Case Study on MR. A
Background information
Mr. A, who is in his mid 50s, is a senior manager with an MNC manufacturer of computer parts based in Bedok. He has 2 children, a son aged 21 who completed his national service enlistment recently and is preparing for a 3 year enrolment in a UK university this summer (estimated annual expenses for a UK university education is about SGD 70,000 a year) and a daughter aged 17 who is currently in her final year of junior college with the intention of studying at a local university for another four years. Mrs. A, who was previously a full-time homemaker when the children were younger, has just re-entered the labour market, working in the accounts department of a local logistics company.
Current situation
Due to the rapid technological changes and to the current industry downturn, Mr. A was retrenched and recently received SGD 350,000 in benefits due to his long service. Together with the availability of CPF ( Central Provident Funds ) savings amounting to SGD 850,000 which he could withdraw anytime now and personal cash savings of SGD 300,000 in various short term savings and fixed deposits with local banks, Mr. A reckons that he now has liquid funds totalling SGD 1.5 million in cash available for investment to meet his various needs.
Investment proposals
Mr. A was attracted to the various proposals made by the following persons:
1. Ms. Kelly, who works in the wealth management department of Bank X, proposed that Mr. A place his available funds with Bank X for investment management so that it can grow at an average of 8 – 12 % p.a. (based on the track records of the bank’s performance for similarly managed investment portfolios over the last 20 years). The money managed by Bank X would be invested in a diversified portfolio comprising local and foreign stocks, bonds as well as liquid investments such as local and foreign currencies. The weightings of the portfolio to be managed for Mr. A as suggested by Ms Kelly would be local stocks ( 50%), bonds ( 20%), foreign stocks (20%) and cash deposits and equivalent including foreign currencies ( 10%) although the individual weightings could be altered to suit Mr. A’s preference.
The minimum amount accepted by Bank X for such an investment proposal is SGD 1 million. Additional funds accepted by Bank X from the same investor account must be in multiples of SGD 100,000 with no upper limit imposed on the amount that it can manage.
2. Mr. Lawrence, who is a very experienced Director of Sales at land development and investment Company Y, recommended that Mr. A uses his available funds to co-invest with Company Y in the purchase of outlying land near very established urban towns in the UK and elsewhere at low market rates. According to Mr. Lawrence, Company Y which has track records for the past 10 years in meeting its clients’
returns expectations, guarantees not only to pay back the original capital invested but also a percentage of profits at the end of the 5 year period (stated in the investment agreement as amounting to 20 % of the original amount invested after the land value has appreciated following its re-gazetting or being rezoned for urban development by the relevant urban authority concerned). Mr. Lawrence not only assured Mr. A that he will not suffer any losses but also promised Mr. A annual returns of 8.0 % payable quarterly throughout the tenure of his investment.
The minimum investment amount is SGD 50,000 but most of the clients have invested at least SGD 250,000 or more, according to Mr. Lawrence. Mr. Lawrence was able to show testimonials of existing clients who were highly satisfied with their investments made through Company Y over the years.
3. Mr. Michael, who recently joined Company Z (a firm specialising in the marketing of investments in energy related assets such oil fields and gas extractions) as Senior VP for Marketing, strongly recommended that Mr. A set aside funds for a maximum tenure of 3 years to invest through his firm. According to Mr. Michael, the expected returns amount to 3 % every 3 months on the total amount invested, with fixed payment dates of the returns and principals at the end of every quarter. The investments from clients would be secured through first charges or lien on specific oil fields located in North America where the oil reserves would be independently certified by oil and gas experts. Such investments which are duly documented (prepared by lawyers who are experts in this field) have proven track records as the Company Z which Mr. Michael is working for has tied up with middlemen having connections with the oil majors to pre-sell the oil in the reserve fields to achieve the desired returns in a series of pre-sell agreements. According to Mr. Michael, in this way investors can then be assured of getting their returns as the whole investment process will be documented and above board.
Mr. Michael who was previously with an investment company promoting gold and related investments, suggested that if Mr. A invested sufficiently and diligently now, the returns to be achieved would be more than adequate to fund his son’s education over the next 3 years. Moreover, as Mr. A has known and trusted Mr. Michael for the last 10 years, he is seriously considering this proposal.
Assumptions
The house in Bishan that Mr. A and his family currently live in is fully paid for. He has more than adequate insurance policies to cover his entire family needs for medical and long term life planning needs as various policies were purchased years ago when he first started working. It can be further assumed that property investments and insurance coverage will not be considered by Mr. A in his current investment decision deliberations. For the purpose of this case study, Mr. A also does not wish to consider placing the funds back with CPF Board or to directly purchasing annuities, listed equities and mutual funds (unit trusts) from insurance companies, banks, brokers or investment houses. There is also no need to consider bank fees and charges, capital gains and income taxes in Mr. A’s investment decision making process.
As to the economic environment in Singapore, the interest rate for short to medium term deposits can be assumed to be 1.0 % p.a. while the annual inflation rate is about 4.0 % p.a.
Assignment
Based on your understanding of the investment tools and concepts that you have learned thus far, explain how you can use the same tools and concepts to advise Mr. A.
Discuss your recommendation(s) on how and with whom Mr. A should or should not invest the cash he has on hand. Analyse the relative merits, demerits and risks involved and discuss the potential outcomes if Mr. A were to take up all your recommendations. Besides considering the 3 proposals outlined in the case, you can also discuss additional suggestion(s) and/or alternative(s) where appropriate (considering the various assumptions mentioned) all of which must be duly supported by sound and detailed arguments.
Investment is one of the major decision making which very done via assessing the feasibility and every possibility of risk and return. There are various types of investment avenues present for the Mr.A who is currently is unemployed and are looking for higher return with low risk taking. Since, Mr. A is situated at Singapore , therefore the chosen investment areas would be driven out of the Singapore investment analysis (Nelken, 2006). As per the given case study Mr. A is considering various investment opportunities that is provided by the various fund managers. The study will keep track of the current investment opportunity available within the Singapore. Apart from that, the study will focuses on the risk and return of the every available opportunity.
As per the case study , there are majorly three types of investment avenues given to Mr.A who is looking to invest in energy sector because of the Michael his friend which is assuring the return worth of 20%. Mr. A planned for investing money for the new plant. However, Mr A considers the offer of his friend Michael and willing to invest in the energy. According to the Michael, price of oil and other energy related products such as electricity and oil and gas , etc has been increased rapidly. Apart from that, the current market analysis demonstrated that organisation in energy business industry make more profit. According to Daley and Matthews (2012), in the world, Singapore is the premier hub of oil as well as gas. The contribution of oil and gas of Singapore is more than 5% within the oil and gas industry of the world. Moreover, market review report of Hargreaves and Dragon (2013) displayed that growth rate of energy industry is much high rather than other investment. Moreover, according to the National Energy Policy Report of 2007, the growth rate of energy sector achieves more than 11% profit rather than other industry from the point of view of investment. Furthermore, the market analysis report of S&P demonstrated that in oil and gas industry, Singapore will grow their business with SGP 1.47 billion. This analysis reports demonstrates the investment will success in oil and gas industry and make more profit for investors rather than other investment.
On the other hand, Kenourgios (2014) argued that there are various types of mutual funds portfolio from the viewpoint of investment such as insurance bonds, debt, equity. These are some of the major investment areas for investor in terms of making more money. However, Ms. Kelly suggested to the Mr. A for investing SGD 1 million into their business. Moreover, Ms. Kelly also promised to Mr. A regarding return on investment. According to Ms. Kelly, if the Mr. A invest SGD 1 million in their business, he will return 9-13% per year. The demand of equity and share has been rising. However, there is higher risk on investment on the business of Ms. Kelly because the market of the company became crash in 2008.
According to the Singapore loyal authority, the needs and demands of real estate in higher in the Singapore country. However, Kung and Wong (2009) argued that in 2008 the housing industry bubbled. It demonstrated the major drawback of housing industry of Singapore. In relation to the housing industry of Singapore, pricing of the pretty has been increased in the year of 2008. Therefore, Plunus, Gillet and Hübner (2012) suggested that the real estate industry of Singapore has rumour. The rumour is that pricing of real estate industry may bounce back in the year of 2016. YI and TAN (2009) cited that the real estate industry of Singapore has the strongest fundamentals in Asia Specific region. According to Daley and Matthews (2012), the real estate market of Singapore may continue for long term despite. Due to the plentiful supply of space, the real estate industry of Singapore may brings back their remain stability within 2015 and 2016. The main issue of real estate industry in Singapore is decrease of rental rates. However, the growing demand of space especially the high tech space can helps in decreasing lower rental rates for the traditional units or older.
As per the case MR.A is looking to invest its money which will give enough pays his bills and manage its son and higher studies. Mr. A is not looking right kind of investment opportunity to increase its ROI with ,lower amount of risk within the business. Since he is first time investor his looking to invest within its friend Michael because trustworthiness on him. However, the standard portfolio must have various types investment option which helps the Mr.A to manage its loss.
Since the Ms.Kelly is asking the MrA. To invest more on equity but Mr.A funds that investing portfolio is bit riskier so he opted for investing only few money which is 105 of its entre money.
|
Standard portfolio of Mr A. |
Investments |
$SGD |
|
Equity |
10% |
15000 |
|
Fixed bond |
25% |
375000 |
|
Foreign currencies |
10% |
15000 |
|
Investment in energy sector |
40% |
60000 |
|
Insurance |
15% |
22500 |
From the above it has been found that, Mr.A is looking to invest more in energy sector because he is basis towards his friends thought. Energy sector is currently growing worth of 3% per quarter which is more than 125 of growth . apart from that, the profiling also shows that Mr.A is not interests in investing the equity more because he is risk averse (Wu, 2012). Apart from that large part of investment will able to make within the fixed bond which is guaranteed by the government of Singapore and apex bank of Singapore for minimum return of 20%. This shows that, Mr. has various lucrative investment which is attracting the customers base. However, investment in real estate is not been because poor growth of real estate in Singapore market. As per the CNBC, Singapore real estate and land dealing is on the verge of housing bubble (Chua & Chou, 2010).
Life cycle of the energy sector and other investor sector as per the SGX shows that, it is growing with slow proportion because of recent recession of 2008 has affected the economy. Current inflation are of Singapore shows 2.4 in 2013 in compare to 4.5% which was higher in 2012. Energy sector is booming but with new laws and regulation is not been helpful for the investors (Fu et al. 2008). Rising environmental laws and cartel formed by OPPEC nations has been creating very rise in the price of the shares.
|
Investment profiling for Mr. A |
Years of investment |
Return as per case in % |
Return of investment |
|
Equity |
2 years |
18% |
8850 |
|
Bond |
3years |
50% |
45000 |
|
Forex |
10 years |
10.5% |
41437.5 |
|
Investment in energy sector |
3 years |
12% |
84000 |
|
Real Estate |
5 years |
20% |
36000 |
From the above data , it shows that, lifecycle of the total investment as per the case is shows that maximum gain from the energy sector. Apart from that next best alternative would be investing shares and bonds would give the Mr. A higher return in compare to real estate (Lecomte & Ooi, 2012). Real estate is also one of the booming industries of the Singapore but fails to maintain its growth which because of the price of land is higher and investors are not willing to buy because of rising in the inflations.
As stated by, Tan (2014) SEA refers to the Securities and Future Act helps to set regulations for the business companies in order to enter into the capital market of Singapore. Securities and Future Act provides some regulation about the activities and institutions of futures, derivatives industry that includes trading of foreign exchange, clearing facilities and other connected matters.
On the other hand, Crump (2006) argued that, Financial Advisors Act 110 also has set some regulations for the business houses in order to enter into the capital market of Singapore. CMSL refers to the Capital Market Services License of Singapore that provides the guidelines of grant management for the business companies those operate effective business within the market of Singapore.
CMSL capital market licensing therefore are involved under the act of Monetary Authority of Singapore (MAS). Therefore, all market intermediaries those have the CMSL licensing are often falls under the Monetary Authority of Singapore (Linton,2008).
These are the governing bodies of regulation for the business companies who have the interest to do business within this area. Therefore, the person as well as the organization needs to take the authorization from these bodies of Singapore Government. In order to take initiatives of ethical trade in this area, one must follow the rules and regulations of these bodies. The organization needs to take authorization from these houses of bodies for ensuring equity and market of bond within this area of Singapore (Zhang & Majid, 2009).
There are various reports that has produced the information that, Singapore Stock Exchange (SGX) hold more than 1100 market intermediaries under the Monetary Authority of Singapore (MAS). On the other hand, The Companies Act 50 mainly deals with the stock market related things of the entire company.
As stated by, Crump (2006) ethical trading involves many activities like promoting products and service in accordance with the rule of ethic of business. Ethical trade means providing more safety towards the workers of the organization. The initiatives of Ethical Trading seek to provide improvement and development in the lives of workers, suppliers and manufactures of different business organization. Working condition of the people who make consumer goods and other services for the organization has been tried to develop by the members of Ethical Trading Initiative organization. Therefore, Rana (2009) stated that, while delivering trade into the capital market of Singapore, SGX follows some rules as well as regulations and norms, those are as follows:
Some of the major risk and return of various investment avenues are :
Equity: Investments in equity is one of most prominent option for investors. There has been ample evidence which shows that investing in equity has given the more than 125 of return but risk is higher in compare to other is higher. The economic turmoil 2008 is one of the major reasons for uncertainty (Lecomte & Ooi, 2012).
Bonds: Bond are one of the most risk free investment but the retain in bonds are lower in compare to equity . Bonds has lower return but is safer and guaranteed by the government and banks .
Forex: Investing foreign exchange is very much riskier because value of foreign exchange fluctuates on daily basis. For instance, 1 US $ = 136 in 204 but in 2102 it was 1.10.
Real estate: Investing in real estate is very riskier currently as the sector is going to face housing bubble (Lecomte & Ooi, 2012).
Energy sector: Investments in energy sector is higher in compare to the other sector because of growth of the energy sector is 3 per quarters. One of the major risk would be changing environmental policy may lead cause higher loss.
The time value of money suggest that investment in Equity would be more riskier in compare to others investment patterns . Investing in equity , real estate and energy sector will improve the Mr. A portfolio.
|
Investment profiling for Mr. A |
Years of investment |
Return of investment |
|
Equity |
2 years |
8850 |
|
Investment in energy sector |
3 years |
84000 |
Equity : NPV=-27000 + 8850 /1.18 +8850/(1.39)
=150000 + 7500+6367
=-136133
Energy sector = -150000 + 56000+37333+ 24926
=31741
With the help of the NPV , it has been found that time value of money can be calculated on the basis of the NOPV. Higher the NPV higher would be chances choosing the investment avenues. Here the investment in equity is higher but there is ample amount of risk in equity which why the chosen the investment avenues would be energy sector.
Investment in Real Estate Market: The real estate market of Singapore is one of the most strongest fundamentals in the Asia Specific region. However, recently the market of real estate in Singapore is not worth. Due to several reasons such as housing bubble, make the market of real estate robust. From the point of view of investment, Mr. Lawrence promises to the Mr. A for returning more than 20% profit on investment of SGD 1 million (Tu et al. 2008). However, the current market analysis of real estate industry utilized that chance of many losing in investment on real estate market is higher rather than investment on other industry (Judge and Korzhenitskaya, 2012). Chance of losing money for Mr. A is higher because supply of space is low due to increase of global finance.
Investment on Capital Market: According to Hargreaves and Dragon (2013), investment on the capital market is one of the most secure way for the investors. The current capital market of Singapore is grow higher and higher. Therefore, investor has chance to increase investment in the capital market. In order to invest money for Mr. A it has been said that he has to invest money in separate mutual funds such as foreign stocks, bonds, foreign currencies, equity, insurance, etc.
Investment in Energy Sector: It is the most prominent sector in the region of Singapore in terms of growth rate. The growth rate of energy sector is higher rather than other industry in Singapore (Judge and Korzhenitskaya, 2012). It has been seen that Michael offers to Mr. A for returning more than 3% profit in each quarter. It is the most lucrative investment rather than other offers that Mr. A accepted. However, the most valuable thing is that energy sector of Singapore runs under the government regulations. Therefore, chances of losing money have low risks.
Money Market: It is also an area of investing money. In order to invest money in money market, need to bond with the purchase for less than six month.
Mutual fund: Investments in equity , bonds and forex is very much diversify the range of risk which will benefit the Mr.A . Apart from that, the mutual fund is higher risk because of the variation within the equity market.
Energy sector: Investments in energy sector is higher and is much safer because demand of energy like oil and gas is never lowered since 2004. Energy sector si one of the booming industry within the Singapore because of the 3% increase in every quarter which more than 12% increase.
Credit risk within the energy sector is lower because of the debt and equity ratio is lower with 0.21% . Most of the investment equity financing because of the rising price of the fuel and other sources like electricity and other limited resources.
Modus operandi for energy sector would be within the Singapore market is attributed by MAUT which manage to wholesale selling of the shares and managing the pricing volatility within the existing market. Energy sector in Singapore are selling largely to wholesale supplier rather than to retail suppliers.
Guaranteed return is backed by the EMA (energy market authority) which is major regulatory body for the energy sector of Singapore.
Yes successful Materialization of payments tempt for more funds because of the rise in the share price of the energy sector is higher in compare to other investment avenues like equity or real estate.
One of the major marketing techniques of the oil and gas company is showing off their sustainability programme which makes the investor to purchase the shares because of the large part of investment is made in CSR activities.
Conclusion
From the above study, it has been found that, MR.A has various options for investment such as equity, real estate and energy sector. There has been ample evidence which shows that, major fundamental of investment is to gain higher ROI form the investment. With the help of time value money , investment made in energy sector will gain the company highest return. Besides that, the study also shows that credit risk within the energy sector is lower in compare to the equity or other form of investment avenues.
Reference list
Books
Nelken, I. (2006). Hedge fund investment management. Amsterdam: Elsevier/Butterworth-Heinemann.
Wu, K. (2012). Energy Economy in China. Singapore: World Scientific Publishing Company.
Journals
Chua, K., & Chou, S. (2010). Energy performance of residential buildings in Singapore. Energy, 35(2), 667-678. doi:10.1016/j.energy.2009.10.039
Fu, Y., & Jennen, M. (2008). Office Construction in Singapore and Hong Kong: Testing Real Option Implications. J Real Estate Finance Econ, 38(1), 39-58. doi:10.1007/s11146-008-9145-z
Lecomte, P., & Ooi, J. (2012). Corporate Governance and Performance of Externally Managed Singapore Reits. The Journal Of Real Estate Finance And Economics, 46(4), 664-684. doi:10.1007/s11146-012-9377-9
Tu, Y., Ong, S., & Han, Y. (2008). Turnovers and Housing Price Dynamics: Evidence from Singapore Condominium Market. J Real Estate Finance Econ, 38(3), 254-274. doi:10.1007/s11146-008-9155-x
Daley, J. and Matthews, K. (2012). Competitive conditions in the Jamaican banking market 1998–2009.International Review of Financial Analysis, 25, pp.131-135.
Hargreaves, C. and Dragon, M. (2013). Predicting the Technology Market Index Using Import & Export Trade: A Technology Trade Application in Singapore. Financial and Quantitative Analysis, 1(4), p.59.
Judge, A. and Korzhenitskaya, A. (2012). Credit market conditions and the impact of access to the public debt market on corporate leverage. International Review of Financial Analysis, 25, pp.28-63.
Kenourgios, D. (2014). On financial contagion and implied market volatility. International Review of Financial Analysis, 34, pp.21-30.
Kung, J. and Wong, W. (2009). Profitability of Technical Analysis in the Singapore Stock Market: before and after the Asian Financial Crisis. Journal of Economic Integration, 24(1), pp.135-150.
Plunus, S., Gillet, R. and Hübner, G. (2012). Reputational damage of operational loss on the bond market: Evidence from the financial industry. International Review of Financial Analysis, 24, pp.66-73.
YI, Z. and TAN, S. (2009). AN EMPIRICAL ANALYSIS OF STOCK MARKET INTEGRATION: COMPARISON STUDY OF SINGAPORE AND MALAYSIA. Singapore Econ. Rev., 54(02), pp.217-232.
Crump, L. (2006). Competitively-Linked and Non-Competitively-Linked Negotiations: Bilateral Trade Policy Negotiations in Australia, Singapore and the United States. International Negotiation, 11(3), 431-466.
Rana, P. (2009). BOOK REVIEW: “Trade Policy, New Century: The WTO, FTAs, and Asia, Rising”. Singapore Econ. Rev., 54(04), 709-711.
Tan, S. (2014). Law Firm Internships and the Making of Future Lawyers: An Empirical Study in Singapore. Legal Ethics, 17(1), 79-106. doi:10.5235/1460728x.17.1.79
Linton, A. (2008). Ethical Trade Initiatives. Globalizations, 5(2), 227-229. doi:10.1080/14747730802057613
Zhang, X., & Majid, S. (2009). Environmental Scanning Initiatives of SMEs in Singapore. Libri, 59(2). doi:10.1515/libr.2009.011
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