BF2206 Notes 123 PDF

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Week 1

Contingent convertibles (Cocos)

Why does strategic asset allocation (SAA) work? - EXAM QNS - Market Timing - It’s about the Time in the Markets, not Timing the Market - Diversification - Diet - Emotional Investing - Rebalance every 6months because assets prices change

Goal - Intent - Action

Equities and Bonds are tilted towards the US.

Increase Revenue or Reduce Cost

Which Equities and Bonds to take?

When you talk, be intelligent or funny Let the client do the talking

Project: 1 market for Equities and Bonds each - 10 countries - 1 country for Equities, Bonds and Currency

Know the asset Know your perspective of the market Know how to participate in the markets Know your (financial) specific goals Facebook: 220six

Sugarcane or Bonsai Banker My financial plan: Retire before the minimum retirement age, Plan to live until 80, Get married by 28, Packgage 50k Have a house by 28, BTO 400k - 500k Have my 1st kid by 30, Have a total of 2 or 4 kids Project: Find an individual and do up their wealth management risk profiling Does the questionnaire and asset allocation model work? (Risk Profile)

How to participate 1) Funds 2) Direct 3) Structured Products Project: Only Funds, - 3 funds for EQ and FI each - all EQ/FI funds must be same currency - e.g. 3 funds following China Tech - select the best fund - must answer to your market views - Need to identify goal, intent and action - present on week 5, not graded

- It does work in general.

- Market view presentation on week 8, not graded - cover big 3 economies + SG - Final presentation

- However, your true north may not be given to your bank. - Your true north may not be updated

8717 1717

Risk ability or Risk tolerance takes precedence - Bank’s perspective - Both important, take the lower score - Bryan’s perspective - Risk ability - Because you will lose it - changes with time

Week 3 Insurance Risk retention, keeping the risk - have money in the bank to pay hospital fees Risk transfer - buying insurance, insurance companies getting insurance from reinsurance companies Participating policies - cash value at the end - premiums will be pooled into a par fund - par fund: just another portfolio (underlying) - most returns will go back to customers Non-participating policies - no cash value - most profitable for insurance companies - e.g. accident plans CPF - OA - SA - Medisave  Funds the medisave life account  Integrated shield plan (ISP) (private plan) ISP - covers most, except co-insurance and deductible - deductible fixed per year - co-insurance (%) CPF Life scheme - annuity plan - 3 types of plans Individual Insurance - Endowment (Par) - Whole Life Insurance (Par) - Term Insurance (Non-par) - Riders (Non-par) Types of Term Life Insurance - Decreasing term (mortgage insurance, tagged to mortgage amount) - Increasing - Leveled

Types of Endowment - Vanilla - Limited Pay - Guaranteed Insurance Option - Single Premium Investment Linked Plans -underlying = portfolio - Y1 = 15% - Y2 = 25% - .. - Y5 = 100% - Charges - Sales and Management fees - Death and TPD charges / Sum Assured  increases every year Critical Illnesses - take about 5-7 years to recover - if relapse = gg - hence income should come during 5-7 years Cost of un-insurance vs Cost of insurance

Week 5

Action - Achieve x% return by which age

Easier money because of lower interest rates > Rising real estate prices > Rising inflation > Rising interest rates (by government) > Propensity to consume, invest decrease and propensity of savings increase > Cost of borrowing/ Discount rate increase = Companies are less valuable and less growth = Stock price decrease

Risk (Insurance)

Falling resources = commodities

Profile - SAA

Non-farm payrolls - Unemployment - Inflation - Fed

Goal - Retire by? Intent - How much $ by when?

- Diversification - Time in the markets - Emotional investing - ability & tolerance

Foreign reserves = FX reserves = more for commodity exporting countries

EQ/FI split allocation

1) Demographic - age, race, profile 2) Balance sheet / income - Critique Risk ability 3) Insurance Portfolio (Gaps: amount for what type) 4) Risk Profile - SAA (No effort) Why SAA? - Diversification - Time - less emotional investing 5) Goal, Intent, Action US, Japan, China, UK, SG, Germany, Brazil Turkey, Vietnam, India

In US, interest rates have been increasing but the S&P500 has been peaking. Why? - Interest rates still low - S&P500 mainly “carried” by tech stocks OR - Growth driven inflation is okay Where is SG on the investment clock 1) Stocks falling, STI 1 year low - 3,134.39 - confidence in SG economy is fading 2) Interest rate high, SIBOR 8 year high SOR SIBOR

17 Aug Nomura reports

3) SG unemployment rate: 2.1% - good, low and stable at 2% ** Look at wage number

Your age = % in bonds If more aggressive, - 10%

Buy or sell SG - can back up with other macro news, e.g. T5

Philips curve, J curve

We were lucky to have the Suez canal open, as trade routes flow through us. We are prepared for artic routes opening, placing ports (PSA) along Alaska.

Inflation is a function of growth - no inflation = no asset growth = no investments Central bank should be independent from the govt because they sort of want different things - Central bank controls inflation

Opening up T5 and new port in Tuas - just to be prepared for further trade - connectivity is important - we do trans-exporting, managing shipping inflows and outflows - Thailand actually makes sense as an airhub

Week 5

Bonds are affected by 3 factors

Define Why? Give an example

Risk free e.g. Fed Funds rate Inflation premium e.g. time Credit default spread

- Short Term Govt bonds Risk free Solid company Short tenor

- Defensive Sectors A defensive stock is a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market. E.g. Consumer staples such as Walmart Because of the constant demand for their products, defensive stocks tend to remain stable during the various phases of the business cycle. Or interest expense decreases during a recession, while the top line is constant hence net income increases. Or Less leveraged sectors which are less affected by high interest rates

Corporate bonds, 3 factors but only have 2 - sexy yield - solid company - short tenor - Growth stocks Supposed to grow faster than average stocks. No dividends. Secular growth trends (long term) are less affected by economic cycle. - Millennial values - e.g. e-sports & gaming - automation - silver care - electric vehicles - angry societies - e.g. domestic/defense - Boeing, not affected by trade wars

Most tech companies are cash positive, little debt. Exception: Tesla

- High Quality Assets

Going into a recession, investors may seek a mix of stability and income. Still higher yield than similar maturity government bonds

- Rate Sensitive sectors e.g. REITS Industrial reits (most affected as longer tenor lease) Commercial reits Hospitality reits (least affected as room rates can change)

Credit spreads won’t increase as much

e.g. Telcos (highly leveraged)

- Long term govt bonds Generally have maturities longer than 10 years.

- Corporate Bonds More returns than govt bonds but safer than equities Safer as higher seniority to claim

E.g. Investment grade bonds - BBB-/Baa3 and above

E.g. 10 year T-bill Going into a recession, interest rates won’t rise for a long period of time, hence not much reinvestment risk.

Russell 2000 - small cap firms

- High yield bonds / Small caps The worst is over, try the funky stuff now - Small caps Easily moved by retailers Large caps stock are moved by large institutions which require a long period of time to move

Early cycle - low interest rate environment less propensity to save - economy is improving, rising employment and consumer spending - e.g. industrials e.g. caterpillar - e.g. financials e.g banks

Spreads - difference between risk free rate and where the company is trading at

Value stocks - trading at low valuation multiples - could be laggards

Types of bonds Callable bonds, higher coupon Puttable bonds

Inflation Linked bonds - e.g. tips - protection against inflation

YTM YTC, Yield to call YTW, Yield to worst

Late cycle sectors - inflation linked (function of growth) - e.g. energy sector

Liquid bonds - about 25 bps - very liquid very tight

Overseas shares -

Currencies - some are controlled - e.g. RMB, Won, ringgit

Recessions are good and bad - Short term bad - Long term good

Commodities - function of energy sector

Difference between RMB and CNY

AUDSGD = AUG/SGD

Issuer rating =/= Issue rating

EGANU - Naming convention - Eur, Pound, AUD, Kiwi, USD - don’t have SGD/AUG

Coco = contingent convertibles - created during the GFC

Commodity block (interest rate sensitive) - AUD/NZD/CAD - AUD trades lots of iron ore to China - AUD linked to HS index - NZD (milk), CAD (oil) Funding currency (Safe haven currencies) - JPY/CHF/USD Euro block - EUR/GBP - ECB/ BREXIT Swiss forex app USD/JPY EUR/USD

Week 6

1st lien - secured against an asset

Raising rates, Yield curve Stock analysis What happens when a stock get kicked out of an index PEG = (P/E) / Growth P/E fluctuates, ask yourself if it is justified above/below the average Sentiment vs Valuation Sentiment - timing your entry point - cheap can be cheaper Valuation -fundamentals Charting - Resistance - Support lines Technical - implies efficiency - helps you enter or exit Fundamentals - implies inefficiency - helps you decide to buy or sell 50, 100, 200 moving average - what happens when they cross - when short term is lower than mid/long term, sentiment is negative - when short term turns, time to consider getting out Relative Strength Index (RSI) Spread - wide spread = cheap - narrow spread = ex Corporate bonds usually aren’t more creditworthy than sovereign bonds

Week 7

G-spread

Funds - basket of assets - diversification - won’t be as hit by 1 mistake

- Nominal spread - difference between yield on Treasuries and Corporate bonds of the same maturity I-spread - Interpolated spread

Facebook lost 22% in 1 trading day EXAM TIP: Pros & Cons of Funds Cash drag - losing money when you are holding cash as an asset Institution funds are the bigger drivers Active vs Passive Funds - cost is the main difference Bond fund benchmark - based on market cap - fear of default

Factors affecting bond - FX - Duration - Credit

Negative duration - achieved by futures and forwards - short the bond, believe interest rates will increase - prices increase when i/r increase - buy when you believe interest rates will increase Short part of the yield curve: 0-5 years Belly of the curve: 5-10 years Long part of the curve: 10+ years

Equity fund benchmark - based on market cap

Distribution yield - amount the fund pays you

Active funds more easily outperform the benchmark in EM

Drawdown -

Fund share classes - are denominated in different currencies - hedged away the currency risk

Physical vs synthetic

Distribution Yield?? - paying back capital Active share - more active = better chance of outperformance Turnover - activity - how much different is your portfolio YoY - passive 15%, active 300% Rolling returns - 1 jan 2010 vs 1 jan 2011 - 1 feb 2010 vs 1 feb 2011

EXAM TIPS: Quantitative factors comparing funds

Week 8

If Growth > Inflation, Okay If Inflation > Growth, along with high i/r, GG China -stagnant GDP growth -inflation increase - why are you still positive on china - take note what kind of denomination of china bonds - CNY or USD - use the investment clock to decide junk, corp or govt - not about risk adverse - If talking about junk, govt bond yields are less relevant Vietnam - good but inflation is running away - justify with unemployment dropping - put some wage numbers - justify with consumption Australia - commodities Japan - r/s between USD/JPY and Japan stock index is inverse - because it is an export driven economy - Abenomics = loose monetary policy - US = tightening - Japan is a funding currency What is driving China’s growth - it is shifting from consumption to consumption - what is the driver for the consumption - all 3 funds chosen must like china consumption - pick same currency and same distribution bond - can consider hedging currency of the fund Individual Insurance Prepare 10 countries (he will choose 1) 3 funds for equities 3 funds for bonds 1 currency What goes into the SAA is a function of the markets, not the risk profile of the client

Week 9 (Weds) EXAM: Calculation for ELN

Structured Products Basic financial + Derivative = Structured Product Options American - Anytime to sell Knock out, knock in option - ceiling and floor of the option exercise price - cheapens the option Participating = I bought an option

Buy option - max loss is option premium Sell option - max loss is notional Issuer - guarantees to pay you back the money - e.g. Société Générale (SocGen) Distributor - Sells the product Principal protected note (Mrs Tay) - Capital Protection 5k commission 15k call option on S&P 180k zero coupon bond (or a 2 year note that SocGen issues) Risks: SocGen defaults Bond defaults Market makers and liquidity Equity Linked Note (Andy DBS) - Yield enhancement risk - 1M Deposit - 7% pa comes from premium collected from selling - short a put Market: - I want the px to go to 24.7 - my stock is range bound Risk: Issuer risk (DBS) Long put (Sell when price is higher) Short put (obligation to buy) *FYI - Naked call not allowed in Singapore

Week 10

EXAM: Dual Currency Investment 1) Selling a EUR call Base: EUR 100k Alt: SGD Spot: 1.5980 Strike price: 100 pips away (= 1bip) Tenor: 1m i/r: 12% you put 1 side means you call the other side When you sell a put you are obliged to buy What you don’t have I am HE-MAN I have EUR I love SGD EUR/SGD = 1.6000 I want to sell at 1.6200 (because I want to get more SGD per EUR) I sold a put on SGD against EUR I am obliged to buy SGD - same as obliged to sell EUR against SGD - i.e. sell a call on EUR against SGD - Bank bought a put = right to sell at 1.62 in 1 month time Spot EURSGD: 1.62 Q1: Strike =? Q2: currency received =? Q3: amount =? Q1: 1.6080 He wants more SGD for each EUR Q2: SGD Q3: EUR 101,000 * 1.6080 (because 1% interest on 100k) P + I or P convert, doesn’t matter 2) Selling a EUR Base: SGD 100k Alt: GBP Spot: 1.8060 Strike price: 100 pips away Tenor: 1m i/r: 12% pa in 1 month time Spot GBPSGD: 1.8000 Q1: Strike =? Q2: currency received =? Q3: amount =? Q1: 1.7960 Q2: SGD Q3: 101k Needs of clients

Private Banking Guest Speaker: Adrian, MD of JPM For clients with full suite of services. In banking, Understanding client relationship, their balance sheet, their needs etc, is important Nomura - japan is 3rd largest economy - bank with them to tap on Japan market LGT, Pictet, EFG etc - Pure private bank - Confidentiality reasons UBS, Credit Suisse - Swiss - Trust No one single bank which has > 10% of the market share Discretionary vs Advisory Portfolio management - Discretionary: Client gives you $1m, you plan their portfolio - Advisory: You tell the client what they can do with their $1m. Money is falling from the sky - mainly due to govt printing money - low i/r environment GCB - Good Class Bungalow Increasing government regulations - increased measures to prevent 1MDB, another GFC - banks must have minimum size and capital - resulted in consolidation Business - private banker’s network, expand their client’s business - corporate banking coverage, facilities

- business - investment - inheritance Exam: Pg 29 Trust vs Will - Will only effective upon death of settlor - Assets in Will will be immediately released to beneficiary - Process will go through the court and will be public - Might take from 3 months - forever - during which, assets are frozen Settlor loses legal possession once his assets are in the trust Trusts - can be revocable and irrevocable - can be discretionary or non-discretionary  discretionary: up to the trustee when to distribute - letter of wishes, to maintain control while you are alive - usually set up in countries with transparent laws, safe and secure Fees - set-up fees + annual fees - more complicated set ups = more ex Common Reporting Standards (CRS) - to avoid tax-avoiding - every country knows where their citizen’s money is at

Collar - protection for private banks to lend you (small company which can’t get a loan from commercial banks) money - Buy put option (Client buys, protection for the bank) + Sell call option (mitigate costs to buying put option) Micro-financing - lending money to poor people (e.g. farmers) to buy seeds and tools - lending to thousands of people, spreading the risk - lower default rates than usual borrowers, honourable

Investment - clients are entrepreneurs, don’t have the financial market expertise or access to funds Inheritance - trust fund, succession planning, estate planning

Week 11 (Not tested)

Hedge funds as an investment

Lee Kian Soon Buy side - AM firms - fund managers - central banks - corporates - retail Sell side - banks

- CBs, SWF often invest in Hedge funds - to achieve uncorrelated returns - diversification - Global AUM: 3.5T George Soros - broke the BoE - triggered the Asian financial crisis Julian Hart Robertson - Tiger funds The best inventors average 30%

Traditional Investments - Equities - Fixed Income - FX - Mutual Funds Alternative Investments - Hedge fund - PE - VC - Real Estate - Crypto - Commodities - Alcohol - Art Value varies from owner to owner, not market driven, very difficult to sell, no official exchange Global 1% - USD870K - 50M people SG 1% - USD5M - 53k people Mutual Fund - Relative returns - Traditionally Long only Hedge Fund (invented in 1950s) - Absolute return - Leverage - Long and Short - Fee Structure - Management fee 2% - Performance fee 20% (of profit) Harder to make money in a crowded trade Hedge funds means you have flexible to do multiple instruments Singapore Accredited Investors - NI: 300k - Net worth: 1mil

ACE Ayer Rajah

Active vs Passive investments ETF Industry - invented in 1990s - 4T industry - Vanguard US Index: 120bn - SPDR STI (SG ETF): 500m (Don’t buy the other one) - Bigger in US because of investor awareness - minimum investment size 500k Things to look out for when choosing ETF - AUM - bid/ask spread - daily volume Mutual Funds vs ETFs - Commissions for introducing Mutual Funds - No commissions for ETFs PE funds - PE fund managers have the network and expertise - help the companies to growth so that their own share grows - in terms of strategy, organisation - end objective: to sell - IPO - sell to another player - 10-12 years life cycle - minimum investment size USD 5M - similar fee structure as Hedge Funds - diversification because not public - portfolio success rate = 10% - ROR: 5-10% VC funds - 20m dollar investment into target coys - smaller because at the early stage, coys don’t need so much money - VC invests at the earlier stage - 10-12 years life cycle

- Singapore VC 1-stop shop - infrastructure in place VC Valuation - cannot use DCF or Comparable approach Multiple rounds of inve...