Invest in the stock market

Dear Mr. Tan,

Should I invest in a capital guaranteed product that pays 2% for 2 years?

REPLY

If you have spare cash, you can invest in shares to earn the following:

a)  STI ETF can earn a dividend yield of around 5%. Even if the dividend drops, you can still earn 3% or more.

b)  REITs (real estate trust) can earn you a dividend yield of 10%.  Even if the rental drop, you can still earn 5% or more.

Do not worry about the share price (ETF or REIT). If it drops, you can still wait and collect the dividend of 3% or 5%. Wait for the stockmarket to recover in 2 or 3 years or longer, in a worse case. You can get a gain of 20% to 50%. Be prepared to take risk and get a better return.

Do not invest in capital guaranteed product that earns 2% and locks you for 2 years.

Tip: Avoid performance chasing based on short-term returns

In a book entitled "Common Sense Investing", the author Jack Bogle said, "In selecting mutual funds, most fund investors seem to rely .... on exciting performance over the short term. Studies showed that over 95% of all investor dollars flow to funds rated four or five stars by Morningstar, the statistical service most broadly used by investors in evaluating fund returns".

These star ratings are based on a composite of a fund's record over the previous 3-, 5- and 10-year periods. It has a heavy bias in favor of recent short-term returns.

A study showed that a mutual fund portfolio continuously adjusted to hold only Morningstar's five-star funds earned an annual return of 6.9 percent between 1994 and 2004, nearly 40% below the 11.0 percent return on the Total Stock Market Index.

Jack Bogle selected the top 10 performers among the 851 equity funds during the "new economy market bubble of 1997 to 1999. These funds performed badly during the bursting of the bubble in 2000 to 2002. For the six year period, these funds earned a cumulate return of 13% for the full six-year period, compared to the cumulative return of 30 percent for the S&P 500.

For the shareholders of these funds, it was a disaster. While the funds achieved a net gain of 13 percent, the shareholders incurred a loss of 57 percent. Most shareholders invested in these funds when they were close to the peak and suffered the full effect of the downfall.

Jack Bogle's message is: avoid performance chasing based on short-term returns, especially during great bull markets.

Results - Mis-selling of credit linked notes

Based on 58 replies

2. Which notes did you invest in?
Minibond       29
High note      12
Pinnacle note  11
Jubilee note   3
Other note     3

3. Which distributors did you buy the notes from?
Hong Leong     23
DBS            13
Maybank        9
OCBC           3
Philip Sec     2
ABN Amro       1
Other          7

4. How much did you invest?
Less than $25,000     10
$25,000 to $50,000    18
$50,001 to $100,000   16
$100,001 to $200,000  11
More than $200,000    3

5. Have you lodged a complaint with the distributor?
Yes                  55
No                   3

6. Have they made you an offer for compensation?
No offer yet           35
Rejected my complaint  20
Offer 0 to 30%          0
Offer 31 to 50%         1
Offer more than 50%     1

7. How long did they take to make their decision, from the time that you lodged the complaint?
Less then 4 weeks      8
4 to 8 weeks           17
More than 8 weeks      21

8. Was the distributor fair in attending to your complaint?
Yes      15
No       30

Survey - Mis-selling of Credit Linked Notes

This is a new survey, to collect statistical information by product and distributor. Please participate:

http://www.surveymonkey.com/s.aspx?sm=bH_2feqjLGwIcvaYbpcbXdRA_3d_3d

MAS reply on Pinnacle Notes

Hi Kin Lian,

Now a piece of positive news. MAS has finally responded to the PLEA I had sent last month on behalf of some 80 PN holders in November. I will like to share this with you and the other PN holders, hopefully before the year is out. 

I will therefore like to impose once again on your kindness to post MAS's letter (attached below) on your website for their awareness.

Dear Mr Quek

We refer to your letter dated 19 November 2008 to Mr Heng Swee Keat, Managing Director, MAS.

2. On 18 December 2008, Morgan Stanley Asia (Singapore) Pte, the arranger of Pinnacle notes published a number of Frequently Asked Questions (FAQs) that address the issues you raised, among others. The FAQs are available athttp://www.morganstanley.com/pinnaclenotes/pdf/series9-10/FAQs_18-12-08.pdf

3. You enquired about the root causes for the devaluation of Pinnacle credit linked notes. Please refer to questions 5 and 11 of the FAQs which explain the reasons for the fall in value of the Notes. You also raised the question on whether any steps could be taken to protect the value of the Pinnacle notes. The petition alluded to steps being taken for the Lehman minibond notes and that these steps if viable should similarly be extended to Pinnacle notes. Please refer to Questions 8 and 9 of the above FAQs where the differences in the circumstances giving rise to early redemption of Minibond notes and the Pinnacle notes are explained, and on the restructuring of Pinnacle notes. You may also refer to MAS' press release of 2 Dec 2008 where we informed investors that due to legal complexities that have arisen, the trustees and receivers are of the view that restructuring of the Minibond notes is not currently viable.
Link to MAS press release on 2 Dec 2008:

http://www.mas.gov.sg/news_room/press_releases/2008/Update_on_Lehman_Minibond_Notes_Programme.html

4. For consumers who consider that the Pinnacle notes were mis-sold to them, we would advise them to first lodge their complaint directly with the financial institution (FI) that sold them the products. MAS requires FIs to have a rigorous process to look into every complaint of mis-selling and resolve them fairly. In the event that consumers are not satisfied with the FI’s reply, they may consider approaching the Financial Industry Disputes Resolution Centre (FIDReC). FIDReC is an independent institution which aims to provide consumers with a one-stop avenue for resolving disputes in the banking, insurance and capital market sectors. Separately, where we have clear evidence that a FI has breached our laws or regulations, we will hold the FI to account.

5. If you have any queries, please feel free to contact me.

Christina Tan
Consumer Issues Division
Monetary Authority of Singapore

Pinnacle Notes: Website should be more free with info

Published in Straits Times, Dec 30, 2008

I WAS directed to the Morgan Stanley website for Pinnacles Notes by the Monetary Authority of Singapore (MAS) website. When I entered the Morgan Stanley website, I was welcomed by a long legal disclaimer that required the answer 'yes' before I was granted further access. As a result, I was discouraged from entering the website for more information.

May I ask Morgan Stanley to consider removing this legalistic disclaimer and making access free for the following reasons:

- Pinnacle Notes is of public interest, and basic information such as redemption value should be freely available.For example, a bank website provides information on fixed deposits and exchange rates. In another example, unit trust investments are quoted daily via normal marketing channels.

- Morgan Stanley should not impose such a legalistic disclaimer because it is merely allowing access and not providing professional advice. Its exposure is next to zero. Members of the public who want access are looking for information and not professional advice.

It would be fair for Morgan Stanley to allow public access to general information without agreeing to a disclaimer. However, if professional advice is solicited, it is free to give it.

Leong Kok Ho

HK Standard: Lehman minibond values up in air

30 Dec 2008

The Hong Kong Association of Banks announced yesterday that leftover values of Lehman Brothers minibonds are as much as 78.31 percent.

However, a source from the banking sector said the pricing, set as at November 21, is no longer applicable because of fundamental uncertainties following a legal challenge from Lehman liquidators.

"There have been no attempts to update the valuation," the source said.

The pricing of the minibonds will continue once the legal issue is settled, the source said.

However, "there will be potentially additional costs to be incurred as a result of the legal challenge.''

The banking association also said: ``If this claim [from Lehman's liquidators] is upheld, the value of the minibonds will significantly decrease.''

According to a Legislative Council document submitted by the association's Lehman task force yesterday, prices, as at November 21, of the minibonds ranged from 0.82 percent to 64.03 percent on average.

Series 11, tranche A, was worth the most among all the series and its price was 78.31 percent, after calculating the value of the underlying collateral. Those who bought the product for US$100 (HK$780) would get US$78.31. Remaining values of series five to nine of the minibonds were only 0.82 percent.

The pricing information no longer represents the current market value of the minibonds and the banks cannot assess how much a minibond investor may recover from the proceeds of the collateral underlying the minibonds, the association added.

A Legco meeting relating to the government buyback proposal for the minibonds will be held this morning.

Late last month, the minibond trustee, a US unit of HSBC (0005), received a letter from legal advisers to Lehman in the United States that the proceeds from any sale of the underlying collateral for the minibonds should be paid to the collapsed US investment bank before the issuer of the minibonds and in turn the investors.

The banks are still circulating the documents for the provision of up to HK$100 million to the trustee and expect it will not only be used for paying legal fees.

"The precise terms of the proposed funding have not yet been agreed between the banks and the trustee," the association said.