Friday, July 29, 2011

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%

Wednesday, July 27, 2011

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.

Friday, July 22, 2011

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.

Thursday, July 21, 2011

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.

Thursday, July 14, 2011

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).

Thursday, July 07, 2011

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).

Wednesday, July 06, 2011

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.

Tuesday, July 05, 2011

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.

Friday, July 01, 2011

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%