DETERRING STOCK MARKET MANIPULATORS IN SINGAPORE
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Quarterly
Issue 13 | April 2014 | www.cfasingapore.org
DETERRING STOCK MARKET
MANIPULATORS IN SINGAPORE
Capturing Smart Betas
What Bets Are Good
For 2014?
Jump Start Your Asset
Management Career
The Era of Fiduciary
Capitalism
NUS Wins Local Research
Challenge
www.cfasingapore.org | Page 1
BOARD MESSAGE Dear fellow CFA Singapore members:
We hope you’ve had an excellent This year, we kicked off the panel
start to 2014. The Society’s various discussion with forecasts of key
committees have been hard at work, market indicators, as well as personal
with a slew of excellent events held portfolio allocations.
in the first quarter. This newsletter
highlights some of the key events. The Career Development Committee
and Asset Management Committee
The University Relations Committee jointly organized a half-day seminar
kicked off the year with the CFA on “Developing a Career within Asset
Singapore University Investment Management” in March. Speakers
Research Challenge. After much included our board members, Asset
deliberation by a panel of industry Management Committee members,
veterans, the NUS team won, with and senior industry colleagues.
NTU as first runner-up. NUS will
represent Singapore at the regional We also had an update by the CFA
finals, which will be held in Singapore Institute on the CLARITAS program.
in late April. CFA Institute leaders addressed
top Singapore employers of CFA
The Senior Members Committee charterholders on the issue of
featured “Capturing Smart Betas” restoring trust to the industry.
in February, with key speaker Raj
Manghani (MD and Head of Risk As always, the Networking
Management Analytics for Asia- Committee provided a steady stream
Pacific at MSCI). of informal events for members to
catch up with each other.
Together with the CFA Institute, the
Advocacy Committee organized a We are, as always, most grateful
dialogue session on “Deterring stock to all the volunteers who are the
market manipulators in Singapore” driving force of our committees.
in March, which was particularly They provide the inspiration and
timely given recent investor leadership for our many events,
concerns regarding small-cap stocks. programmes and initiatives, most
An impressive line-up of speakers ably supported by our Society’s staff.
discussed current conditions,
retail investors’ perspectives, roles Please do approach the committees
of directors, and class action as a or board members if you are
potential deterrence. interested in any area. We hope to
see you soon!
The Professional Development
Committee held the Annual Forecast
Dinner in March. The key speaker
was Steen Jakobsen (Saxo Bank’s
chief economist), with other senior
investment professionals joining the
panel. The Board
Page 2 | www.cfasingapore.org
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www.cfasingapore.org | Page 3
CONTENTS
Deterring Stock Market
Manipulators in Singapore
7
Richard Teng
T.K. Yap, CFA
Mano Sabnani
Adrian Chan
Daniel S. Drosman
Capturing Smart Betas 12
Raj Manghani, CFA
Ashish Goyal, CFA
Dr Chen Peng, CFA
What Bets are Good
for 2014?
17
Steen Jakobsen
Ashish Goyal, CFA
Ng Kheng Siang, CFA
Hou Wey Fook, CFA
Page 4 | www.cfasingapore.org
This magazine is intended to be
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23 Jump Start Your
Asset Management Career
Joshua Teo Arun Kelshiker, CFA
Madeline Ho Paul Bernard, CFA
Freddy Lim Lim Li YIng, CFA
John Ng Kanol Pal, CFA
Ryan Yeo Sean Quek, CFA
Patrick Yeo, CFA Mark Tan, CFA
29 The Era of
Fiduciary Capitalism
John Bowman, CFA
Richard McGillivray
Paul Smith, CFA
32 NUS Wins
Local Research Challenge
Mrs Chin Ean Wah
Kes Visuvalingam, CFA
Mark Tan, CFA
Ong Seow Beng, CFA
Tan See Wee, CFA
www.cfasingapore.org | Page 5
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Page 6 | www.cfasingapore.org
DETERRING STOCK MARKET MANIPULATORS IN SINGAPORE
Industry dialogue with Singapore Exchange and market participants
Many retail investors were burnt SGX AS A MARKET OPERATOR A recent CFA Institute survey
after 3 small-cap stocks crashed in REGULATOR AND FRONTLINE identified market fraud as the top
October 2013, wiping out close to REGULATOR concern of Singapore members
S$9 billion in market value in a mere 3 about the local market. CFA
days. Stock prices of Blumont Group, The Monetary Authority of Singapore, with the support of CFA
Asiasons Capital and LionGold Corp Singapore is the key regulator of Institute, then invited the following
slumped by more than 80%. capital markets. Most of the key industry experts to discuss how
legal provisions overseeing the market manipulation happens,
As market participants came to capital market, including licensing what is being done to deter it and
view stocks, especially small caps, and oversight of market operators possible remedies:
with heightened suspicion, trading and participants such as member
volumes on the Singapore bourse firms and fund managers as well 1. SGX Chief Regulatory Officer
during the first two months of this as administering fund-raising and Richard Teng
year tumbled 40% year-on-year. prospectus provisions are prescribed
under the Securities & Futures 2. Former US federal prosecutor
Market manipulation -- that is, Act and Securities and Futures Daniel Drosman
practices that falsely inflate or deflate Regulations.
stock prices with the intention to 3. Lee & Lee Corporate Head
deceive and affect trading volumes -- As a frontline regulator, SGX is a Adrian Chan
turns investors away from the broad co-regulator that works closely
market in the long run. with the MAS to supervise listed 4. Rafflesia Holdings founder
companies and member firms as well Mano Sabnani
What can be done to restore investor as to monitor market activities. For
confidence? At the closed-door instance, companies seeking listings 5. OCBC Securities Executive Director
event, SGX Chief Regulatory Officer that intend to raise money will have TK Yap, CFA
Richard Teng provided illustrations their prospectuses approved by
on the Exchange’s regulatory role the MAS in addition to having their About 40 senior CFA members
and function. listing applications approved by were at the closed door session
SGX. Also, member firms will need to moderated by Dr. Tony Tan, CFA
be licensed and supervised by MAS (Head of Standards and Financial
over and above their membership Market Integrity at CFA Institute,
approval by SGX. Asia Pacific) in March at Tower Club.
SGX is regulated by the MAS in the
performance of its regulatory role.
www.cfasingapore.org | Page 7
The MAS conducts annual This was unusual as the takeover
inspections on SGX, and has powers price was S$6.25. A trader had
to appoint and remove its board placed a sell order for 200,000 shares
directors as well as key appointment before the pre-closing routine and
holders. withdrawn the order just before it
matched. By doing so, the trader was
SGX is one of the few exchanges in able to shift the equilibrium stock
the world that conduct real-time price to S$6.42.
surveillance. It is also one of the few
exchanges that query companies on SGX called the trader and found
a real-time basis. that he keyed in a sell order for
200,000 shares when he had only
55,000 shares. SGX referred the case
TOOLS USED TO ENSURE FAIR AND to MAS for further investigation.
“Low-priced stocks may be
more susceptible to market ORDERLY TRADING On 22 September 2010, MAS
manipulation - hence the joint announced that it had imposed a
consultation with the MAS SGX has three regulatory tools civil penalty of $50,000 on the trader
proposing the imposition of a
minimum trading price.” to maintain a fair, orderly and and suspended his Capital Markets
transparent. They are: Services representative licence for 3
Richard Teng months.
Chief Regulatory Officer 1. Queries to listed companies
SGX when there are unusual
trading patterns that could not Market abuses and misconduct
explained by market sentiment, such as insider trading and market
industry trends, corporate manipulation are offences under
Mr Teng and his team work closely developments and other factors. the Securities and Futures Act.
with the Monetary Authority of This serves to extract yet-to-be SGX cooperates with the relevant
Singapore in developing and disclosed material information regulatory agencies such as MAS
enforcing rules and regulations as well as to alert investors of and CAD for investigation into such
for market participants. Mr Teng the observed unusual market misconduct as SGX is not a state
joined SGX from the MAS in 2007 action. agency and does not have state
where his last appointment was powers to call witnesses and seize
2. Trading suspension if there records.
Director of Corporate Finance
is threat to fair, orderly and
Division. At MAS, Mr Teng was
transparent trading.
also Secretary to the Securities
Industry Council, the body 3. Designation of a security
responsible for regulating take- where, in SGX’s opinion, there REVIEW OF TRADING SAFEGUARDS
over and merger transactions in is manipulation of the security,
Singapore. excessive speculation, or if it is Before 26 Sep 11, the non-
in the interest of the market. cancellation phase of the closing
Mr Teng graduated from Nanyang routine was fixed at 5:05pm. As
Technological University (First SGX will deploy the appropriate part of its regular reviews, SGX
Class Honours in Accountancy) tool depending on circumstances, implemented initiatives to enhance
and holds a Masters in Applied unusual trading activities observed market transparency:
Finance (with Distinction) from and risks involved. SGX uses • Publication of real-time
the University of Western Sydney. SMARTS, a market surveillance and indicative equilibrium prices
compliance technology solutions during the Opening and Closing
Mr Teng is a Council member system from NASDAQ OMX. Routines
of the Singapore Institute of
Here is an illustration of what the • Random ending to the Pre-Open
Directors and a member of the
system helped SGX surveillance and Pre-Close phases of the
Singapore Divisional Council of
analysts detect: Opening and Closing Routines.
CPA Australia. He also chairs the
Institute of Banking and Finance’s On one occasion just before the
Capital Markets and Financial market closed, the price of a stock In 2012, SGX commissioned a study
Advisory Services Examination that had announced a takeover offer to examine if the safeguards were
Board. jumped from S$6.25 to S$6.42. effective in enhancing market
quality.
Page 8 | www.cfasingapore.org
The findings show that order The extent of market manipulation
amendments were made earlier is partly dependent on the market
which suggest that the safeguards do structure that allows it.
have an impact on order behaviour
as intended. It is also partly dependent on wheth-
er the regulator prefers an approach
More recently, MAS and SGX that is a tighter prescriptive (and pro-
conducted a review of market tective) regime of a closed market, or
structure and practices and a “caveat emptor” disclosure-based
concluded that Singapore’s regime of an open market.
market structure and practices are
fundamentally sound. This is in line Each approach attracts different
with the IMF assessment last year types of market participants.
that Singapore’s financial services
“There is sometimes a fine line
sector is well regulated with a high The reality is that whilst market par- between where you can clamp
level of adherence to international ticipants do not want over-regula- down hard and where you don’t
standards. tion which can stifle market activi- in order not to kill the market. A
measured approach is important.”
ties, they are also likely to push the
There are a few areas of possible regulatory envelope. T.K. Yap, CFA
enhancements. MAS and SGX have Executive Director
OCBC Securities
invited public feedback to these Regulators are always having to
proposals with the aim of further find an optimal balance as markets
promotingorderly trading and evolve because you will always have
responsible investing by imposing: people trying to be smarter and try-
• A minimum share price for com- ing to beat the system.
panies listed on SGX Mainboard Mr Yap oversees OCBC Securities’
So, you can mitigate the risks of mar- Institutional Business Group,
• Collateral requirements for trad- ket manipulation, but I don’t think which includes the institutional
ing you can eliminate the risks if you execution and electronic
• Short position reporting want to open up capital markets. execution teams handling ASEAN
direct execution and ETF block
The consultation paper for review- execution. His experience in
ing securities market structure and WHAT ARE THE COMMENTS FROM the investment and securities
practices also proposed improving THE RETAIL PERSPECTIVE? business over the last 30 years
the transparency of trading restric- spanned local and foreign firms,
tions imposed by broking houses, MANO SABNANI: buy and sell sides, distribution
strengthening the process for admit- The SGX has an onerous task of and origination. He was also head
ting new listings and enforcing ac- watching over the market. My ques- of research and head of sales of
tion against listing rule breaches. tion is whether it is feasible to try to a regional brokerage in the early
know what is going on in the market 90s.
place. The market place is made up
Here is a summary of questions raised of individuals who exercise their own He is advisor to CFA Singapore
at the dialogue and comments from ingenuity. and was formerly on the Board
the expert panelists. of Governors of the CFA Institute.
The broking house is in a position He now serves on the SGX
IT IS IN THE COMMERCIAL INTER- to detect market manipulation by Securities Advisory Committee
EST OF SGX TO ENSURE THAT THE analysing what their clients are in- and other committees of IBF AND
MARKET TRANSACTS WITH INTEG- structing them to do. The persons SIAS. He has also served on MAS
RITY. WHY DO YOU THINK WE ARE in the best position to know what is committees and task forces.
HAVING PROBLEMS WITH EQUITY going on are the dealers and remi-
MARKET MANIPULATION? siers, rather than the investors. Deal-
ers and remisiers have a very good
TK YAP: feel of who is doing what. However,
It is important to understand the ex- there is no regulatory requirement
tent of market manipulation in the for them to report suspicious market
context of a holistic market ecosys- activity to SGX.
tem.
www.cfasingapore.org | Page 9
RICHARD TENG:
As a frontline market regulator, SGX
has an established set of robust rules
to regulate its member firms (broking
houses) and their representatives
against such practices. There
are also robust provisions in the
Securities and Futures Act with
adequate penalties to deter market
misconduct.
ARE THE TRADING
REPRESENTATIVES OF BROKING
“It will be nice if the SIAS takes the “We can do a lot of internal
lead in class action in Singapore. training, but deterrence of HOUSES REALLY CROSSING THE
Lawyers here are not cheap. At an market fraud is going to boil EDGE?
individual investor level, merely down to effective detection and
the first step of locating the effective enforcement of external
relevant affected people already sanctions by a regulator.” TK YAP:
amounts to a lot of effort.” As long as there is an opportunity to
make money, and the desire, people
Mano Sabnani Adrian Chan
Chairman and CEO Head of Corporate will take their chances and walk on
Rafflesia Holdings Lee & Lee the edge. Some of them will even
find ways to walk over the edge
A well-known writer and Mr Chan is Vice-Chairman of the and hope they don’t get caught.
commentator in the mass media, Singapore Institute of Directors That is often driven by greed. You
Mano Sabnani was the Chief and is the Head of the Corporate can’t really anticipate how market
Editor of Singapore’s Business Department at the Singapore participants are crossing the edge.
Times from 1986 to 1992. He was law firm, Lee & Lee, which was That’s why it’s not surprising to see
then appointed Managing Editor founded by the first Prime Minister rules being tweaked after something
of The Straits Times and Head of of Singapore, Lee Kuan Yew. major happens in any market around
the Editorial Support Unit of SPH the world.
English/Malay newspapers. Mr Chan is also the Non-Executive
Chairman of several SGX-listed The management of a broking
He was CEO and Editor-in-Chief firms, including Nobel Design house can inculcate a ‘code
of daily newspaper TODAY from Holding, Isetan (Singapore), Yoma of ethics’ among its trading
2003 to 2006. Strategic and Biosensors. He is representatives (TRs) by laying down
also an independent director on what’s acceptable and what’s not.
During the mid-1990s, he was the Boards of SGX-listed AEM It is quite clear to TRs in Singapore
Director of Research at DBS Holdings and Global Investments. that if they break the rules, they risk
Securities and MD for Equity losing their trading licence. On top
Capital Markets, DBS Bank. He co-authored Singapore’s first of that, TRs also face regular internal
“Annotated Code of Corporate audits by the broking house that
He has also served on the board of Governance” for Lexis-Nexis and they represent, as well as by the
several SGX-listed companies. sits on the Corporate Governance Monetary Authority of Singapore.
and Regulations Committee Everyone knows the rules. On top
of the Singapore International of that, an ethical culture is a good
Chamber of Commerce. He has preventive approach. When I coach
been appointed to the Corporate trainee brokers in my firm, I remind
Governance and Directors’ Duties them this business is about Trust,
Working Group of the Steering Integrity and Professionalism (TIP).
Committee that has been
established by the Ministry of
Finance to review and rewrite the SHOULD DIRECTORS PLAY A
Companies Act of Singapore. BIGGER ROLE WHEN THERE
IS UNUSUAL PRICE STOCK
MOVEMENT OF THE COMPANY
THEY ARE IN?
Page 10 | www.cfasingapore.orgTT
ADRIAN CHAN: DANIEL DROSMAN:
There is very little the board can do Deterrence against fraud is good for
to deal with market fraud, except to investors, is good for the economy
co-operate with regulators. and is in the long run good for com-
panies that are component stocks of
RICHARD TENG: an index.
We co-operate with other regulatory
agencies in investigations. Market In the US, we have a dual public-pri-
manipulation has been more vate anti-fraud enforcement regime
challenging to investigate compared where we have anti-fraud actions by
with insider trading. regulators and we have anti-fraud
class actions by private attorneys. It
To investigate market manipulation, is often not economically feasible to
we need to first consider which file individual law suits on securities
“Securities class action is very
parties may be working in concert, fraud. The economic costs of filing important to institutional
how they work together and how such law suits overwhelm retail in- investors in the United States.”
they are connected. vestors. Even institutional investors
Daniel S. Drosman
are often priced out of taking indi- Founding Partner
It demands more time as we need to vidual action. Robbins Geller Rudman & Dowd
gather more points of evidence.
What a class action does is, it aggre-
MANO SABNANI: gates the claims of all the investors
The charts of Blumont, Asiasons and against the company that issued
Liongold showed a steady upward the stock, in a situation where the A former federal prosecutor and
gradient over one and a half years company has defrauded investors by graduate of the Harvard Law
even though there were no signifi- issuing false and misleading state- School, Mr. Drosman served as
cant earnings. Their prices did not re- ments, thereby inflating the stock one of the lead trial attorneys in
flect the ups and downs of the mar- price. Jaffe v. Household Int’l, Inc. in the
ket due to macro factors. Northern District of Illinois – a six-
Class action addresses the situation week jury trial which resulted in a
Besides share price manipulation, when investors bought the stock at verdict for plaintiffs and a record
when a listed company cooks its ac- an inflated price suffered a real loss. judgment of US$2.46 billion for
counts in order to get a good IPO the defrauded investors.
price, and continues to inflate its In the US, 75% of class action is head-
performance metrics subsequent to ed by a large institutional investor Mr. Drosman also led a group
being listed, all who invested will be with professional managers. What of attorneys prosecuting
affected. That is market fraud from a that does is, it maximizes the return fraud claims against the credit
different angle. to that institutional investor from rating agencies, where he is
taking up the law suit. distinguished as one of the few
When the market capitalisation has plaintiffs’ counsel to defeat the
become massive, such companies Empirical data shows that private se- rating agencies’ traditional First
can raise new money by issuing curity class action law suits are able Amendment defense and their
shares to unsuspecting investors. to return more money to investors motions for summary judgment
This is market fraud, where investors than regulatory action. They are also based on the mischaracterization
get hurt when the stock falls off the often more effective. Private security of credit ratings as mere opinions
cliff. class action law suits also compen- not actionable in fraud.
sate in ways that regulatory action
law suit does not.
HOW CAN CLASS ACTION, WHETH- Take the Enron scandal for example.
ER AGAINST COMPANIES OR DI- Regulatory action by SEC recovered
RECTORS, BE A PRIVATE MARKET US$444 million for investors while
MECHANISM TO DEAL WITH MAR- private law suits returned US$7.3 bil-
KET MANIPULATION? lion. In the case of WorldCom, the
SEC recovered US$750 million while
private law suits returned US$6.1 bil-
lion.
www.cfasingapore.org | Page 11CAPTURING SMART BETAS
MSCI MD Raj Manghani, CFA on ‘Factor Investing’
Smart beta and risk premia are Traditionally, investors associate WHERE DO RISK PREMIA EXIST?
today’s buzz words among fund two types of strategies with return
managers. If ‘beta’ is the return sources:- There are three main categories of
from the broad market, than ‘smart factors: macroeconomic, statistical,
beta’ is the excess return from stocks 1) Passive strategies capture broad and fundamental.
selected based on a factor that has market beta via passive replication
historically been proven to drive of cap weighted indices. Macroeconomic factors include
outperformance. measures such as surprise numbers
2) Active strategies capture alpha via relating to inflation, GNP, the yield
Raj Manghani, CFA, a Managing asset allocation, stock selection, and curve, and other measures of the
Director and Head of Risk market timing. macro economy.
Management Analytics for Asia-
Pacific at MSCI, spoke with senior According to Raj, with the The mostly widely used factors are
CFA members on its MSCI Analytics identification and advent of risk fundamental factors, which capture
at an exclusive round table event premia strategies, there is now a 3rd stock characteristics such as industry,
held at Otto Ristorante in February. return source that you can capture country and valuation ratios.
either passively through replication
of indices or actively via active factor
allocation and factor timing.
MSCI factor indices enable investors
to capture risk premia via factors
that drive stock returns, be it value,
size (market cap based), trading
momentum, or volatility.
In general, a factor can be thought
of as any characteristic relating to a
group of securities that is important
in explaining their returns and risks.
Page 12 | www.cfasingapore.orgSYSTEMATIC FACTORS WHAT IT IS CAPTURED BY
Value Captures excess returns to stocks Book to price, earnings to price, book
that have low prices relative to their value, sales, earnings, cash earnings,
fundamental value net profit, dividends, cash flow
Small Caps Captures excess returns of smaller Market capitalization (full or free
firms (by market capitalization) float)
relative to their larger counterparts
Momentum Reflects excess returns to stocks with Relative returns (3-mth, 6-mth, 12-
stronger past performance mth, sometimes with last 1 mth
excluded), historical alpha
Low Volatility Captures excess returns to stocks Standard deviation (1-yr, 2-yrs,
with lower than average volatility, 3-yrs), downside standard deviation,
beta, and/or idiosyncratic risk standard deviation of idiosyncratic
returns, Beta
Dividend Yield Captures excess returns to stocks Dividend yield
that have higher-than-average
dividend yields
Quality Captures excess returns to stocks ROE, earnings stability, dividend
that are characterized by low debt, growth stability, strength of balance
stable earnings growth, and other sheet, financial leverage, accounting
“quality” metrics policies, strength of management,
accruals, cash flows
Well-known systematic factors compiled by MSCI
FRAMEWORK FOR FACTOR INVESTING
ASSESSING THE ROLE OF SELECTING FACTORS AND IMPLEMENTING
FACTOR INVESTING FACTOR COMBINATIONS FACTOR INVESTING
• Investment belief • Investment thesis / • Governance structure
rationale of each factor
• Investment objective • Policy vs. Strategic vs. Tactical
• Single vs. combinations of factors
• Where does it sit in an asset • Index Selection
allocation framework? • Historical risk & returns
• Investability, Liquidity
• Role of factor portfolio in • Business / macro cycles and capacity considerations
an investment
• Active vs. Passive
• Performance monitoring
and measurement
www.cfasingapore.org | Page 13Here is a summary of Raj’s replies When there are changes in economic
to questions raised by senior CFA regime (and this could happen in a
members at Otto Ristorante. 5 year period), there can be down
cycles for a factor strategy as borne
out even historically.
ARE THERE ANY INDEX FUNDS
RUNNING ON THESE FACTOR However, over a long period (25+
MODELS? years), the returns are unarguably
favorable.
iShares has selected strategies such
as Minimum VAR ETF. Over a course of a business cycle,
what we have observed is that
certain strategies such as value
“Since we started measuring WHAT IS THE PUSH FACTOR FOR are rewarded for bearing macro-
the different returns associated PROMOTING FACTOR INVESTING? economic risk.
with using different brokers, we
started noticing who did a better
job. This allowed us to negotiate Results are impressive from a In other words, value companies are
for better service.” historical perspective. hit more during a down cycle because
Ashish Goyal, CFA they are generally associated with
While past performance is not having physical assets that tend to
Mr Goyal is Investment Director indicator of future returns, the become under-utilized as demand
at Eastspring Investments cumulative returns from factor drops, but are also the first to recover
(Singapore), formerly known as investing are clearly favorable over a when the business cycle becomes
Prudential Asset Management long-term historical perspective. more favorable.
(Singapore).
Also, funds are able to track a factor Similarly, other factor strategies such
portfolio based on investability as size, momentum, and quality
considerations, which is an important will be impacted by changing
factor for large investors such as economic and interest rate regimes
sovereign wealth and government and could produce period of under-
pension funds. performance.
Investability considerations are Even taking the business cycle into
important is because the turnover of account, factor strategies earn a risk
these of these strategies can be 5 or premium over the long term: Either
6 times that of a traditional market for bearing systematic risk related
cap weighted benchmark. to the marco-economy or due to
systematic errors in the market
whereby certain underpriced stocks
ASHISH: subsequently earn a higher return.
“We add value by using factors as
well as via carefully managed and 2013 has been one particular
sophisticated trading.” economic regime characterised by
Dr Chen Peng, CFA
falling interest rates. Over the next WHAT CONSTRAINTS DO YOU USE
few years, the economic regime WHEN YOU CREATE A FACTOR
could change with higher interest EXPOSURE?
Dr Chen is Asia CEO at Dimensional
rates.
Fund Advisors. Dimensional has
We use the Barra value factors to
assets under management exceeding
You can have a monetary easing create the value-weighted portfolio.
US$300 billion. There are 11 legendary
policy for 15 years, and then it If you have a pre-determined set
financial economists (such as Nobel
becomes tighter. Nobody knows of sector constraints, you can use
Prize winners Eugene Fama, Myron
how that can affect payoffs and the MSCI Analytics to create a
Scholes and Robert Merton) directly
persistency of returns over the next customized index.
associated with Dimensional.
5 years on the factor index.
Page 14 | www.cfasingapore.orgHOW DO YOU REBALANCE YOUR How much of the variation
FACTOR PORTFOLIO? FOR EXAMPLE, from benchmark is due to the
HOW FREQUENTLY? systematic risk factor?
DR CHEN:
Our data is long-term and our current Using a risk model framework like the Dimensional has been doing factor
rebalancing frequency of the indices MSCI equity model, one can measure investing in one way or another for
is quarterly for size, semi-annual for how much of the risk that is being the past 30 years.
value and volume, and monthly for compensated is systematic and how
momentum. much is unsystematic due to market We invested in small caps before
behavioral factors that create pricing there were small cap indices. We
During early 2000s, the dot com anomalies in certain stocks. invested in value companies before
bubble burst. During 2008, there there were value indices.
was the global financial crisis. The good thing about the MSCI
factor indices is that the underlying However, over the past 30 years, we
Value stocks tend to be hit the most MSCI risk factors used for these have found that the performance
during downturns. Our analytics various strategies can be easily drag on implementing these factor
interface allows you to splice the and transparently analyzed and strategies is huge.
data to different time periods. decomposed in terms of exposure
and risk characteristics using
available MSCI analytics.
HAVE YOU DONE ANY RESEARCH THERE ARE SOME FUND MANAGERS WHAT ARE YOUR LARGE
ON THE LEVEL OF DISPERSION OVER OFFERING ‘SMART BETA’ MANAGED INSTITUTIONAL CLIENTS DOING TO
TIME? E.G. IF THE SHARPE RATIO IS PRODUCTS. WHAT ARE THE COST MITIGATE THAT COST?
0.5, WHAT IS THE DISPERSION OF ADVANTAGES OF OFFERING
YOUR SHARPE RATIO OVER ONE INDEXED PRODUCTS COMPARED The larger the client, the better the
YEAR? TO OFFERING THE ‘SMART BETA’ terms they can generally procure
VERSION OF MANAGED PRODUCTS? from various intermediaries and
We have done studies and found the service providers.
Sharpe ratio to be fairly robust over a One would expect costs to be
25-year sample period. generally lower for passive factor However, the larger the fund,
strategies as compared to their the greater is the investability
managed counterparts. consideration in terms of capacity,
WHAT KIND OF FEEDBACK ARE YOU tradability, costs, and tracking error
GETTING ON THE FACTOR INDICES? Alpha strategies will stay. True alpha of the strategy relative to its market
managers earn their worth with a cap weighted benchmark.
The feedback has been positive. portfolio is truly uncorrelated to
We have worked with a number of systematic sources. All else being equal, the more passive
large investors including a detailed the strategy, the lower the cost, the
published research study that was Based on our experience, many higher the transparency, tradability,
done with the Norwegian Ministry of institutional investors are looking and capacity.
Finance on using factor strategies for at how traditional alpha and factor
large scale portfolios. strategies, indexed or active, can co-
exist.
A number of large pension and
sovereign wealth funds have been It is possible that some institutional
working with our historical data investors many decide to bring down
to conduct their own tests on the costs by deciding to replicate in-
efficacy of factor strategies in the house some active strategies, which
context of their specific needs and are really factor strategies disguised
constraints. as pure alpha strategies, with factor
indices.
www.cfasingapore.org | Page 15This returns captured do not include transaction costs or market impact, but are still favorable assuming expected transaction
costs. MSCI can be contacted to understand the drag on performance if you include different transaction costs and market impact
assumptions.
ACWI ACWI EW ACWI RW ACWI MV ACWI VW ACWI HDY ACWI QT ACWI MO
Total Return* (%) 8.7 12.8 12.9 11.1 9.2 9.8 9.8 11.4
Total Risk* (%) 16.5 19.5 16.2 11.2 17.9 17.1 14.4 17.8
Return/Risk 0.52 0.66 0.80 0.99 0.52 0.57 0.69 0.64
Sharpe Ratio 0.47 0.62 0.71 0.82 0.47 0.52 0.59 0.59
Active Return* (%) 0.0 4.1 4.3 2.4 0.6 1.1 1.2 2.7
Tracking Error* (%) 0.0 4.9 3.4 7.6 2.6 4.2 4.0 7.7
Information Ratio NaN 0.84 1.26 0.32 0.22 0.26 0.29 0.35
Historical Beta 1.00 1.15 0.96 0.62 1.08 1.00 0.85 0.97
Turnover** (%) 3.0 17.6 22.3 22.4 16.6 18.5 22.5 93.1
Price to Book*** 2.0 1.7 1.8 2.3 1.6 1.9 3.8 2.9
Price to Earnings*** 16.1 18.4 16.9 17.1 15.8 12.3 14.5 19.2
Div. Yield*** (%) 2.5 2.4 2.8 2.9 2.8 4.3 2.4 1.8
MSCI ACWI (market cap) 100.0
Equal Weighted (EW) 100.0
Risk Weighted (RW) 100.0
Minimum Volatility (MV) 100.0
Value Weighted (VW) 100.0
High Dividend Yield (HDY) 100.0
Quality (QT) 100.0
Momentum (MO) 100.0
* Annualized in USD for the 05/30/2003 to 05/31/2013 period
** Annualized one-way index turnover for the 05/30/2003 to 05/31/2013 period
*** Monthly averages for the 05/30/2003 to 05/31/2013 period
The definitions of all statistical parameters are available in the Appendix
Factor indices that consistently show superior returns when benchmarked against the MSCI All Country World Index (ACWI ,
Factor
which indicesthe
represents that
fullconsistently showopportunity
equity investment superior returns when
set). (Data benchmarked
Source: MSCI) against the MSCI All Country
World Index (ACWI, which represents the f ull equity investment opportunity set). MSCI data
Page 16 | www.cfasingapore.orgWHAT BETS ARE GOOD FOR 2014?
Views from an economist, equity & fixed income fund managers, and a private banker
How will equities do this year? Are
markets overvalued? Will cyclical stocks
outperform dividend yield stocks? How
will the fixed income markets do as
The CFA Singapore Annual Forecast WHY STOCKS WILL UNDERPERFORM interest rates rise? What are the risks in
Dinner took place on 25 March 2014, THIS YEAR the year 2014?
a week after the US Federal Open
Market Committee announced the “The two main conclusions I have These issues were tackled at the Society’s
continued tapering of its monthly today are: Firstly, the stock market Annual Forecast Dinner held on 25
purchases of mortgage-backed is lagging the real economy by 3 March 2014. Panel speakers included an
securities and long-term Treasuries, months. More importantly, the economist, an asset allocator, an equity
which will be balanced by low interest rate cycle leads the real portfolio manager and a fixed income
Federal funds rates. economy by 9 months. Exactly 9 portfolio manager.
months ago (during May to June
However, Steen Jakobsen (Saxo 2013), all the talk was about tapering. Saxo Capital Markets was the exclusive
Bank’s chief economist), who was sponsor for the event.
the keynote speaker at the Forecast “The consequences of that move
Dinner, believes that the US Federal are being felt right now. Do not
Reserve will not be able to carry on underestimate the impact of
with the tapering. Federal Reserve policy decisions
on the currency and interest rate
He thinks there will be a severe sell- environment down the road.
off in equities markets by the end of
this year. “A businessman may decide on some
corporate action based on today’s
The following is a summary of interest rate. But it will be at least 6
Mr Jakobsen’s address at the CFA to 9 months down the road before
Singapore Annual Forecast Dinner. he would have secured financing
or invested. What happened last
year explains a lot about what goes
on now. The price of higher rates is
immediately felt in the economy.
www.cfasingapore.org | Page 17“Out of the 25 indicators that we Mr Jakobsen pointed out that
have in Saxo’s forecasting model, 20 growth in the US housing market
indicate that the US economy will has been slowing after the tapering
turn down in 2014 and hit a low. began.
The interesting thing is: As we come In the chart below, an inverse
out of 2014 into 2015, we expect relationship between the 30-year US
higher growth and higher inflation. mortgage rate and building permits
shows a very strong correlation
“Some people think the low interest between the lack of growth in the US
rate environment will persist. housing market right now and the
interest rate increase since May last
Anyone in fixed income will realize year.
short term interest rates stopped
going down a long time ago. He also pointed to a chart from
Steen Jakobsen the San Francisco Federal Reserve
Chief Economist A chart on GDP-weighted interest website that clearly indicated that
Saxo Bank
rates of G10 nations shows that last the US growth will come down
year, one-year interest rates of large dramatically this year.
Steen has more than 25 years of economies moved 72 basis points
experience in proprietary trading down, and then back up by 58 basis The San Francisco Federal Reserve
and alternative investment with points.” should be on the same page as Janet
in Hafnia Merchant Bank, Chase Yellen, since she was formerly its
Manhattan Proprietary Trading President.
Group, Swiss Bank Corp, Nordea
and UBS. He speaks regularly on
BBC, Bloomberg and CNBC.
Mortgage rates, which dropped to its lowest ever af ter QE3 was announced in September 2012, rose
af ter the US Federal Reserve decreased its monthly f und injection into mortgage-backed securities
Page 18 | www.cfasingapore.orgLim Li Ying, CFA
Chief Investment Officer
Singapore Labour Foundation
Ms Lim was moderator for the Annual
Forecast Dinner. She is also the
Chairperson of CFA Singapore’s Asset
Management Committee.
Taken f rom the San Francisco Federal Reserve website in March 2014,
the chart clearly indicated that US growth will come down dramatically Ms Lim started her investment
this year. management career in fixed income,
moving thereafter to global multi-
asset including asset allocation. She
“The reason US stock market valua- CFA Singapore members generally has held previous appointments
tions are rich even though we have believe tapering will be completed this with the Government of Singapore
high unemployment and low pro- year. Investment Corporation, Barclays,
ductivity is because we have a 80:20 Norges Bank Investment Management
economy. They are expecting a significant sell- and DBS Asset Management.
off in US 10-year Treasuries.
80% of all the companies are SMEs.
This 80% accounts for 100% of job As much as 30% to 50% of their port-
growth, but are only given 20% of folio is allocated to cash.
US credit financing.
Mr Jakobsen is looking at a sell-off of
On the other hand, listed com- equities in the US and in Singapore.
panies, which account for 20% of
companies, get 80% of the credit He is expecting a weaker Euro and
financing.” stronger Yen.
His personal investments are 70% to
The following discussion is based on a 90% in investment grade bonds, and
survey of CFA Singapore members as he finds 5- to 10-year bonds most
well as panel speakers on their views attractive.
for 2014 and their personal portfolio
allocation strategy.
www.cfasingapore.org | Page 19However, Hou Wey Fook is bullish on the equities market. He is expecting a nice
rally in the S&P. He is expecting the tapering to be near completion by year-end.
He is also expecting a stronger US dollar.
His personal investment portfolio is 90% to 100% in stocks.
WEY FOOK:
My central premise is the US will The shale gas boom has also made it
be the market that will do very well more competitive.
compared to the rest of the world.
The US will continue to attract a lot
The US accounts for 55% of the of cash out of the emerging markets.
world’s equities market. As it starts to
recover, it sucks the excess liquidity You can see this coming from the
out from every corner of the world. massive amounts of cash allocation
Hou Wey Fook, CFA in Singapore private banks -
MD & CIO
Bank of Singapore You are seeing the effect of that in currently in the region of 30% to
stocks and currencies, and that has 40%. (Singapore is one of the world’s
Wey Fook has 26 years of fund some way to go. largest private banking centres.)
management experience. He
started his career with the GIC, The US economy is recovering I am extremely bullish on US equities.
and then joined OCBC, where he nicely because it has become more Valuations are not cheap, but not
managed portfolios of bonds, competitive. Its wages have been overly expensive.
equities and funds. He now chairs stagnant for the past 10 years.
the BOS investment committee. I am completely invested in US
He also oversees the management Today, it is the most competitive exchange traded funds.
of clients’ discretionary portfolios. economy in the world.
Page 20 | www.cfasingapore.orgAshish Goyal is looking at the US Fed tightening as the main factor influencing
the markets. He is expecting a weaker Euro and no change in the Yen.
He has a balanced portfolio.
ASHISH:
Most of the forecasts will be wrong When government bonds are ab-
at the end of the year, but what is normally priced for a long time, as in
important is the thinking behind the case of Japan, how do you value
them. equities?
My framework of thinking is the Should equities trade at 15 to 16
world’s got a mountain of debt. times earnings, which may be the
market average?
To chew through that debt, you Ashish Goyal, CFA
Investment Director
need growth. Or should they trade at higher valua- Eastspring Investments (Singapore)
tions, given the low interest rates?
I don’t think the growth is coming Ashish has over 20 years of investment
through. I don’t share the optimism that mar- experience, all at Eastspring
kets will go up. Investments working out of offices in
You face a tough environment this Singapore, Hong Kong and Mumbai.
year and for the next several years if I do care a lot about valuation and I He focuses on Asian Equity strategies
you are thinking of making a lot of don’t see great valuation in equities overseeing over USD4 billion of client
money. anywhere in the world. assets.
Investment returns will be much You can always find a company with
harder to come by compared to the great business.
last 10 to 20 years.
But in general, it is very hard to
In that kind of environment, income- make the case to be long on equi-
related instruments will do very well. ties.
In the last 4 to 5 years, dividend Most of the money in my personal
stocks have done very well - much portfolio is in fixed income.
better than they have done over the
very long term. Duration in my portfolio is a bit
shorter than I would like it to be and
I think that will be a recurring theme. I will have to rethink my portfolio.
My background is mainly in equities, I’m not optimistic about the US shale
but I’ve done other things. gas boom.
One of the challenges that I’ve had I think in this year and the next,
is: How do you value equities when people will see how little economic
there is severe mispricing in govern- value that has created for the opera-
ment bonds? What is your cost of tors of shale gas.
capital?
In normal circumstances, you derive
your cost of capital from the return
on 10-year government bonds.
www.cfasingapore.org | Page 21Ng Kheng Siang is expecting tapering to be complete at the end of this year and
a sell-off in US 10-year Treasuries.
He has a balanced portfolio.
KHENG SIANG:
I don’t think the Fed wants to rock I don’t think the economy is strong
the boat by changing their forward enough to warrant a much stronger
guidance unless they see strong yield.
evidence of data that warrants a shift
from the view it has given. I think that even when the Fed starts
normalizing interest rates, it will do
I think they want to give the market a so at a very slow pace.
sense of certainty so that the market
Ng Kheng Siang, CFA can see where they are going. I will still have some allocation to
Asia Pacific Head of Fixed Income
State Street Global Advisors bonds, but more on corporate bonds
The market is well-prepared for what rather than government bonds.
Janet Yellen said about the tapering
being completed at the end of this I think credit spreads will tighten a
year. little further.
Kheng Siang is responsible for
leading SSgA’s Asia Pacific fixed They are looking at some form of I still believe in the stock market
income teams managing global recovery and normalization of the recovery, so I personally still have
and local fixed income mandates. interest rates that will soon come. exposure of 10% to 30% to stocks.
Prior to joining SSgA in 2005,
he was a global fixed income In the fixed income world, as the Fed I would also keep a fair amount
portfolio manager at ABN AMRO. tapers off its asset purchase program in cash because I think there will
He started his career as a Portfolio and starts thinking about raising Fed be opportunities for investors to
Manager at Bank Negara Malaysia, funds rate in the future, the bond tactically shift asset allocations
where he managed fixed income market will start pricing in higher around.
portfolios of the foreign reserves yields.
and was Head of Financial Market I will only buy bonds when they
Analysis. I think bond yields will have to adjust trade closer to 3-1/4 to 3-1/2.
upwards.
At a turning point, there will be
As the economy continues to opportunistic trading opportunities.
improve, I believe the S&P will likely
do fairly well (up around 10%), but So, I have some allocation in
not as well as last year. Similarly for alternative investments based on
the STI. global macro factors.
The rebound in economic growth
will come but not from a strong base.
I don’t think the economy will
rebound as strongly as in the past.
In the past, when there was a
recession or weak growth, we tend
to see a V-shaped recovery, but we
are not seeing that this time round.
Page 22 | www.cfasingapore.orgJUMP START YOUR
ASSET MANAGEMENT CAREER
Mr Paul Bernard, CFA, who retired as 3. UNDERSTAND YOUR How to get into the asset management
a Goldman Sachs Managing Director JOB DESCRIPTION industry has always been less
in 2011 after being in its Investment Understand what your job transparent than other sectors.
Research division for 19 years, had description is, not only your job title.
the following pointers for those What does your boss actually want To demystify things for job-seekers,
starting out in their career. you to do? It’s an important dialogue CFA Singapore’s Asset Management
to have with your boss. How is your & Career Development Committees
success defined? hosted the first “Building Careers in
1. DO SOMETHING STIMULATING Asset Management” Seminar on 29th of
Whatever the job, it should be “At times when I was running a March, 2014 on the University of Chicago
something you find stimulation in. research department, the most Booth School of Business campus in
If not, you should look for another important thing was managing Singapore.
job. You spend an exceptionally high costs. At other times, it was about
proportion of your life at work, and building an onshore China research Thirteen top tier senior asset
there are trade offs. presence more quickly than anyone management professionals volunteered
else could.” The environment will their time across the half day seminar
“I noticed a lot of people ended up dictate what success is. presenting and discussing with over
in jobs because they thought were 130 university students and young CFA
prestigious or something they could professionals during two panels and a
talk to their families about. You don’t 4. MAKE YOURSELF NECESSARY rotation around smaller working table
want to come to a realization that If an organization finds you a groups similar to “speed dating”.
you don’t like what you are doing necessity, it will go out of its way to
when you are in your mid thirties or take care of you. Arun Kelshiker, CFA, CAIA, who is a
forties.” member of the CFA Singapore Asset
Management Committee and the Head
2. DO YOUR JOB 5. SEEK FEEDBACK of Investment Research for Oclaner Asset
EXCEPTIONALLY WELL Seek feedback from your bosses and Management, facilitated the event.
That’s the only way you can move up peers on how you’re doing in what
in an organization. you’re doing. This feedback is often CFA Singapore would like to thank
not forthcoming during the early the generous efforts of the volunteer
part of your career, so you have to organising team lead by Ms. Toh Shiling,
aggressively go out there to find that together with Ms. Tao Jingyang and Mr.
out. Loy Xing Tai.
www.cfasingapore.org | Page 236. ACT THE PART Your prospective bosses are going to
Think about how you dress and the hire you partly based on what they
things you say. know or have heard about how you
performed in your current job. They
want to know you can work with
KNOW WHAT YOU ARE GOOD AT other people. They want to know
you can see things to fruition.
LI YING:
It is very difficult to graduate out of When you know your goals, you have
school and have made plans knowing to build up on that and that involves
what the rest of your life will look like a personal choice of getting out
and what your career will look like. of your comfort zone. You have to
You should have some aspirations know what you look like to the rest
and you should have dreams, but of the world. You have to fit in and
Paul Bernard, CFA they are going to change along the show how you can improve things
Managing Director way because you are going to learn for them.
TTS Advisors
things and you are not going to be
IT’S A VERY SMALL WORLD exactly the same person.
TENACITY IS IMPORTANT
In the asset management business The most important thing is to get
on the portfolio management side, good exposure because you need to MADELINE:
you will have a number of brokers find things out. You need to see how We may not always know what
who will be kicking down your door you actually perform in different we want to do when we start out
to get your attention. They will wine aspects. You need to find out what and I’ve seen people change roles
and dine you and tell you how smart you are good at. when they don’t achieve success to
you are just to get commission their expectations after two years.
dollars. That sort of perception of If you are just rotating from one place There are many sub-roles in asset
power, even at a junior level, can be to another, but are not outstanding, management and I see people going
quite intoxicating. people don’t know where to put you. to the client side, and then returning
Your bosses and potential bosses to the asset management side.
I’ve seen a number of people look at you in terms of the attributes
become nasty or petty in how they you bring to the table for the team. You need to exceed your current role
dealt with brokers. A few years ago, That is, the skill sets you have. This before you think about something
there was a guy in the Singapore could be quantitative, or it could be else.
market who seemed to revel in people-oriented. But you need to be
being a jerk to as many brokers as really good at something and know
possible. He lost his job. No broker what you are good at. LEARN SOMETHING EVERY DAY
would ever recommend him. He
spent three years in Singapore You need to be operationally ready The Chinese say that if you don’t
looking for a job and had to leave because you never know when an move forward, you are automatically
the country. opportunity is going to knock on moving backward. That is, your peers
your door. will move ahead of you. If you are not
More positively, I have been in a job that makes you feel that you
the beneficiary of many former You may not know what that can learn every day, you will find
colleagues and clients actively opportunity is going to be, but you yourself feeling complacent.
helping me out as I’ve started my have to be ready to jump and go for
own business. People have long it. You will then find yourself overtaken
memories, and they like to help by those who are hungrier, more
those who have helped them in the While you’re being flexible in looking aggressive, and who move much
past. for opportunities, you need to be faster than you.
committed in what you’re currently
doing.
Page 24 | www.cfasingapore.orgYou can also read
