Monthly Review - December 2011

December saw the value of the portfolio edge slightly higher, largely in line with the movements in equity markets and favourable exchange rate movements.

Positive cash from on the properties (fully leased) and a healthy savings rate were enough to produce a respectable end to a very disappointing year.

Here are the details:

1. my Hong Kong equity portfolio appreciated, with China Gas being the standout performer. I purchased shares in VTech, Sino Oil & Gas, Sinopec, Cosco Pacific, GDI and NWS;

2. my AU/NZ equities declined;

3.my ETFs were mixed in line with the local markets, with Hong Kong being positive and the others being negative. I sold all my Lyxor ETFs (except for a small position in the Lyxor Commodity fund which inadvertently escaped the cull in response to news that the funds would be delisted). There were no ETF purchases this month;

4. my commodities fell, led by silver.  Most of my Lyxor Commodities Fund was sold;

5. all of my properties are occupied with all tenants paying on time. Some minor repairs this month;

6. currency movements were very negative, as the NZD and AUD fell sharply against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had no open derivative positions;

9. savings were good with high income and low expenses.  The Christmas holiday was fully provided for and had no impact on my net worth.

My cash position increased in spite of making net new investments. I currently hold 35.3 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).  This is an all time high.

For the month, my net worth increased by 1.76%. The year to date increase is a meagre 5.6
8% - which is less than my net savings and cash flow from properties, indicating that I have had material losses on investments this year.

An annual review will be posted separately.

Hong Kong property prices

The current state of the Hong Kong property market has generated a considerable amount of press coverage and public commentary during the course of 2011, mostly focused on two issues:

1. making Hong Kong housing more affordable for low and middle income groups;

2. the extent to which Hong Kong property prices either have fallen or will fall.

As to the affordability issue, as much as the politicians bleat about increasing affordability, the blunt reality is that they have taken steps which make housing less affordable. Specifically, they put through a large increase in rates earlier this year (at about the same time that our grossly overpaid civil servants where handed a substantial pay increase) and they have contributed to mortgage finance being harder to obtain and more expensive.  The effect of the special stamp duty is debatable in so far as prices are concerned but has obviously reduced liquidity in the secondary market.

As to current market prices, it is clear from looking at sales data and mortgagee valuations that prices today are lower than they were at the peak of the market (in early 2011).  Using HSBC's on line property valuation tool, the properties in our portfolio are now worth between 9% and 2% less than their peak valuations.  While you can obviously debate whether mortgage valuations accurately reflect the current market, it seems clear to me, both from the mortgage valuations as well as discussions with agents, that prices have fallen, but not by much.

As to the future, while sentiment is decidedly is bearish, given continued low interest rates, high employment, continued inflation, a degree of restraint by the government in supplying additional land for residential development and continuing demand from PRC buyers, it would be surprising if we saw a repeat of the 1997-2003 bear market.  At the same time, I still do not see value at current price levels.  Beyond that, I have no idea as to whether prices will continue to decline and, if so, by how much.  Accordingly, as an investor, I have no interest in buying additional properties at this time.

VTech purchased

This morning I added a few more VTech (HK:303) to the portfolio.  There has been no change to the reasons given for previous purchases.  I paid HK$80.00 for the additional shares.

I also neglected to post that I had sold my remaning shares in Kenford (HK:464) at a loss last week. 

Lyxor funds delisting - resulting portfolio changes

Lyxor recently announced that it would delist its ETFs from the Hong Kong Stock Exchange and also deauthorise them with the SFC.  Having decided that I do not wish to hold unauthorised funds (even though they would still be regulated in Europe and would be redeemable at NAV), I have sold my positions in the Lyxor India MSCI ETF (HK:2810), Lyxor Commodities ETF (HK:2809), Lyxor Taiwan ETF (HK:2837) and Lyxor Russia ETF (HK:2831).  Although irrelevant to my decision, all were sold at prices higher than my original purchase costs.

I have reinvested some of the proceeds into the iShares India ETF (HK: 2836) fund.  The balance is still looking for a new home.  A small amount has been added to my position in Vodone (HK:82) which today announced the launch of its online lottery business.  I paid HK$1.00 for the additional shares.

Between existing cash/near cash, the sale proceeds from the Lyxor funds, the possible sale proceeds from the possible general offer for China Gas (HK:384) and my end of year payment, I will have a considerable amount of cash on hand and be in need of some investment ideas.

Sino Oil and Gas purchased

This afternoon I added some additional shares in Sino Oil and Gas (HK:702) to the portfolio.  This is essentially an investment in China's increasing consumption of gas.  Sino Oil and Gas is now one of my ten largest positions.

I paid HK$0.295 for the additional shares.

Sinopec purchased

This morning I added a few more Sinopec (HK:386) to the portfolio.  My expectation is that Sinopec will benefit from a general trend towards a more market driven regulatory environment in the PRC as well as a general increase in energy consumption.  The yield is a decent if unexceptional 3.1% and the PE is well below 10x, making the stock a decent value play.

I paid HK$8.00 for the additional shares.

Sinopec is now my second largest individual holding.

China Gas - general offer

China Gas (HK:384) is one of my five largest individual shareholdings and is now subject to a general offer for all the outstanding shares.  The offer is HK$3.50 per share in cash.  Absent a higher offer (which I consider unlikely), I intend to accept the offer.

That will leave me with the nice problem of having to find something to reinvest the money into.  Current thinking is to look for two or three Hong Kong listed blue or red chips.  If nothing else, the yield on whatever I reinvest in will almost certainly be higher than China Gas's very low 0.65% yield.

CNOOC purchased

Yesterday afternoon I added a few more shares in CNOOC (HK:883) to the portfolio.  Like all my recent purchases, this was a small incremental purchase.  As CNOOC is my largest holding (by a meaningful margin), this will probably be my last purchase in this company.

I paid HK$14.80 for the additional shares.

Cosco Pacific purchased

This afternoon I also added some additional shares in Cosco Pacific (HK:1199) to the portfolio.  I paid HK$9.10 for the additional shares.

There is no change to my reasoning from previous purchases.

GDI purchased

This morning I added a few more shares in GDI (HK:270) to the portfolio.  The company is largely driven by its water business and has recently negotiated modestly higher increases in the revenue it will receive for supplying water to Hong Kong.  It wont be exciting, but should provide a steadily growing stream of dividends in the years ahead.

I paid HK$4.80 for the additional shares.

Off topic: Canon's lack of customer support

I have been happily using an original Canon EOS 5D as my camera of choice for about six years now. Six years of trouble free digital photography. Until now. Until I purchased a new laptop which came with Windows 7 at which point I discovered that the driver for the EOS 5D is not supported by Windows 7 and Canon has no intention of producing one.

This basically means that the automatic selecting and transfer feature which I have long accepted as a basic feature of using a digital camera no longer works. It also means that the ability to use the remote shooting feature through the laptop is gone as well. In practice I now have to use a card reader to select and transfer pictures from the camera's memory card to the laptop. It still works but is less efficient or convenient. There appears to be nothing I can do about remote shooting. (There were some highly technical work arounds but they were beyond my technical comfort level and appear to be even less convenient than using the card reader.)

It is very disappointing that Canon has no interest in supporting a camera that still enjoys widespread use and which I still hope to get several more years of wear and tear out of.

I've been drooling over the EOS 1D X as either a replacement for or an addition to the 5D but am now having second thoughts. It's a lot of money to invest in something which I expect to use for far longer than Canon apparently is willing to support that usage.

Off topic: a literary binge (2)

Carrying on from the October post on an out-of-character literary binge, since then, I've completed:

• Emma - Jane Austin. I found this mildly entertaining



• Walden - Henry David Thoreau. As much as I can appreciate the quest for simplicity in life, on the whole it came across as a snivelling, opinionated call for universal poverty and a rejection of human progress or dissenting opinion



• Metamorphosis - Franz Kafka. Entertaining



• Heart of Darkness - Joseph Conrad. Grim reading and a sad reflection on the time and place it was set in



• The Brothers Karamazov - Fyodor Dostoyevsky. Long. Just long. But well worth the read. Unquestionably the highlight of this batch

(These are in addition to other reading material.)

With the exception of Walden, I enjoyed all of these books. I'm not sure what's next for the literary genre, possibly something a bit more contemporary.

VTech purchased

This morning I added some additional shares in VTech (HK:303) to the portfolio. While their most recent result was adversely affected by a combination of reduced demand in Europe and North America for their products and increased cost pressures, both factors were less significant than I would have expected. My expectation is that revenues will continue to grow - the tablet for children product is particularly interesting.

The balance sheet is very sound with USD128.5 million in net cash on hand (about HK$15 per share) and the interim dividend was maintained at the same level as last year.

I paid an average of HK$78.10 per share.

Some contrary indicators

CNBC carried a report on hedge funds reducing their exposure to stocks . Given that hedge funds are supposedly managed by some of the best and brightest investors around, it's tempting to adopt the view that if these people are reducing exposure to equities (by around one third according to the report), maybe the rest of us should follow. I prefer to look at it as another contrary indicator - if so many people (including professionals) are underweight equities, maybe it is time to increase exposure? Of course, it would be much nicer if I'd been underweight during this year's bear market but that's another story....

I also received an interesting report on emerging market equities issues by one of the bulge bracket houses (which I can't link to for copyright reasons). Among the data points used to make a case for over weighting emerging market equities was the correlation between net fund outflows and market troughs. Over the last few months, net fund outflows from emerging markets have reached very elevated levels. If history repeats itself, this bodes well for median term equity performance.

Lastly, amid all the doom and gloom about falling property prices in the PRC its also worth noting that the volume and aggregate value of new home sales have held up well - indicating that while developers will be experiencing some pain (possibly a lot of pain), at least there should be plenty of cash coming in to cushion the downside for the developers and the banks which finance their developments. It's still not an attractive situation but, so long as they can keep shifting their inventory, the wider effects of the fall in prices may not be as bad as many fear.

I'm starting to sound like a permabull....which is not a good thing.

NWS Holdings purchased

I added a few more shares in NWS Holdings Limited (HK:659) to the portfolio today, paying an average of HK$10.95 for the additional shares. The company looks comparatively cheap on valuation grounds and is operating what I consider to be a mix or relatively low risk (toll roads) and strategically attractive (water) businesses. The trailing yield of 6.4% is attactive.

Monthly Review - November 2011

November saw the value of the portfolio decline, largely in line with the decline in equity markets and adverse exchange rate movements.

Positive cash from on the properties (fully leased) and a healthy savings rate were not enough to overcome the mark to market losses.

Here are the details:

1. my Hong Kong equity portfolio declined, with HWL leading the way down. I purchased shares in CMR , Cosco Pacific, K Wah and HKR and sold some shares in Kenford, Perennial and CMOC to partially pay for the purchases; . The amounts involved were not large;

2. my AU/NZ equities declined;

3.my ETFs declined in line with the local markets, with India being the worst affected. There were no ETF purchases this month;

4. my commodities fell slightly, led by silver;

5. all of my properties are occupied with all tenants paying on time. No repairs this month;

6. currency movements were very negative, as the NZD and AUD fell sharply against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had no open derivative positions;

9. savings were good with high income and low expenses.

My cash position increased in spite of making net new investments. I currently hold 22.3 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth decreased by 2.74%. The year to date increase is a meagre 3.84% - which is less than my net savings and cash flow from properties, indicating that I have had material losses on investments this year.

Cosco Pacific purchased

Ok, my self control didn't last long. This morning I added a few more Cosco Pacific (HK:1199) to the portfolio paying an HK$8.65 for the additional shares.

I have become very marginally more optimistic about the US economy (primarily on the back of strong corporate balance sheets, slowly growing employment numbers and improved retail sales) and China (some monetary and fiscal easing, moderating inflation and clearance of developers' housing stocks (although at low levels)) but remain concerned about Europe's dysfunctional leadership.

Some small portfolio sales

A rather tardy update: to pay for last week's purchase of additional shares in CMR (HK:773), I sold a few shares in Kenford (HK:464) at HK$0.57 and Perennial (HK:725) at HK$0.62.

As I watch the Hang Seng Index drift below 18,000, it is very hard to resist the urge to spend all the cash I have on hand. Very.....very.....hard....

Hong Kong trailwalker 2011

Nothing to do with personal finance, but my team took part in this year's 100 km Oxfam Hong Kong Trailwalker. Warm and very humid weather combined with a muddy and very slippery trail to put us a few hours behind target, but the whole team made it to the finish line with no serious injuries (only the usual collection of blisters).

Apart from the benefits of raising a modest amount of money for Oxfam, completing an event which is a considerable step up from running a marathon provides a great sense of achievement.

CMR purchased

This morning I added a few more shares in China Metal Recycling (HK:773) to the portfolio. This was largely on the back of a broker's report giving a price target of HK$13.50. Nothwithstanding some weakening in scrap prices and the impact of rising operating costs, my expectation is that the company will continue to benefit from the considerable investments in new capacity and the on going industry consolidation.

I paid HK$8.70 for the additional shares.

Hong Kong property - random musings

Hong Kong property is a subject that produces a very wide range of views, currently ranging from the cautiously confident to the extremely bearish.

The cautiously confident camp largely rest their case on:

(i) continued demand from mainland investors;

(ii) sell side structural issues which act as an impediment to selling or trading up - specifically the difficulty in replacing existing low cost mortgage financing, tighter lending criteria and the punitive stamp duty regime adopted to curb speculation;

(iii) the likelihood of continued inflation as central banks continue to try and inflate their way out of what may or may not be a double dip recession.

The bearish camp typically put forward a number of reasons why the property market will decline including:

(i) rising interest rate costs for new borrowers. While old HIBOR loans are still costing less than 1% pa, new loans typically cost around 2.5% (+/- a bit depending on bank and borrower). This is enough to make borrowing more expensive by a meaningful margin;

(ii) tighter lending criteria. Loan to value and payment to income thresholds being tighter than during the bull market. Funding pressures on banks are contributing to the tighter lending conditions;

(iii) reduced future demand from mainland buyers;

(iv) increased supply as the government releases more land for development and developers rush projects to market before sale prices start falling (this is already happening);

(v) property prices are high by historical standards, high in absolute terms and high in relative terms.

Predictions for the size of the expected decline range from a relatively mild 10% to a very damaging 50%.

Both the optimists and the bears count among their numbers rather shrill "perma" members who occasionally appear quite emotional on the subject.

It seems beyond debate that, at least in the short term, prices are headed lower. In fact they already have in both the secondary and the primary markets although it is unclear by how much. FWIW, my view is that there is far more downside risk that upside risk at the moment. I expect property prices to fall further, largely due to further increases in supply and the continued effects the tight market for property finance. That said, while we have experienced greater than 50% falls in the past, given the very high levels of equity in the market, it would take a significant further deterioration in market fundamentals (e.g. a very large increase in HIBOR etc) to produce a 50% fall. This doesn't mean in can't happen, only that I consider a much smaller decline to be more likely - possibly something in the order of 20% (although that is a complete guess). I also expect rents to level off or even soften a bit as more owners put their units out for lease and/or the banking sector sheds jobs.

If prices do fall significantly, I will probably buy again. Realistically, given the impact of the 1997-2003 bear market, I would expect the Hong Kong government to reverse some or all of the cooling measures long before we got to that stage.

CMR purchased

This morning I added some more shares in China Metal Recycling (HK:773) to the portfolio. The combined effect of the very strong interim results, bullish forward looking statements from the company, insider buying, a sound macro environment, industry consolidation and, most recently, a very aggressive price target released by one research house made a compelling case for adding to my position. I paid HK$7.96 for the additional shares.

In an effort to avoid running down the cash too far, to fund the purchase I sold some of my shares in each of CMOC (HK: 3993) at HK$3.56, Herald Holdings (HK:114) at HK$0.90 and AUPU (HK:477) at HK$0.62.

Some small portfolio adjustments

A slightly late update.

On Monday I added a few additional shares in K Wah (HK:173) and HKR International (HK:480) to the portfolio. I paid HK$2.12 for K Wah and HK$3.25 for HKR.

K Wah is a mid tier Hong Kong property developer (some projects in the PRC as well). Sales of its current JV project Marinella have been going well even without allowing for current market conditions. The balance sheet is strong. The discount to NAV is large - even if there is a very large write down in asset values - but so are most property companies. IMHO the shares have been oversold.

HKR is a smaller property investor and developer (with a few other businesses). The companies track record of delivering growth and keeping up a respectable dividend is excellent. The discount to NAV is huge and, together with a strong balance sheet, provides considerable long term downside protection.

Right now it seems a bit counter intuitive to be buying property companies.

I'm trying to get into the habit of funding new acquisitions by selling some existing investments rather than repeatedly running down my cash position - once I eventually stop working I won't have much choice in the matter. The K Wah and HKR purchases were funded by selling part of my position in CMOC (HK:3993) for HK$3.88. CMOC has been a disappointing investment (to put it mildly). That said, I have no particular views on whether to hold or sell my remaining shares in CMOC.

The amounts involved are not large.

Greece - digging a deeper hole

The announcement that Greece intends to put the austerity/bailout package to a national referendum undid much, if not all, of the positive that could be taken from the rather sketchy EU bailout plan.

There is widespread and probably realistic expectation that, when the time comes to vote, the Greek people will reject a package of tax increases and entitlement cuts. This is likely to be true, even if the alternative is the national equivalent of bankruptcy and even greater hardship. Even if the referendum is passed, it would be a safe assumption that no sane person would have failed to take their money out of the Greek banks, out of overseas banks based in Greece (ring fencing risk etc) and out of Greece generally. (Quite frankly, I'm a little surprised that Greece hasn't been stripped bare already.) At this point, no amount of regulation is going to stop that from happening and, one way or another, people will get everything they can off the ship before it finally sinks.

For what it's worth, matters have reached the point where the rest of the EU should wash its hands of Greece, let the country (and its creditors) sort out its own mess and put the stability fund to work to ensure that European banks do not fail (or, if they do, nationalise them to prevent a domino effect). Greece clearly wants to fail and should be allowed to do so as a lesson to other states that consistently spending beyond your means will, sooner or later, lead to considerable economic hardship. I'd say it would also teach lenders and investors to at least consider the possibility of country default risk when lending/investing but that would be a waste of effort - every few years they seem to need re-educating.

Monthly Review - October 2011

Last month I reported that September had been the single worst month for my investment (in dollar terms) ever and that retirement plans were on hold. October was, in many respects, a mirror image of September with very strong gains across the board. Although I did not drain my cash reserves, I did make some additional investments near the bottom of the market and, importantly, didn't do any panic selling.

Mark to market appreciation in asset values, particularly equities, added to the gains from rental income and were compounded by favourable FX movements. A healthy savings rate also contributed to a very good monthly result.

Here are the details:

1. my Hong Kong equity portfolio appreciated sharply. During the month I purchased shares in K Wah, Yangzhou Coal, New World Services and Cosco Pacific;

2. my AU/NZ equities appreciated;

3.my ETFs were up sharply in line with the local markets. There were no ETF purchases this month;

4. my commodities gained, led by silver;

5. all of my properties are occupied, however, one tenant missed a payment and is being chased. There was only one minor repair bill;

6. currency movements were very positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had onne open derivative position, a put written against the AUD, which was closed out at a profit;

9. savings were good with high income and low expenses.

My cash position decreased due to new investments. I currently hold 16.4 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth increased by 10.47%. The year to date increase is 6.77%

K Wah purchased

This morning I added a few more shares in K Wah (HK:173) to the portfolio. The mid-tier property developer has, like many, taken something of a hiding during the market down turn. However, it is well capitalised and salas of units in its developments (especially Marinello) are going well.

I paid HK$2.18 for the additional shares.

The quest for green shoots

Good news has been thin on the ground recently. Very thin. However, a number of positive items have made the headlines in the last few days:

1. the European Union reaching an agreement to deal with Greece and European banks . Sure, there are a lot of important details which are still missing and the fundamental problem of governments spending too much is not going to go away, but it's still a major step forward from where we were as recently as last week;

2. the inane Occupy movement has failed to gain mainstream support, has lost much of what limited media interest it ever had and is fading away . If anything, most people are sick of the self centred hypocrisy of the "movement" as are the overly tolerant politicians who are finally dealing with the disruption, sanitation and increased crime associated with the protesters' actions. Hopefully the people involved will go and do something constructive in the future;

3. US housing data has improved with both new home sales rising and the inventory of unsold homes falling. The improvements were modest and the overall numbers are still weak (especially average prices), but they are heading in the right direction;

4. US economic data has shown a small improvement;

5. expectations that China has finished monetary tightening and may actually consider easing;

6. declining oil inventories, may suggest that economic activity is picking up again;

7. fears that international trade would fall victim to protectionism have not eventuated....so far;

8. although I couldn't lay my hands on any consolidated data, generally I have been left with the impression that corporate earnings have, on average, exceeded estimates and, most importantly, there appears to be top line revenue growth.

Sure there are still huge problems out there - government spending (especially in the US and Western Europe), inflation (especially food inflation in developing nations), housing in the US and China and many other problems (not least on environmental issues), things look at least a little better now than they did a month ago.

AUD/HKD FX contract closed out at a profit

The AUD/HKD FX contract I opened late last month was closed out this week. As the contract was out of the money, I pocketed the premium for a total return of 2.02%. While this is many multiples of what I could have earned on a bank deposit over a month, it is less than half what I would have earned had I simply brought and sold the AUD over the same time period and a small fraction of the return that would have been generated by buying Hong Kong equities.

While it is not always the case the lower risk equates to lower return, this time it did.

Businesses under attack don't hire

Around the world businesses are under attack - increased taxes, more onerous regulations and the explicit or implicit risks of more to come. Obamacare, carbon taxes, higher consumption taxes, Dodd-Frank and its equivalents and so on are becoming a global epidemic.

Likewise the "rich" (insert definition of choice, but basically the western world's declining middle class as well as genuinely wealthy) are under attack from rising tax burdens, rising living costs (e.g. education and health care) and face widespread threats of more (the "rich" should pay more etc).

Regardless of the merits of individual proposals (and most are nothing more than a naked grab for revenue so governments unable to live within their means can make electoral bribes to people who, for the most part, take from rather than contribute to the cost of running the country), one of the consequences of the attacks on businesses and taxpayers is that they feel threatened. People who feel threatened don't spend - they go into survival mode:

• businesses (especially smaller businesses) don't invest in expansion and don't hire - they conserve their cash rather than risk it


• taxpayers (especially the middle class) faced with the prospect of rising taxes will cut back spending where possible (discretionary consumption spending and charity being the easy cut backs) - they pay down debt and build emergency funds


• investors divert money away from risk assets into safer investments - in particular government issued or backed securities which do much less for economic expansion than many other forms of investment

Simple message - if you want businesses to invest in themselves and create jobs, take away the threats. This is especially true for countries which do not enjoy a low cost labour advantage.

And yes, I had far too much to drink last night.

Cosco Pacific purchased

This afternoon I made a small incremental purchase of Cosco Pacific (HK:1199). The additional shares cost HK$9.52.

A tightening market for mortgage finance

This week both Citibank and BoCom announced that they would no longer be offering residential mortgages (in Bocom's case "traditional" mortgages). Although not as publicly announced, other banks have been tightening their lending criteria beyond the cooling measures imposed by the Hong Kong government. As a matter of anecdotal support, the bank which has loaned my most of my outstanding mortgages has told me that they will not lend me any more money.

The driving force behind the tightening of the mortgage market is the steady rise in the loan to deposit ratio in the Hong Kong banking system. For HKD deposits, the ratio has risen from around 65.1 in October 2009 to 85.9 in August 2011. A similar increase occurred in the all currency ratio (from 50.1 to 67.9). These ratios reflect an increase in total lending by Hong Kong banks (currently the highest since 2006 which was the earliest year in the HKMA table I was looking at).

Given the tightening of the mortgage market (higher deposits, more stringent borrower evaluation and higher interest rates) and lower turnover in the property market, one would expect that the value of mortgage loans would be falling. It's not. In fact the total value of outstanding residential mortgage loans hit an all time high in August.

Although speculative, I suspect that many borrowers (including myself) are unwilling to repay loans early. HIBOR linked loan taken out over the few years before the tightening began are still paying less than 1% on those loans. Not only is this a negative real interest rate and well below the yield on property, but new loans are more expensive (likely 2-2.25% depending on which bank you approach) and harder to obtain.

For my part, I have no intention of paying off any of the loans on my investment properties early and am increasingly coming to the view that I should not pay off the loan on my home early either. I can revisit if HIBOR starts rising.

Cosco Pacific purchased

This morning I added shares in COSCO Pacifc (HK:1199) to the portfolio. COSCO Pacifc is essentially a PRC port operator which also carries on a number of related businesses. The company is selling on a trailing PE and dividend yield of 8.9x and 4.5%. The company's history of paying dividends (annual and interim) is quite consistent and the balance sheet carries a reasonable level of indebtedness. Available information in container volumes for the year to August are encouraging.

I paid an average of HK$9.82 per share.

NWS Holdings purchased

This morning I added some shares in NWS Holdings Limited (HK:659) to the portfolio. NWS Holdings is a diversified conglomerate with its main businesses being toll roads/transport, water, waste management and miscellaneous services. The company is selling at a trailing PE of 7.6x and a trailing yield of 6.6%. The yield represents a pay out ratio of 50%, leaving plenty of profit being reinvested. The balance sheet is solid, with HK$4.5 billion in cash and net gearing of only 7% giving the company the flexibility to continuing expanding its businesses and to withstand adverse economic conditions.

I paid an average of HK$10.62 per share.

Book Review: The Upside of Irrationality

I purchased this book as in flight reading material for a recent business trip on the strength of a single question on the back cover:

"Why can paying high bonuses lead to lower productivity?"

I was also generally interested in the first part of Dan Ariely's book which deals with the unexpected ways in which we defy logic at work.

I found The Upside of Irrationality to be an engaging book that explained a number apparently irrational responses to various situations. The (simplified) answer to the issue of why large bonuses don't always produce better performance, and sometimes produce worse performance, is that the higher the stakes the more likely that the recipient of the bonus will succumb to pressure. Also, when as the stakes get higher, people (understandably) start spending more time thinking about their bonus than focusing on the task at hand. As an aside, I wouldn't have minded more space being devoted to what incentive schemes do tend to produce higher performance. The author does address the point but not in as much detail as he devotes to unsuccessful incentive structures.

While he book reads as a discrete list of issues where irrational human behavior is examined and explained rather than a single cohesive look at the subject, it remained an engaging and thought provoking read.

Recommended (although possibly not for people who's compensation includes a large bonus element).

Even Karl Marx would be sniggering at this rubbish

Widespread ire at the scape goats for the developed world's financial mess is more than understandable - it's justified. (Of course it would help if all the scapegoats were vilified in the same way (politicians, unions, regulators, civil servants etc) but that's another issue...)

But this list of demands from the "Occupy Wall Street" movement is so silly it's actually quite funny.

Sure there's a lot wrong with the world and a lot that needs fixing but rubbish like this is, at best, a demonstration of the failings of an education system, the absence of a moral framework and an abrogation of personal responsibility for ones self. The only thing missing from the list is the author's right to have someone else cook and serve his meals for him.

Maybe I should come up with my own list.

Banning short selling is a bad idea

There have been calls from several broking houses to follow the examples set by some European and Asian markets and either ban or further restrict short selling on the Hong Kong stock market.

A ban on short selling would be short sighted and detrimental to the market and investors generally.

To begin with, short selling in Hong Kong is already tightly regulated:

1. only designated securities may be short sold - all large cap liquid stocks

2. naked short selling is illegal - if you want to sell short, you have to borrow the shares from someone else first

3. short selling requires disclosure - short sales have to be reported on a daily basis and insiders have to publicly disclose short positions

At the risk of stating the obvious, short selling provides many benefits including:

1. a more liquid market with reduced spread - not only due to short selling in expectation of falling share prices but also short selling for abritrage purposes, the smaller spreads actually help long only investors

2. reduces the potential for market manipulation (although this is more of an issue in smaller cap stocks which are not eligible for short selling anyway)

3. reduces the risk of the market becoming over valued (or at least offers the potential to reduce the extent to which the market may become over valued) . Put differently, short sellers give long only investors an opportunity to buy at better price than would otherwise be available

4. provides the potential for support when the market has fallen - at some point the borrowed shares have to be returned to their owner which will require the short seller to go out and buy (or repurchase) the necessary shares. Every short seller becomes a buyer at some point

5. produces a more transparent market and incentivises companies to be more open and honest - allowing short selling gives investors an incentive to look for problems with a company and to invest accordingly

Jake van der Kamp's piece in this morning's SCMP made the excellent point that professional shorts produce some of the most thorough investment research and that such research goes a long way towards exposing issues with listed companies and protecting investors.

Also Sprach Analyst made the valid point that banning short selling simply does not work.

Suggesting that short selling should be banned is nothing new. Hopefully the government and the regulators will ignore the calls.

The really really depressing thing about the calls for a ban on short selling is not the general ignorance that is implicit in such calls, but that it is brokerage houses that are supporting them. These people should know better.

Confessional - I got it very wrong

Over the last few months, I've had the distinct displeasure of watching the value of my investments take a very significant reduction in value. Not only did I not sell anything when prices were much higher, I kept convincing myself that shares were, if not cheap, at least good value in the context of a market that was trading at below its long term averages (in terms of PB, PE etc). In rather blunt terms, I got it very very wrong.

I spent a significant amount of time over the weekend crunching numbers and working out where I stand in terms of my possible retirement in early 2012. While the numbers still make sense on paper, the margin of safety has largely evaporated and, subject to finding a job when I go off contract, I will likely continue working until that margin of safety is restored.

I have also considered where we will be if I find myself dealing with an extended period of unemployment. Some back-of-the-envelope calculations suggest that I would have enough cash on hand in Q1 next year to cover about 42 months of living expenses (including mortgage payments) if I don't pay off the home mortgage or 14 months of living expenses if I do pay off the home mortgage in full. (These numbers assume no new investments made and no existing investments sold.) Given the number of variables involved, I need to put together a spreadsheet to get a more accurate picture but it is unlikely that I will have any kind of near term cash shortage.

Lastly, I have to consider whether I should keep buying shares, take the losses on some of the existing portfolio or just do nothing and let the cash build up. I have not reached any conclusions on this issue.

Monthly Review - September 2011

Last month I reported that August had been the single worst month for my investment (in dollar terms) ever. The losses in September were nearly three times those of August. Retirement plans are on hold, which raises the likelihood that I will need to start looking for a job when I my contract finishes early next year.

Mark to market declines in asset values, particularly equities, were massively greater than the gains from rental income and were made much worse by adverse FX movements. Even a healthy savings rate and positive cash flow from the properties were unable to make more than a token offset of the losses. My equity investments have produced negative returns this year and many positions are now below cost.

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry or company specific factors. Some of my largest holdings (HWL, CCB, Hua Han, Yanzhou) recorded particularly large losses (on top of the large losses incurred in August). A few companies dropped by more than 50% during the month. In no case was the fall in share price accompanied by a negative company specific announcement (although in some cases there were broker downgrades). During the month I purchased shares in Tontine Wines, China VTM, Sinopec, Hang Seng Bank, CNOOC and Jiangsu Expressway;

2.my ETFs were down sharply in line with the local markets. There were no ETF purchases this month;

3. my commodities fell significantly, led by silver;

4. all of my properties are occupied (the one vacant unit will be occupied at the end of this week), the tenants are paying on time. There were some minor repair bills which needed paying;

5. currency movements were very negative, as the NZD and AUD fell against the HKD/USD;

6. my position in bonds remains small. No bonds were purchased this month. One of my early RMB bond purchases matured;

7. I have one open derivative position, a put written against the AUD;

8. savings were good with high income and low expenses.

My cash position decreased due to new investments. I currently hold 18.1 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth fell by a staggering 10.70%. The year to date decrease is 3.35%%

Yanzhou Coal purchased

This afternoon I added some additional shares in Yanzhou Coal (HK:1171) to the portfolio. The company is on a trailing PE of 6.7 and a dividend yield of 4.7%. While many (most?) brokers are predicting meaningful growth in earnings and dividends for the current and next financial years, at current prices such assumptions are not really necessary to justify a purchase. The only negative is the relatively high debt level.

I paid HKD14.78 for he additional shares.

Off topic: a literary binge

Nothing to do with personal finance, but I've spent the last several weeks on something of a literary reading binge. This was, in part, inspired by glancing at a (obviously subjective) list of the greatest novels of all time and, in part, by a desire to read something a bit different from my usual fare (mostly non-fiction with a lesser amount of popular fiction).

Books read:

1. Tender is the Night - F Scott Fitzgerald

2. The Great Gatsby - F Scott Fitzgerald (previously read at school)

3. Jane Eyre - Charlotte Bronte

4. The Trial - Franz Kafka

5. Portrait of the Artist as a Young Man - James Joyce

6. The Picture of Dorian Grey - Oscar Wilde

I'm currently on Joseph Conrad's Heart of Darkness.

I actually enjoyed reading all of these (with the exception of Jane Eyre which I found rather dull and marred by a plot line that required a most unlikely coincidence to "work"). The Trial was rather disturbing and it's easy to find parallels with daily life. However, Tender is the Night was the most thought provoking - I was left thinking to myself "I don't want to be Dick Diver".

I haven't quite found the courage to take on one of the door stopper long novels like Ulysses or War and Peace.

AUD/HKD FX contract

Yesterday I entered into an AUD/HKD FX contract - essentially writing a put option on the AUD.

Here are the details:

Prevailing spot rate: 7.5578
Strike price: 7.5578
Settlement date: 26 October
Fixing Date: 25 October
Implied annualised interest rate: 24.5775%
Break even if the option is in the money: 7.40815
Absolute return if the option is out of the money: 2.02%

China VTM Purchased

This morning I added some more shares in China VTM (HK:893) to the portfolio. With a trailing PE of less than 5x and a trailing dividend of above 4% the current share price offers attractive fundamentals which are expected to improve further. The balance sheet is sound with a net cash position (although that is likely to change as further investment is made). The fact China VTM supplies raw materials which are of strategic importance to the PRC and in respect of which three global mining companies are industry dominant is an added attraction.

I paid HK$1.52 for the additional shares.

Jiangsu Expressway purchased

This morning I added some more share in Jiangsu Expressway (HK:177) to the portfolio. With a trailing PE of around 9.2x and a yield of more than 7.5% the company offers sound value. While the toll road sector has been something of a victim of the PRC government's anti-inflation measures (i.e. reduced tolls), the net profit attributable to shareholders still rose slightly in the last interim reporting period. Gearing is moderate.

I paid HK$5.52 per share.

Hang Seng Bank purchased

This morning I made a small additional purchase of shares in Hang Seng Bank (HK:11). At current prices it offers a trailing yield of around 4.9%. I paid HK$106 for the additional shares.

Sinopec purchased

This morning I added a few more Sinopec (HK:386) to the portfolio paying HK$7.60 per share. The business is still growing, the company is selling for only slightly more than book value and I expect vulnerability to being squeezed between high crude prices and domestic PRC inflation controlling policies to decline.

CNOOC purchased

This morning I purchased additional shares in CNOOC (HK:883). The up-stream ail company has been sold off heavily in response to a combination of falling oil prices and the effect of a shut down at the Penglai 19-3 oilfield. This is largely an exercise in hoping that the sell off is over done.

I paid HK$13.40 for the additional shares.

Tontine Wines - partial sale

This morning I sold a small part of my investment in Tontine Wines (HK389) for HK$0.97 per share. This compares with the average purchase price of HK$0.85 (including costs).

There was no particular reason behind the sale other than a desire to realise a partial profit.

Hong Kong Resorts purchased

This morning I made a small investment in Hong Kong Resorts (HK:480) paying an average of HK$3.85 per share.

At current prices, the shares are trading at less than 40% of book value and offer a trailing dividend yield of 4.6%. The company's balance sheet looks quite good with net gearing at around 8%. Even if the revaluation gains which inflated the last annual result are not repeated (or even go into reverse), the company offers an acceptable level of safety.

While there are other small listed property developers/investors which sell at a higher discount to NAV, the ones I have looked at have very little liquidity.

Tontine Wines purchased #2

Yesterday, I added some additional shares in Tontine Wines (HK:389) to the portfolio, paying HK$0.92 per share.

Monthly Review - August 2011

August was not only another bad month for investments, in dollar terms it was the worst month I have experienced ever. Mark to market declines in asset values, particularly equities, were massively greater than the gains from rental income and were made worse by adverse FX movements. Even a healthy savings rate and positive cash flow from the properties were unable to offset the losses. My equity investments have produced negative returns this year (but are still ahead of cost overall).

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry or company specific factors. Some of my largest holdings (HWL, CCB, Hua Han, Yanzhou) recorded particularly large losses. There were few gainers. During the month I purchased shares in VODone, Tontine Wines, Sinopec, Sinopec, CNOOC, GDI and Varitronix;

2.my ETFs were down sharply in line with the local markets. There were no ETF purchases this month;

3. my commodities rose marginally, led by a gain in silver;

4. all of my properties are occupied, the tenants are paying on time. Two of my Hong Kong properties require minor repairs and one aircon unit needs replacing. I will have a single brief vacancy in late September/early October and will have to do the usual touch up and cleaning. One overseas property requires work on its roof. The collective bills are not significant but will temporarily dent cash flow in October;

5. currency movements were very slightly negative, as the NZD and AUD fell against the HKD/USD;

6. my position in bonds remains small. No bonds were purchased this month;

7. there are no open derivative positions;

8. savings were moderate with high income and high expenses. My major expenses were for a short summer holiday and the annual premium for the medical insurance.

My cash position decreased due to new investments. I currently hold 21.4 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth fell by 3.23%. The year to date increase is now only 8.25%

VODone purchased

VODone (HK:82) put in a disappointing result for the six months to 30 June, 2011. EPS were down 4.5% to 4.3c cps. Other material negatives were:

• a substantial dilution in the share base through a combination of non-prorata new issues;



• one off expenses of HKD34 million for one-off fair value loss on deferred consideration shares and share-based payment expenses



• an explosion in selling and marketing expenses to HKD249.7 million (from HKD73.2 million)

It was not surprising that the shares fell sharply on opening - a continuation of a downward trend which has seen the share lose about 55% of their value since my purchase at HKD2.36 in September 2010. VODone is currently the worst performing investment in the portfolio.

However, the gross profit more than doubled on the back of a significant jump in revenue and the balance sheet remains clean with no borrowings and modest cash balance of HKD342 million.

IMHO, the second half profit has potential to be significantly better than the first half. The non-repitition of the one off items alone would produce a material lift in EPS (although not one that I can precisely quantify because of the effect of minority interests). More importantly, if there was a combination of further growth in revenue and a reduction in the selling and marketing expenses, then the bottom line profit could increase significantly.

Accordingly, I added to my position this morning paying HK$1.05 per share.

Tontine Wines purchased

This afternoon I added Tontine Wines (HK:389) to the portfolio, paying and average of HK$0.825 per share.

The company has just released its interim results, showing a 21.7% decline in net profit and a 32.7% decline in EPS for the six months to 30 June, 2011. On the surface, this looked like a very bad result and the share price fell 19% today.

My take on the results (available here ) is that the shares look attractive.

Firstly, the interim result included one off expenses/losses of RMB20.9 million relating to share options and RMB14.4 million relating to FX. If these items are treated as non-recurring and backed out of the results, the interim result actually looks a lot better - the EPS would be similar to the previous corresponding period. This is especially so when the 22.1% increase in revenue and 19.3% increase in gross profit show that the company successfully grew its business during the period.

Second, the balance sheet looks very healthy. The company is sitting on RMB1.2 billion (HKD1.4 billion) in cash and has no borrowings. It has shareholders funds of RMB1.68 billion (HKD2.0 billion). The market capitalisation is around HK$1.7 billion.

Like all companies, there are issues (e.g. the extended duration of the receivable, rising costs and absence of an interim dividend) but, on the whole, the company looks like an attractive entry point to China's growing domestic consumer market.

A very short vacancy

The tenant in my highest renting property gave notice to quit last Friday. If the property remained vacant, I would have negative cash flow on the rental portfolio as a whole (although principal payments are the biggest component of the cash outflows, so I would still be making a profit).

However, a new tenant has been signed up already and I will be banking the cheque at lunchtime.

While the new rent is 11.4% higher than the previous rent, I am not actually any better off unless the new tenant stays there for more than year because the negative effect of (i) agent's commission (ii) tidy up and cleaning costs and (iii) a two week vacancy between tenancies is equal to just under 12 months worth of the rental difference.

Inflation hits 7.9%

That's right - Hong Kong's CPI for the year ending July 2011 hit 7.9%. This is the highest level since November 1995 (8.4%) and compares to 5.6% for the year to June.

The main contributors to the sharp rise were (i) rents (ii) food (iii) travel.

The HKSAR government made a rather feeble attempt to spin the number saying that it was partly due to a lower base comparison arising from one off concessions granted in July 2010 (in particular a waiver of public housing rentals that month). At best, this is misleading as it is simply another way of saying that CPI was understated a year ago.

Some granularity:

• alcohol and tobacco rose 20.1% (there was an increase in the tobacco tax)


• housing rose 16.4%


• food rose 10.7%


• clothing and footwear rose 7.3%


• dining out rose 5.5%


• transport rose 4.8%


• utility costs fell 16% (the government used taxpayers money to subsidise eletricity consumption)

Even if you accept the government's arguement that the effective CPI was "only" 5.8%, this is still higher than the average pay increase (civil servants and a few other small groups excepted), much higher than the yield on good quality HKD bonds and multipiles of HKD bank deposit rates. For investors, the message is pretty clear - if you want to mainatin the real value of your investments, you have to buy risk assets and/or be a borrower. Conservative savers are keeping their money nominally safe, but accepting an assured destruction of real value.

Varitronix purchased

This morning I purchased a small number of additional shares in Varitronix (HK:710) paying HK$3.54 per share.

Varitronix was sold off heavily following the release of its interim results this morning. At the time of writing the shares were down more than 12% from Friday's close. While I usually proceed on the basis that the market knows more than I do, this was puzzling:

1. the result was a good one - EPS for the period was 30.38 cps, up 39% from the previous corresponding period

2. the interim dividend was doubled to 11 cps

3. the result was achieved in spite of (i) rising costs typical of those faced by PRC manufacturers generally (ii) the impact of the Japanese earthquake and tsunami and (iii) losing HK$19.9 million on trading securities

4. the company is sitting on HK$354 million in cash and HK$294 million in securities. While details of the securities held were not provided, it can be inferred from the break down of "other income" that the bulk of them should be debt securities. After backing out the HK$126 million in debt and arbitrarily discounting the securities by 20%, the company has net cash and investments of HK$463 million or approximately HK$1.41 per share

5. the Chairman's comments were cautious to slightly negative, leading to the conclusion that results for the second half may not be as good as the results for the first half. This is hardly surprising. However, IMHO, the second half results would have to be a lot worse to justify the sell off in the company's shares. Put differently, if the final dividend for 2011 is the same as the final dividend for 2010 (21 cps), then the annual dividend is 32 cps, a yield of over 9%

What am I missing?

CNOOC purchased

This afternoon my small limit order on CNOOC (HK:883) got hit. I paid HKD14.36 for the additional shares. With a trailing yield of 3.2%, a sound balance sheet and a number of brokers having price targets above HKD21.00 the sell down is (IMHO) over done - notwithstanding that the recent fall in the price of oil may not have been factored into valuations.

Guangdong Investments purchased

This morning I made a further investment in Guangdong Investments (HK:270), paying HKD4.26 per share. Once again, this is an attempt to add some low risk yield to the portfolio.

Hang Seng Bank purchased

This morning I made another small investment in Hang Seng Bank (HK:11), paying HKD112.80 per share. The attraction remains the 4.6% yield.

At the time of writing, several other limit orders remain unfilled.

Sinopec purchased

This morning I made another small addition to my position in Sinopec (HK:386) paying HKD6.60 per share. The company offers a trailing dividend yield of 3.7%.

Guangdong Investments purchased

This morning I made a small additional investment in Guangdong Investments (HK:270) paying HKD4.26 per share. The company is essentially a utility with its largest asset being the water business. The later is interesting in that the long term contract to supply water to Hong Kong is due to be renegotiated later this year. Given the way in which the PRC government has shifted the inflationary burden onto the toll road operators, there is at least some risk that the company may be put under pressure to absorb inflationary pressures itself (rather than set a free market price), but my view is that this is well recognised and already reflected in the price.
Trailing yield is 3.5%

Hang Seng Bank purchased

This morning I topped up my shareholding in Hang Seng Bank (HK:11) paying HKD113.20 per share. At current prices, Hang Seng Bank offers a nice fat 4.6% yield (paid quarterly). It won't be the most exciting of stocks on the upside, but it's one I feel comfortable owning for the longer term.

Living with the downside

As mentioned in my previous post, every equity I've purchased so far this year is now trading at below cost, in some cases well below cost. Add in the declines in value in the portfolio I held at the beginning of the year and the cumulative losses on equities far outweigh the net rentals and FX gains. As things currently stand, plans to retire in early 2012 are in jeopardy.

That said, there are some positives:

1. assuming no further investments, by month end I will be sitting on around 30 months of living expenses in cash or near cash. This is the most I have had for a considerable time;

2. interest rates remain low and are likely to remain low for the foreseeable future. The risk of higher interest rates on my floating rate mortgages has been significantly reduced;

3. I am still accumulating and the recent share market falls mean that I will be buying at more attractive prices than earlier 2011 or in 2010. The Hang Seng Index is trading at below 11x current year earnings. While this is not as low as in early 2009, it is well below the historic average;

4. it is better that this happen now when I am still working (although with considerable uncertainty when I come off contract at the end of 2011) than after I retire;

5. the weaker AUD/NZD provides an opportunity to move some money offshore to further diversify my asset base.

Obviously markets can keep falling - we are still well above the early 2009 lows, I could be facing unemployment next year and I could get some vacancies on the properties. A lot of things could continue to go wrong, but at some point the current market rout will become an opportunity. Although this may be evidence that I need therapy, I am more inclined to ignore the overwhelming tide of negativity and view the current market as a buying opportunity than to panic and sell. Famous last words I am sure.

Sinopec purchased

Insanity, it is often said, is doing the same thing over and over again and expecting a different result.

I've been "buying the dips" all year and, so far, every single equity purchase this year is currently underwater with Sino Oil & Gas (HK:702) being the most expensive in terms of unrealised losses and Specialty Fashion (ASX: SFH) being the worst performer in percentage terms. The losses on the equities (including those held at the start of the year) now exceed the net rental income and FX gains by a considerable margin. Things have reached the stage where my plans to retire in early 2012 are now very much in jeopardy. I'll post some further thoughts on the big picture separately.

In any event, I purchased some more Sinopec (HK:386) today - another small incremental addition to the portfolio. I paid HK$6.48 per share. Sinopec has been hammered by the inability to pass high oil prices through to end users. With oil prices falling (and PRC imports of crude still rising), I would expect Sinopec to perform better once the damage to the current reporting period is out of the way. It also offers an attractive dividend yield of close to 4%.

AUD/HKD FX contract

On Friday I entered into a short term (two week) AUD/HKD FX contract:

Spot rate at time of contract: 8.096
Strike: 8.05
Annualised premium: 10.06%
Fixing date: 18 August
Maturity Date: 19 August
Implied break even rate: 8.019

This is largely an exercise in attempting to extract a better yield from my bank deposits. While this is not always a sensible exercise, with inflation running at 4+% and deposits yielding close to zero, the alternative is to accept certain erosion of the real value of my savings. The amount involved is not particularly large - about the "standard" amount I would put into a single stock position.

The problem with bottom fishing...

The problem with bottom fishing is that you never know how deep the water is.

My previous efforts to add to the portfolio by picking up some "bargains" has, to date, been an exercise in catching the falling knife. It was fortunate that previous purchases were small incremental additions to the portfolio.

This morning I repeated the exercise making small incremental additions:

1. Sinopec (HK:386): I paid HK$6.98 for some additional shares;

2. Sino Oil & Gas (HK:702): I paid HK$0.34 and HK$0.36 for some additional shares;

3. CNOOC (HK:883): I paid HK$15.50 for some additional shares.

Monthly Review - July 2011

July was another bad month for investments, and with mark to market declines in asset values being greater than the gains from rental income, commodities and FX movements. Only a healthy savings rate resulted in a small increase in net worth for the month.

Equities and ETFs all declined during the month with a very small positive contribution from currency fluctuations, positive cash flow from the properties, commodity gains and a moderate savings rate being sufficient to offset the losses.

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry specific factors. During the month I purchased shares in Anhui Express, China VTM, Sino Oli & Gas and CCB. Only the latter is currently above the price paid;

2.my ETFs were down marginally in line with the local markets. I made a small addtion to my position in the Russia ETF;

3. my commodities rose, led by a gain in silver;

4. all of my properties are occupied, the tenants are paying on time. One overseas property has reached the point where a number of long term maintenance issues need to be dealt with. Fortunately the tenant (who has been there for over 7 years) is happy to stay while the work is being done. I had one repair bill this month (a new washing machine). I will have a larger repair bill at some stage on a Hong Kong property suffering from a persistent leak;

5. currency movements were very slightly positive, as the NZD and AUD appreciated against the HKD/USD;

6. my position in bonds remains small. I subscribed for HKD iBonds this month;

7. My only open FX derivative contract - short NZD/HKD - was exercised against me, but I still made a small profit on the transaction;

8. savings were moderate with high income and high expenses. My major expenses were for the en primeur wine season (again). Fluctuations in income is inherent in the nature of my remuneration package. Next month, the annual bill for my family's medical insurance falls due.

My cash position was slightly increased (in spite of the new investments). I currently hold 25.6 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth increased by 0.19%. The year to date increase is 11.86%

iBond allocation

The Hong Kong government has formally announced the results of the subscription and allocation of the iBonds .

As expected, this was largely a retail focused offering - the average subscription value was about HK$84,000. Given the allocation procedure for this offer (which is different from other public offers), substantial scaling down of larger applications was to be expected with either 44 or 45 bonds (HK$440,000 - 450,000) being the largest allocations.

The general lack of interest from larger (and presumably more sophisticated) investors is understandable - equities offer considerably more upside. However, for those who want or need to have an allocation to HKD cash/near cash/short term bonds, the iBonds represent a better deal than anything else which is available. For my part, I will happy to have part of my cash allocation in iBonds instead of bank deposits.

2011 Mid Year Review

A slightly late mid year review.

So far, 2011 has been something of a mixed bag as far as the objectives set at the beginning of the year are concerned. Going through them in order:

1. my savings rate has been excellent. Because of the irregular nature of some of my expenses, I can't give an accurate estimate of my YTD savings rate, I think I am on track to have an annual savings rate in excess of 50% again.

2. asset allocation is moving in the right direction. I currently hold more cash than I did at the beginning of the year and am more or less at the lower end of my 24-36 months of living expenses target.

3. I have maintained my predominant exposure to risk assets. Real estate continues to do well - rents have risen more than enough to cover the increased expenses (mostly due to increased government taxes) and, while equities have been disappointing, they have not been disastrous. The worst mistake I made was not selling my silver when it spiked to USD49 per oz.

4. I have made no decision on my home mortgage. Current thinking is that I will most likely repay it even though this seems like a sub-optimal decision.

5. I have tracked expenses closely. They keep rising even though I do not feel that we are being extravagant. Some of the increase is due to our children's education. Most of the rest is very real and very noticeable inflation.

6. I have not done the medical.

7. I have made some progress on upgrading my awful tech skills. There is still a lot of work to be done in this area. The big challenge will come when I replace my current laptop (which needs to be done soon).

8. The home renovation project remains in limbo. It needs to be done, but keeps getting deferred. From a monetary perspective, the longer it gets delayed the better.

9. I have signed up for the HK Trailwalker this year. So far, no sign of a recurrence of the injury problems which have plagued me for the last few years. Given that my weight has crept up a few kilograms since February, this is a positive development.

10. I have rewritten about 60 pages of the fantasy novel. This doesn't really add anything to the total amount of product, but it is still progress of a sort.

11. I have done nothing towards shifting the focus of my social network.

In terms of other developments, although I remain in track to hit my number and retire in early 2012, the last few months of negative returns on my equity investments has put a dent in my confidence and I am seriously considering extending my working career for another year. What happens when I come off contract at year end will also be relevant to this decision.

I've spent some time looking into university courses. While language issues make some of them impractical, there are still plenty of reasonable options to consider. The large gap between my likely retirement date in early 2012 and the start of most semesters in Q4 2012 is unfortunate but will give me an opportunity to focus on some of my other activities.

We continue to foster kittens for the SPCA. Although our own cat is unhappy with the intruders, it's a rewarding, if slight messy, experience.

We took one family holiday in the first half of the year and mrs traineeinvestor and I took a short trip to New York without the children. We have two short family holidays planned for the second half of the year.

The consequences of excess regulation

HSBC Private Bank has become the latest financial institution to announce that it will no longer provide services to US expats. While the official announcement from HSBC Private Bank was couched in fairly diplomatic terms, it is obvious (to me at least) that this is a direct response to proposed disclosure rules and the consequential regulatory burden and potentially draconian penalties associated with doing business with HNWIs who also happen to be US expats.

In short form, the new rules which take effect on 30 June next year will not only make the banks responsible for non-disclosure by their US clients but require the banks to prove their innocence to avoid those penalties. Leaving aside the absolutely inappropriate shift in responsibility onto the banks and the very improper extrateratorial effect of the new regulations, it's worth noting that there were much easier and less costly ways of achieving the same objective (of identifying tax evasion by US persons).

Note: edited to clarify that the announcement relates to HSBC Private Bank, not HSBC as a whole

HSBC is not the only financial intermediary that will not accept US clients outside the US - it is now common to see account opening documents and investment subscription forms contain declarations that the investor is not a US person.

iBond subscription

I submitted a subscription for the Hong Kong government's iBonds. Given that I expect allocations to be scaled back substantially, I used most of my available HKD cash - equivalent to about two years worth of living expenses.

It has been reported that total subscriptions were about HKD13 billion (total issue size is HKD10 billion with no provision for over allotment). Given that the government has stated that it wants every subscriber to get at least one board lot (HKD10,000) and reports from banks handling applications suggest that a lot of the subscriptions were for relatively small amounts, I still expect to get scaled back significantly.

Given my reservations about the merits of the iBonds as an investment when viewed in isolation or in comparison to equities, it's worth reminding myself that the iBonds will form part of the (approximately) two years worth of living expenses which I want to hold in cash or near cash form once I retire. As such, although I expect them to generate a loss in real terms (fee waivers by the banks notwithstanding), they are still a much better deal than bank deposits or other available HKD denominated bonds of similar maturity. Put differently, the purpose of this investment is to reduce risk rather than to generate optimal returns.

The downside to owning iBonds is really just the opportunity cost. I have considered the argument put forward by some commentators that the iBonds could end up trading below par in the event that we experience a combination of low inflation (or deflation) and rising interest rates. Even if that were to happen (i) it would have to apply, on average, over the three year term and (ii) there is a floor of 1% which means that the bonds will show a positive real return if inflation is less than 1% and (iii) the relatively short term would allow me to hold to maturity without too much pain.

CCB purchased #4

Yesterday I made a small incremental purchase of shares in China Construction Bank (HK:939). With the mainland economy continuing to grow at a robust rate and the range of financial products and services continuing to expand and to reach a greater percentage of China's emerging wealthy and middle classes, my expectation is that earnings will continue to grow over time. Based on trailing and projected ratios (PE, PB, NIM etc) it appears cheap. The biggest issues facing the bank are concern over exposure to local government borrowers (and, to a lesser extent, property developers) and the possibility of further tightening measures in the PRC's war against inflation. These issues have received massive amounts of publicity and, I hope, are well reflected in the price. The BOA stock overhang is also weighing on the share price. While cheap could become cheaper, I am willing to make a small addition to my position.

I paid HK$6.06 per share. Average cost is now $6.41 (reflecting transaction costs but ignoring dividends).

Hong Kong property prices retreating?

There is now plenty of anecdotal evidence that Hong Kong property prices are starting to fall in price. Whether this is the beginning of the bursting of a bubble (assuming it is a bubble in the first place) or merely a healthy correction is, at this point in time, something that could be debated endlessly.

From my perspective, a moderate pull back in prices is welcome - not only will it reduce the risk of further intervention by the Hong Kong government, but it will also reduce the risk of a more substantial crash at some point in the future. If the fall in prices is large enough, there is also the possibility of finding something to add to the private portfolio at a price that makes sense.

The SCMP's Property Section for this week carried an article about investors cutting prices in a rush to sell flats. This quote sums up the article:

"Flat owners are cutting prices to unload their investment properties because they fear the government will launch more cooling measures..."

I have long since made the decision to hold my portfolio through the market cycle and am not overly concerned at the prospect of a reduction in values. However, I would be concerned if rental levels fell to any material extent (and it has to be remembered that, in spite of complaints from renters) rental levels have not risen nearly as much as property prices and, in my experience, have probably not even kept up with inflation over the last several years.

I would also be affected, but less concerned, if HIBOR started rising by a material amount. There is no sign of that happening yet, but it has to be assumed that it will rise at some point in the future.

As an aside, at least one bank (HSBC) has announced another increase in the margin it charges on HIBOR linked mortgage loans. The once very meaningful difference between HIBOR linked loans and Prime linked loans is rapidly disappearing for new mortgage loans (existing loans are not affected).

An almost guaranteed loss - in real terms

The Hong Kong government has announced that it will press ahead with the issue of HK$10 billion of inflation linked bonds. In spite of going on a spending binge (unjustifiable increases in already bloated civil servant salaries, new government offices and, most likely, sticking the taxpayers with the cost of a third runway etc etc), the government does not need the money - it is sitting on financial reserves which are enormous however you measure them.

The bonds will pay interest at the higher of the rate of inflation (as measured by the CPI) or 1% pa every six months. Maturity is in 2014 (three year term). There will be no adjustment to the principal value of the bonds.

Unless inflation is below 1%, the bonds will guarantee a loss to investors in real terms because:

1. there will be a fee payable on application (expected to be 0.15%);

2. the interest payments will be at least six months in arrears;

3. the banks will charge a fee on each interest payment and on repayment of principal on maturity.

Depending on the amount invested and the CPI, the cumulative effect of items 1-3 above could be about 1% a year. Viewed in isolation, the bonds do not represent good value. IMHO, this remains true, even with the downside protection offered by the 1% floor in the event that we have very low inflation or even deflation.

However, I'll be applying for whatever I can get. With inflation currently above 4% and expected to exceed 5% this year, the yield is much better than I can get on either term deposits or other HKD/USD bonds with a similar maturity. I intend to keep about 24 months' worth of expenses in cash or near cash form once I retire. HKD bonds issued by the HKSAR government with a maturity of three years (less the interval between issuance and my retirement date) will be a much better option for the cash/near cash part of the private portfolio than bank deposits with their negligible yields.

The issue will be the fact that only HKD10 billion will be issued - getting a reasonable allocation may be difficult.

Some small portfolio additions

Yesterday I made some small additions to the private portfolio. Whether this proves to be an exercise in bottom fishing or catching the falling knife is a question that I will only be able to answer with hindsight. Here are the details:

1. Russia ETF (HK:2831): I paid HK$39.50 for some additional units. This compares with my original purchase price of HK$19.12. Average purchase price is now HK$20.32. Selling on a projected 2011 PE of around 6x, Russia looks cheap;

2. Anhui Expressway (HK: 995): toll road operators have taken a pounding as targets of the PRC government's attempts to transfer the cost of managing inflation (at least partly created by PRC government policy) onto businesses. I think this is overdone and, with a projected yield of more than 4%, the shares offer reasonable value. I paid HK$6.45 for some additional shares. My original purchase price was HK$4.33 and my average purchase price is now HK$4.57;

3. Sino Oil & Gas (HK:702): this has been one of my more disappointing investments with the shares trading well down on my original purchase price of HK$0.52. However, with gas now flowing risk associated with the company's projects should be reducing. The additional shares cost HK$0.43 and the average purchase price is HK$0.49;

4. China VTM Mining (HK:893): this has been another disappointing investment. However, I have seen nothing to indicate that the company's fundamentals have changed. The additional shares cost HK$3.01 which compares to an original purchase price of HK$3.73. Average purchase price is now HK$3.71.

Prices include transaction costs and ignore the effect of dividends received.

Market risks realised

The last few months have provided some graphic illustrations of the risks of investing in equities. As I have reviewed the declines in the values of my investments over the last few months, it's worth making a note of the reasons for the decline. It's even more important for me to remember that fluctuation is the normal condition of the world's equity markets and downward movements are opportunities above all else.

Some observations on the declines:

1. equity markets have declined globally. The declines have been attributed to a number of factors: the Greek financial crisis and problems in the Eurozone generally, the USA's own budgetary problems, the end of QEII etc;

2. locally, China is facing rising inflationary pressures and the measures it is adopting to curb inflation are impacting several companies in the portfolio. Specifically, China is preventing companies from raising prices - Sinopec and my toll road operating companies have been hit hard by price controls. Likewise, my investment in CCB has been impacted by increases in reserve requirements (as well as the spectre of rising loan losses);

3. several PRC companies have been the subject of allegations of fraud or other irregularities. While no company in the private portfolio has been subject to such allegations, small and some mid-caps generally have been sold off in response to this problem. CMR, Aupu and others;

4. some company results have been disappointing (China Gas, Allen International, Specialty Fashion) and other companies have been subject to analyst downgrades (Caltex, Nufarm);

5. talk of a collapse of the property bubbles in Hong Kong and China continues unabated. Such talk has been going on for years. Sooner or later prices probably will decline. I just have no idea when. So far the only company which has been adversely affected is Ka Wah.

While some of these issues are not going to go away very easily (in particular the US and Euro zone debt problems), they are presenting opportunities. Both trailing and forward earnings estimates for Hong Kong and China are will below historical averages. Even allowing for downward revisions to earnings estimates, prices still look attractive and it is very tempting to make some more investments.

How much of my cash pile to invest is a question I need to think about. Once I stop working, the position changes and I will need to maintain a reasonable amount of cash. My target is around 24 months worth of expenses. However, as long as I am working, I have no need to hold much more than a couple of months of expenses in cash form. So I can more or less spend as much as I want.

The next question is which investments to make. I'll give some thought to that over the long weekend.

Monthly Review - June 2011

June was a very bad month for investments, and with mark to market declines in asset values being large enough to result in a reduction in net worth. This is the third month in a row that equity values have declined.

Equities, ETFs and commodities all declined during the month with a very small positive contribution from currency fluctuations, positive cash flow from the properties and a moderate savings rate being insufficient to offset the losses.

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry specific factors (separate post to follow). During the month I purchased shares in Sino Oil & Gas and China Blue Chemical;

2.my ETFs were down marginally in line with the local markets;

3. my commodities declined, led by a big drop in silver;

4. all of my properties are occupied, the tenants are paying on time. One overseas property has reached the point where a number of long term maintenance issues need to be dealt with. Fortunately the tenant (who has been there for over 7 years) is happy to stay while the work is being done. While I had no repair bills this month, I will have a large repair bill at some stage on a Hong Kong property suffering from a persistent leak;

5. currency movements were very slightly positive, as the NZD appreciated against the HKD/USD;

6. my position in bonds remains small. There were no purchases this month;

7. I entered into an FX derivative contract - short NZD/HKD;

8. savings were moderate with high income and high expenses. Fluctuations in income is inherent in the nature of my remuneration package. The additional expenses this month were due to the en primeur wine campaign;

9. I transferred some money to Mrs Traineeinvestor.

My cash position was slightly increased (in spite of the new investments and the transfer to Mrs Traineeinvestor). I currently hold 21.4 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth decreased by 0.09%. The year to date increase is 11.65%

FX Contract rolled over

I have rolled over my NZD/HKD FX contract. The contract amounts to writing a covered call option on the New Zealand dollar. Details are as follows:

1. prevailing spot rate: 6.2665
2. fixing rate: 6.2665
3. fixing date: 27 July, 2011
4. maturity date: 28 July 2011
5. implied annual interest rate: 11.4625%
6. implied conversion rate if option is exercised against me: 6.3263

If the NZD/HKD exchange rate is below the fixing rate determined on the fixing date, then I will keep my NZD and be paid interest at an annualised 11.4625%. If the NZD/HKD is above the fixing rate then I will be paid in HKD converted at the fixing rate. So long as the spot rate on maturity is less than 6.3263 then I make money.

Looking back, I realised that I forgot to post about the previous FX transaction which matured today. Oh well....

World Wealth Report 2011

The 2011 edition of the Capgemini Merrill Lynch World Wealth Report provides an interesting snapshot of the world's high and ultra high net worth populations. While the information in the report is very much in summary form, it is still interesting to see the trends in how the wealthy allocate their assets.

Some highlights:

• globally, HNWIs increased their financial wealth by 9.7% and their numbers by 8.3%



• there are now more HNWIs in Asia-Pacific (3.3 million) than in Europe (3.1 million). North America still has the highest HNWI population at 3.4 million



• the UHNWI population grew more rapidly than the HNWI population. There are now an estimated 103,000 UHNWIs



• HNWIs increased their allocations to equities (to 33% from 29%) and reduced allocations from cash/deposits (to 14% from 17%) and fixed income (to 29% from 31%)



• North American HNWIs increased their exposure to home country investments (to 76%) but are expected to reduce home country allocations going forward. In contrast both European (to 56% from 59%) and Asia-Pacific HNWIs (to 57% from 64%) reduced their home country allocations



• the average age of HNWIs is falling with the percentage who are aged under 45 rising from 13% to 17%. The number of young HNWIs is particularly high in Asia-Pacific (41%)



• the percentage of HNWIs who are women continues to rise strongly (to 27% from 24%). North America continues to lead in this figure with women making up 37% of the HNWI population

The rise in the number of HNWIs and UHNWIs and their average wealth levels is hardly surprising. The numbers merely reflect a rise in asset prices (in particular global equities and Asian real estate) during 2010. An increase in exposure to equities after equity prices has risen is also unsurprising. The more interesting information are the trends within the larger numbers - the growing levels of wealth in developing economies, the increasing fragmentation of wealth accross the globe, within age groups and between genders.

HNWIs are defined as having investable assets of USD1 million or more, excluding primary residence, collectibles, consumables and consumer durables. For UHNWIs the threshold is set at 30 million.

Telling it like it is - becoming "really rich"

This article on MSN Money caught my attention.

The basic premise is that USD1 million in net assets is no longer enough either to be considered genuinely wealthy or to support a moderately affluent retirement - even if you also happen to own your own home mortgage free. This is a simple reflection on the realities of inflation at even moderate levels over a period of time (or, if you prefer, the decline purchasing power of currencies). It's also worth mentioning that inflation in the luxury sector has been outpacing the general rate of inflation for at least the last several years. Sure you can retire with this sort of nest egg, but even if you live in a low cost location, your retirement will hardly be the stuff of aspirational dreams.

The article neatly summarises the difficulties of getting to be "really rich" (defined as net assets of at least USD7.5 million). Earning a middle class income, saving and investing sensibly for a long period of time won't do the job (even with company matches to retirement plans). This is not exactly news and a little basic maths is enough to demonstrate this. As a comparison, a Barclays report in 2008 defined "wealthy" as USD10 million in net assets.

If you want to get "really rich" the key message is that, absent some exceptional talent (sports, writing, singing, acting etc) or winning a lottery (genetic, marital or other), you need either (i) to earn exceptional income (being a top end earner is a field like law, medicine, accounting, banking etc) or (ii) to take a lot of risks (using leverage) or (iii) to start your own business. This is consistent with my own thinking back in 2006 on getting to UHNW status.

While the reality of getting "really rich" is nothing new, its worth a reminder. For most of us, if you want to achieve more than common millionaire financial status and you are not earning an exceptional income, then your choices are largely limited to using leverage or starting your own business (or both). Since it's not going to come to you, the only way its going to happen is if you get out there and do it yourself.

Two additional thoughts:

• the longer you leave it the harder it is to break away from the seemingly comfortable and secure middle class lifestyle. As your career progresses and you start to accumulate at some assets, possible start a family, the opportunity cost of taking a risk (the cost of failure) increases. In some respects I regard the failure to get off my butt and start a business as one of life's failures;
  


• if you are going with the leverage route, the best time to do is is when "there is blood on the street" (attributed to Nathan Rothschild). Buying real estate (or any asset for that matter) on leverage with positive cash flow at a time when the world thinks it will never stop falling has, time and again, been a wonderful way to generate wealth. I give myself more credit here than I do on the entrepreneurial front.

Longevity and early retirement - revisited

I last posted on this subject back in 2009

Longevity is pretty fundamental so it's worth revisiting the question of whether or not there a link between early retirement and longevity and, if so, is the link a positive one or a negative one? It's a subject that comes up on internet forums from time to time and is clearly an important issue to many people. With my own plans for early retirement well advanced, it is one that is certainly important to me.

There have been at least some studies done on the subject, including:

1. this paper summarising the correlation between life expectancy and retirement age at Boeing - and finding a strong positive degree of correlation between early retirement and longevity;

2. this study of retirees from Shell which found that the earlier retirees (aged 55) included in the studies had shorter life expectancies than those who retired later (aged 60 or 65);

3. there is also the more comprehensive study done by the UK Economic and Social Research Council which was the basis for my earlier post.

Both the Boeing and the Shell studies have been subject to comments that they fail to properly take into account factors such as the health of the individuals involved, whether the retirement was voluntary or compulsory, diet, attitude etc. This suggests that neither study can be regarded as conclusive. The UK Economic and Social Research Council's study did address a number of these issues.

My own take, after reviewing not only the materials cited above, but also a selection of the extensive commentary available on the internet is that early retirement is likely to be positively correlated with longevity if, following retirement

1. retirees experience reduced stress levels;

2. retirees remain physically active;

3. retirees remain mentally active;

4. retirees remain socially active;

5. retirees have the financial resources to support their chosen lifestyle;

6. retirees live a reasonably disciplined lifestyle;

7. retirees get sufficient good quality sleep;

8. retirees contribute to either their families or society.

This is not exactly rocket science. Most people who can follow 1-8 will be in pretty good physical and mental health regardless of whether they are retired or working. The issue for retirees is that you have to create or achieve all of these things on your own - the discipline of turning up to work each morning will be gone - no one is going to do it for you (although Mrs Traineeinvestor would probably have some thoughts on this subject).

For my part:

1. work is a cause of stress. I expect that retiring will reduce stress (although it is possible that other causes of stress may emerge post-retirement);

2. retirement will enable me to spend more time in the gym;

3. I have a number of bucket list items and hobbies which will keep me mentally active and challenged. If all else fails, I will do some studying;

4. remaining socially connected is likely to be my biggest challenge. By nature I am an introvert and have a very limited social circle. Right now I prefer it that way, but I have to recognise that I may need to start interacting with people more;

5. finance should be fine. Building a bigger cash/near cash reserve and (possibly) paying off the home mortgage should give additonal peace of mind once the pay cheques stop arriving each month;

6. I don't anticipate too much difficulty in maintaining self discipline. Getting out of bed in the morning has never been a problem. I initially thought that maintaining a healthy diet might be an issue, but since most of my dietary sins occur during office hours, I'm not too concerned;

7. sleep is an issue. I am a chronic insomniac. I have no idea whether I will sleep better after retiring or not - I only know that it's very unlikely that I will sleep any less;

8. I already have a couple of volunteer activities and can expand on these easily enough.

It's also worth bearing in mind that I will be retiring by choice - I am not retiring early due to job loss, ill health, technical obsolescence or other adverse reasons. Also, for me retirement is not only about leaving my job, it's also about moving on to embrace a different phase of my life.

Looking forward to it.