish outlook for the office leasing market, sup-ported by an expected stable economic growth and tight upcoming supply of prime office spaces will continue to fuel demand for strata-titled office spaces in Singapore. Ac-cording to the recently released Knight Frank Global Cities Report 2015, Singapore’s prime office rentals are forecast to grow by 25 per cent from 2014 to 2019, barring any unfore-seen market circumstances.

Food & Beverage (F&B) and retail operators held back on operating or investing in shophouses in recent quar-ters, as the F&B and retail business becomes more com-petitive over the recent years. The continuing manpower crunch also inhibited business expansion plans for retail operators who look for unique concepts in shophouse spaces. The lower demand for shophouses is also exac-erbated by the persistent price disparity between bullish sellers and discerning prospective buyers. Prices of shop-houses in Q3 2014 averaged S$4,170 psf, a 12 per cent

correction on a yearly basis, yet a 19 per cent rebound on a quarterly basis. Most of the higher-ticket shophouse transactions exceeding S$5,000 psf land area are in the Outram Planning Area.

The retail segment showed price stability with little cor-rections for the past two quarters. Prices of strata-titled re-tail spaces rose by 11 per cent y-o-y to average S$3,730 psf in Q3 2014. A significant proportion of strata-titled retail unit transactions are contributed by City Gate, a recently launched mixed-use development project at Beach Road. Transacted prices for City Gate retail units averaged be-tween S$2,880 psf and S$6,300 psf. With the anticipated gradual increase in population and the expansion of Singapore’s business landscape in the near future, the demand for commercial spaces is poised to rise. Coupled with the limited new supply of strata-titled com-mercial spaces and the government’s calibrated approach to approve land uses for strata-titled development, the out-look for rental and price trends for this market segment is moderately positive.

As speculative activity recedes with a smaller pool of buyers amid the TDSR ruling, the slowing price escala-tion of strata-titled commercial property will present new opportunities for investors who look for properties with a unique proposition in terms of location and scarcity. Strata-titled commercial spaces and shophouses that are located in places with a strong catchment profile or within future growth precincts will potentially see higher demand and greater promise for capital upside. n W

real estate

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Q3 Q120122011

Q4 Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3

Figure 1: Transaction volume and average prices ofstrata-titled offices, new sale and resale

3,500

3,000

2,500

2,000

1,500

1,000

500

0

500450400350300250200150100

500

Average $psf strata area No of transactions

Transaction volume - resales (RHS)Transaction volume - new sale (RHS)Average $psf - resale (LHS)Average $psf - new sale (LHS)

Figure 2: Transaction volume and average prices ofretail units, new sale and resale

6,000

5,000

4,000

3,000

2,000

1,000

0

700

600

500

400

300

200

100

0

Average $psf strata area No of transactions

Q3 Q120122011

Q4 Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3

Transaction volume - resales (RHS)Transaction volume - new sale (RHS)Average $psf - resale (LHS)Average $psf - new sale (LHS)

Figure 3: Transaction volume and average prices ofshophouses, freehold and leasehold

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

100908070605040302010

0

Average $psf land area No of units

Transaction volume leasehold (RHS)Transaction volume - freehold (RHS)Average $psf leasehold (LHS)Average $psf - freehold (LHS)

2008 2009 2010 2011 2012 2013 2014

Source: REALIS (as at Oct 2, 2014) Knight Frank Research

FILE PHOTO

wealthkfrank_Nov_pg34-35.indd 3 21/10/2014 12:45:29 AM

36 | wealth

lifestyle |

PHOTO: ISTOCK

Being SantaBanks, exclusive members-only firms and concierge

service companies are here to help the time poor but resource rich deliver gifts to their loved ones

By Rahita Elias

wealthrahita_Nov_pg36-37.indd 2 21/10/2014 7:27:40 PM

wealth | 37

| lifestyle

‘T IS the season to play Santa again and pop a present or two under the Christmas tree. If you are time poor but resource rich, you can still be

the extravagantly generous St Nicholas making Christmas a truly magical event for your loved ones. Banks, exclusive members-only firms and concierge service companies are on hand to play the role of Santa’s elves.

Choo Wan Sim, executive director, cards and payment products, personal financial services at UOB Group, says: “During festive seasons, we usually see an increase of about 10 to 15 per cent in clients’ requests for bespoke gifts.”

Limited-edition luxury goods are top on Santa’s shopping list. A UOB Reserve cardmem-ber wanted to surprise his wife with the much-coveted Hermes Birkin 35cm bag with black hardware, while another card-member was on the lookout for a 2014 S class Mercedes 400 hybrid.

Apart from these hard-to-find products, says Ms Choo, people are increasingly giving the gift of unique experiences. For in-stance, doting grandpar-ents rented a pony for two hours because their grandchildren wanted pony rides in the gar-den, while a father got his soccer-mad son a meet-and-greet with English footballer Rio Ferdinand.

The desire to give unique gifts is not limited to just the Christmas season. Anastasia Ling, managing director of Quintessentially Lifestyle, says members request for help throughout the year in their quest for the ultimate gift.

“At times, our members will have very specif-ic instructions as to what they’re looking for and for whom and how they want it presented. Most of the time, they come to us for suggestions and ideas for gifts.”

The company literally searches the globe to hunt down rare and unusual pre-sents for its members.

Ms Ling says among the more extraordinary gifts was a world map made of mother of pearl, lapis lazuli and other semi-precious stones that a member had seen in Singapore a decade ago. It helped another to purchase a Louis Vuitton limited edition bag, which was only available at a particular store in Japan. The company found a limited edition Panerai Luminor 1950 Regatta Rattrapante watch. The waiting list in Singapore for the timepiece was one year. Quintessentially found one in South Africa within just five days.

Experiential gifts are also very popular among Quintessentially’s members. One

member wanted the company to arrange for his mother to meet Spanish crooner Julio Iglesias on her birthday.

Often members are on a tight sched-ule and want their requests

fulfilled within days if not hours. One member gave Quintessentially only two hours to locate and pur-chase an antique compass as a birthday present for his father. Another wanted to impress a friend with a particular Rolex model that had a three-month waiting list. Through Quintessentially, he got it within 24 hours.

Citibank’s Ultima card concierge service has also received urgent re-quests for the festive season. Just two weeks be-fore Christmas, a member wanted the service to source for a 3.6 metre real Christmas tree.

A Citibank spokesman says: “The main diffi-culty was the short turnaround time in fulfilling our customer’s request. It was so close to Christ-mas day, and our customer wanted the tree to be delivered at a specific date and time.”

Despite the tight schedule, Citibank success-

fully found a supplier who was able to deliver the tree at the specified time.

The spokesman explains: “Once the gift idea is selected by the customer, Citi’s Ultima lifestyle manager will link up the customer with the seller so both of them can transact di-rectly between themselves. It acts as a form of security for our customers as they will have the

comfort of knowing the actual cost of the gift.”Apart from these members-only services,

those who are busy can turn to concierge service specialists.

My Singapore Concierge owner Raymond Ling says: “We target high-net worth individuals that want to add a personal touch to gift buying.”

One customer was travelling overseas and asked the concierge company to get a Christmas present for his partner. My Singapore Concierge went to Marina Bay Sands to buy the partner’s fa-vourite macaroons. It delivered the confection-ery, flowers and a hand-written card to her work-place. The concierge then took a photo of her with the gifts before e-mailing it to the customer.

Another customer who was away on busi-ness e-mailed photos of his children with in-structions to shop for clothing and gifts for them.

Mr Ling says: “We had to ‘guessti-mate’ their sizes based on the pictures only! We made a trip down to Toys ‘R’ Us and picked out some Spiderman and princess outfits. Fortunately, it all worked out as we later found out that they fitted well.”

He adds that while provid-ing such services are a great responsibility, it has its own rewards. “After each job done well, seeing the surprised, de-lighted, sometimes even hap-py, teary faces of the recipients gives us such deep satisfaction. That is the best Christmas present we can ever receive. After all, who doesn’t want to be Santa for a day?” n W

Being Santafor a day

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38 | wealth

T the Monaco Yacht Show this year – wide-ly-considered the bell-wether for the super-yachting industry – the atmosphere was buzzier

than ever. Some 118 superyachts crammed into a blazing-hot Port Hercules, a record number for the show, with many having to anchor outside in the harbour. Attendees said that a hike in ticket pric-es (almost double that of the previous year) had snared a more “serious” visitor, with lots of promising enquiries that they hope will translate to sales. Lamberto Tacoli, chief executive of CRN, which builds some of the world’s most expensive superyachts, said that after some slow years during the financial crisis, demand was finally coming back. “It has been a good year, we have three customised boats under construction and ‘touch wood’ three or four more soon.” Others agree the industry is looking up, with estimates that the current fleet of ap-proximately 5,000 superyachts will see 6,000 yachts added within the next two decades, to around 11,000. And the pool of potential buyers is swelling too. According to the an-nual Wealth-X and UBS Billionaire Census published in September, the typical buyer of a superyacht is a billionaire, of which there are now a record 2,325, worth a collec-tive US$7.3 trillion. And by 2020, Wealth-X estimates that there will be more than 3,800 billionaires – so plenty of new market. All good news, but more yachts need more marinas. Over-crowding is already afflicting those seeking a spot in the Medi-terranean. According to Hume Jones, a charter broker at YCo: “It is becoming in-creasingly difficult to moor your supery-acht in St Tropez, Cannes, Monte Carlo or Capri during the prime summer months, and likewise in St Barths over the winter. New centres will open up without doubt.”

The question is, where will the next Monte Carlo and St Tropez of the world be? “Firstly, the Cote D’Azur will always be the key sea,” said Vincenzo Poerio, chief ex-ecutive of Benetti, pointing to the region’s rich 5,000-year history, excellent infrastruc-ture and protected sea, which he reckons give it permanent pulling power. “But in 20 years’ time there will be many other super-yachting hotspots,” he added. He pointed to the Balearics, such as Majorca and Ibiza, and also Barcelona, as areas that could emerge as the next hubs. At the show, Barcelona seemed to be the place on everyone’s lips. As announced last month, the billionaire US-based Huizenga family have teamed up with merchant bank Salamanca Group to acquire Barcelona’s state-of-the-art Marina Port Vell. As part of the deal they will invest in a new superyacht repair facility that will be able to take vessels of up to 180 metres, the largest of its kind in Europe. Wayne Huizenga Jr said in a state-ment that it will “transform Barcelona into the most important super-yachting hub in the Mediterranean”.

Eastern EuropeAnd a bit further into Eastern Europe, Mon-tenegro, Croatia and Turkey – particularly the marinas in Bodrum, Antalya and Mar-maris – are positioning themselves as the next European Riviera. “There is a lot of noise about the Adri-atic and Eastern Mediterranean, Turkey, Montenegro, Croatia and beyond,” says Rebecca Taylor, brokerage editor at The Superyacht Group. “Clients berthing here are usually looking for something new and different and want to avoid the usual spots in the Mediterranean and the Caribbean, which some consider to be flashy, owner-crowded and over-priced.” Eleven-year-old D-Marin Marinas Group is a rapidly expanding marina com-pany that in recent years has launched nine different locations in Croatia, Turkey and Greece. Meanwhile, the coastline of Montene-gro is getting a full-on makeover. It started when Canadian oil tycoon Peter Munk bought an old naval shipyard from the gov-ernment in 2006, with the help of a group

of ultra high net worth investors including Oleg Deripaska, Nathaniel Rothschild, Ja-cob Rothschild and Bernard Arnault. Fast-forward eight years and Porto Montenegro has become a thriving village of the inter-national jet-set in the beautiful Unesco-protected Bay of Kotor. Already the first phase of luxury residences has sold out and a forthcoming residential building is 67 per cent sold. In addition, Porto Montenegro just created 150 new berths with capacity for yachts of up to 180 metres, making a to-tal of 400 berths. Hot on its heels is the Dukley Gardens and marina development in nearby Budva. As well as 200 luxury one, two and three-bedroom apartments overlooking the panoramic turquoise Zavala peninsula, the project includes a 300-berth marina which is undergoing a 45 million euro (S$72.5 mil-lion) refurbishment guided by Camper & Nicholsons. And along the coast lies the burgeon-ing Lustica Bay development, backed by Orascom Development chairman and bil-lionaire Samih Sawiris who has already in-vested 35 million euros in the project. This will see the creation of a 120-berth marina and around 1,500 luxury properties. The duty-free fuel and low value-added tax on marine services in Montenegro, which is not yet part of the European Union, is en-couraging more superyacht owners to refu-el their yachts here and stay a while, agreed a spokesman for the development. On the other side of the Atlantic, anoth-er lesser-known jurisdiction is using low tax to its advantage to position itself as a future superyacht destination. Puerto Rico in the Caribbean is seeing more interest from the yachting commu-nity after two recently introduced tax in-centives – Act 20 and Act 22, which mean zero capital gains tax. More than 200 people this year have applied to move to the island under Act 22, which has been endorsed by highly successful investors such as John Paulson, who correctly predicted the mort-gage meltdown. In addition to competitive port fees and berthing costs, Puerto Rico has no passport requirements for those travelling from the United States. In anticipation,

Puerto Rico is planning to grow its yacht-ing industry from US$3.6 million annually to more than US$100 million in five years, said a spokeswoman. Earlier this year, the Encanto Group announced an investment of US$200 million to develop a worldclass beach and marina community on the is-land’s east coast, The Yacht Club at Palmas del Mar. When complete, it will offer 158 boat slips, including 40 designed for yachts up to 175 feet or 53 metres. But when you ask about China, the re-action from the industry is usually the same – not yet. Ferretti is investing in a large su-peryacht marina and facility in Zhuhai, but insiders believe it could take years for the industry to properly take off due to a lack of infrastructure and cultural differences. It has to start somewhere though, believes Ferretti.

Leonardo Allasia, a spokesman for the Italian yacht builder which is now owned by a Chinese billionaire, said: “We have been a firm believer in the Chinese market for years, and trust that it will continue to evolve.” n W

Wealth-X is the source of intelligence on the ultra wealthy, with the world’s largest collection of curated research on UHNW individuals

Tomorrow’s super-yachting hotspots

ultra wealth

ATara Loader WilkinsonEditor-in-ChiefWealth-X

As superyacht demand warms up, countries from Europe to Chinavie to be the next Monte Carlo and St Tropez

BERTH RIGHTPorto Montenegro (above);Puerto Rico marina (below)

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Wealth 7 nov2014

Business

Transcript of Wealth 7 nov2014