Blindfolded

I have so many comments on my previous post thanks to Coconut and others who shared their thoughts and experiences, of course, I am still trying to figure out what make him tick with such confidence in his trading. Yes, look at the rear mirror, always be cautious of what's behind you and side mirror too, for the blind spot, be prepared just in case.

So, I would like to share further on this topic, looking at the rear mirror after an accident.

The father of my son's classmate is a private banker with a foreign bank. At one of the function, I had a chance to chat with this very successful banker. That was sometime in 2009 after the Lehman crisis where the whole world stock market crashed, very gloomy everywhere and possible collapse of the world financial system. Of course, I dare not tell him it's all because of some greedy bankers.

He told me the crisis whack many of his clients, many lost up to 90% of their capital, from $10 million worth to just $1 million, and all these clients are knowledgeable and smart, obviously or else they won't be so rich.

One of the reason why they lost so much money is because they are too smart, using a very simple investment strategy, by just following what our best fund managers in the two biggest sovereign wealth funds here are doing. How wrong can the best fund managers in the industry be? It's easy to make money, no brainer. They blindfolded themselves and drive along.

So they bought into the 2 biggest, best well managed Banks in the World, Citibank and Merrill Lynch with decades of enviable track record. Any objection at that time before Lehman crisis? These are among the best stocks you can have in your investment portfolio, safe and sound. They loaded up on these 2 stocks by following big brothers.

When there was a cash call in the mist of the Lehman crisis, they followed too by borrowing more from the bank to leverage, no choice or else they would be diluted. They forgotten all about risk and money management. These 2 banks are too big to fail, the US government will bail them out, but the question is when? The crisis deepened and the share prices tank with short sellers taking advantage and those who are long on margin, forced to cut their positions.

The rest is history.

Don't drive blindfolded.

At this point, I would like to introduce www.robertchuablog.com, written by a fellow floor trader, a very consistent trader who taught me about market correlationship when I went back to the arcade in 2008. He was magnanimous in willing to share that strategy at a time when I was lost in the wilderness. It was a very simple strategy but somehow or rather, it was a spark that brighten me up with confidence for the next few years. Though it doesn't work all the time now because the HFTs would be right in front of us with their speed, I am grateful to him for giving me that little lift.

He can express pretty well and do follow his journey in Forex trading.

Account 8030, 17/11/2012

This is the only trade done so far for the account. The option still have 3 weeks to go before expiry. The margin utilised is S$2,364.87 out of the capital of S$44,328.03, so I am actually using a small portion of the margin in a futures account. It's a very conservative approach to trading, that's why I can sleep soundly to attain a 10% return for this account.

This trade only cost me S$1.24 in comm, very cheap. The broker will be charging me interest for the negative Yen account, probably around 3% in a almost zero interest rate environment in Yen borrowing. That's where the Exchanges and brokers make extra money out from the traders, and they pay peanuts for my positive S$ account. And of course, they don't pay interest on any credit balances in the Yen account.

Some readers may feel the risk I am taking is too high for only a limited return but I felt otherwise. I will show my trades but not going to explain the reasons behind taking such trades. We shall see whether how I perform in a year's time. It's challenging for me firstly to show the account and secondly, for trades that are longer term which is not my forte. So, please don't follow what I am doing as my cut lost level is quite far away.

I will be looking out for more trades to add on whenever the opportunity arises, it might be a roller coaster ride that I have been used to all these years.

No-fee fund aims for 12% return

A friend who email this to me.

Working for free: The fund's founders - Mr Tok (left), Mr Wong (centre) and Mr Kong - and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. The trio say they won't collect salaries. - PHOTO: ARTHUR LEE

A FUND that aims to deliver 12 per cent a year and does not charge any management fees - that's what a new fund management firm is bringing to the market. It is an offering to the increasing number of accredited investors in Singapore who have yet to qualify as private banking customers, said founders of Aggregate Asset Management.

Many of these investors have holdings in unit trusts that have not been doing well, says Kevin Tok, one of the three founders.

Mr Tok, who has 20 years of experience in financial planning, says most of these clients are directed to unit trusts by their financial advisers after having gone through the six-step financial planning process.

"There aren't a lot of options out there for them. The boutique fund managers in Singapore don't actively market their service to this group of people," he says.

There's no way a typical client can retire well with a portfolio of unit trusts that charge very high fees, he says.

Unit-trust investors have to incur 3 to 5 per cent of sales charge and one to 2 per cent in annual management fees regardless of whether the funds make money or not. "If you leave your money there for five years, 10 per cent of the money disappears. And the value doesn't add up," points out Mr Tok, 43.

"The trick of (growing your savings for) retirement is to find something that's proven, that gives you an average of 8 to 10 per cent return a year instead of going round in circles looking for all sorts of strange products, like gold products, or trying to find something unproven to hit your 10 per cent," he says.

Value investing - buying of stocks with low multiples of earnings and cash flows, low price-to-net tangible assets, high dividend yields - is a proven process that generates good long-term returns, says Aggregate co-founder and its fund manager, Eric Kong, 44.

"We have no doubts that the value investing process can put our clients in good shape in the long term for retirement needs," he says. "We are putting our money where our mouths are."

Aggregate Value Fund, a small-cap Asia long only fund, will not have any sales charge and there will be no management fees. Mr Kong, and another founder and fund manager Wong Seak Eng, 33, say they will not be collecting any salaries. The firm will only charge the fund 20 per cent should it manage to increase its value above the initial $1 per unit subscription price. Performance review will be done every six months, and subsequent fees will only be charged if the fund exceeds its previous high, that is it has a high water mark in industry parlance.

The three founders and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. "We are not worried. We are not desperate because we know that this process is a good and sustainable process. Even if we have to (have) packet lunch everyday for the first two years, we will do it," says Mr Kong.

Office now is a $1,000 a month shared space in Bishan.

Says Mr Wong: "We are already mentally prepared that we are subsidising our investors in the sense that we will pay for the rental, air fares for company visits etc out of our own pockets. And under the new MAS (Monetary Authority of Singapore) regime for fund management firms, we have to maintain a capital of $250,000 at all time. We are mentally and financially prepared for that.

"We may have to wait two, three, or five years. It depends on the market cycle. But we will definitely work hard to deliver for the investors so that we will also be rewarded."

As noted by Mr Kong, the value investing process as adopted by various value funds has shown impressive records. Yeoman Capital, where Mr Kong and Mr Wong were from before striking out on their own, has returned a 12.7 per cent compounded annually net of all fees in Singapore dollar terms over about 15 years to September 2012.

Target Asset Management returned 17.6 per cent a year between 1996 and November 2010. Its fund manager liquidated the fund as it had gotten too big. A new value fund was started in June 2011, and it has returned 3.99 per cent since inception to end-October in difficult market conditions. It outperformed the MSCI Asia ex-Japan Index by more than 10 percentage points.

Aggregate, says Mr Kong, will generate stock ideas in a quantitative way. Then it will add a layer of analysis before selecting the stocks for its portfolio. An independent search process is very important in generating stock ideas. "You have to be very impartial in the search."

He developed his search process, scoring companies on the strength of their balance sheets, earnings record, and dividends record. "There are more than 10,000 stocks out there. (This quantitative screening) gives you a very fast way of getting to the undervaluation when the news are not out yet," he says.

Mr Kong's background is in computer programming, having worked in the Ministry of Defence in operations research "where we used algorithms and computer models to solve real-life problems".

But investment is his passion. And so he took the Chartered Financial Analysis exams some 10 years ago. He paved his entry to the fund management industry by first joining the banks, Citi and UOB. He then offered to work for free in a local fund management firm in order to gain fund management experience. But he was rejected because the firm wanted a CFA charterholder. Mr Kong wasn't one yet because he didn't have the necessary work experience.

He eventually joined Yeoman in 2002 and was made a partner a few years later. He left the firm in end-2009 to spend time with his home-schooled elder daughter.

According to Mr Kong, since he started tracking his personal portfolio, the return was 17.8 per cent a year between May 2005 and June 2012. Currently, 30 per cent of his portfolio is in Hong Kong, 20 per cent each in Singapore and Malaysia, and the rest in Thailand and Japan.

Aggregate will take a very diversified approach, with each stock making up not more than 2 per cent of its portfolio in a steady state.

"Warren Buffett advocates the focus approach," says Mr Kong. "But we find that when you bring your holding up to 5, 10, 20 per cent of your portfolio, you'll make more behavioural mistakes. You start to get emotionally attached to the stock, you fall in love with the stock. That is dangerous because it can really affect your judgment."

Also, Mr Buffett has a gift. He is able to read business very accurately. Not everyone has that kind of gift, notes Mr Kong. Aggregate prefers a more conservative and boring approach. "We concentrate on what's currently on hand."

Mr Wong chips in: "We don't make any unnecessary projections into the future."

Aggregate would rather look at the track record of companies, going as far back as 10, 20 years. Typically, Mr Kong says, the fund will hold its stocks for about five years.

Mr Kong reckons now is a good time to start a fund because valuations for equities are not high. He sees great value in Hong Kong. Some stocks there are yielding up to 10 per cent. He names Oriental Watch, Lai Fung and Herald as examples of undervalued stocks in Hong Kong; New Hoong Fatt in Malaysia and MK Real Estate in Thailand.

On the marketing of the fund, Mr Tok says the plan is to put Aggregate Value Fund on the iFast platform for products that cater to high net worth individuals.

The minimum subscription of the fund is $150,000. There is a one-off $2,000 subscription fee to cover the administrative, legal and compliance costs. There is a 5 per cent early-exit charge within the first three years. This however will be waived for investors who may want to withdraw less than 5 per cent from the fund every year as income.

DBS Bank is the fund's custodian, Ernst & Young its auditor, and Rajah & Tann its legal advisers. Crowe Horwath First Trust Fund Services is the fund administrator.

Besides Aggregate, APS Alpha fund also does not charge management fees. Another boutique fund manager, Lumiere Capital, also launched its Lumiere Value Fund in 2007 without management fees. But it started charging one per cent management fees at end-2010.

Nikkei 225 Option

Option trading is highly a risky, sophisticated and complicated instrument to most traders but it also provide a good source of passive income for the professional traders.

I do not encourage anyone to follow what I am doing for Acc FAT8030, it's my attempt to move away from scalping and experiment on other strategies based on my money management parameters and expected returns.

Nikkei is trading at the price of 8700 at the moment, decided to take a short 8500 Dec put at the price of 90 expiring in a month time. Will be collecting a premium of Yen 45,000 and will know what's the margin requirement for this trade tomorrow. Intend to hold this trade till expiry. Effectively I will lose money if the Nikkei plunge below 8410 after factoring the 90 points premium.

I have decided to trade the Nikkei Option because of the liquidity though I will need to pay interest on the Yen margin required for this trade. It's unfortunate that there is no liquidity in the Simsci option as my capital is in Sing Dollar and I wouldn't incur any interest charges.

Nikkei contract at the price of 8500 is worth Yen 4,250,000 (8500 x Yen 500), converted to S$ at the rate of 0.015399 is equivalent to S$65,446.00 worth of 225 Japanese Blue chip stocks.

Can I sleep over this position? Yes, definitely and soundly too though I have a slight leverage of holding a Nikkei 225 contract at 8500 over my capital base in this account. I will be collecting the premium of Yen 45,000 or S$693 upon expiry of the contract in December. In fact I would be most happy if the Nikkei will to come off since I have only utilise a small portion of my margin.