Den of The Lion Investor

On 15th April this year, there was a sudden spike in the price of Unisteel from $1.40 to $1.68. Apparently, there were rumours in the market that there might be some takeover offer for Unisteel.

SGX issued a query to Unisteel which was answered on the following day as such:

The Company is not aware of any reason for the substantial increase in the price of shares on 15th April 2008. From time to time the Company reviews strategic options available to the Company and its subsidiaries with the view to enhance shareholder value. The Company is currently in the preliminary stages of such a review and there is no certainty that the review will proceed beyond the preliminary stages or that any transaction would result from such review. The Company will make the necessary announcement if there are any material developments.

Shareholders are advised to refrain from taking any action in respect of their shares in the Company which may be prejudicial to their interests, and to exercise caution when dealing in the shares of the Company.

Business Times then carried a story on 18th April highlighting the possibility of a buyout offer for Unisteel. This drew the following response from the company:

We would like to state that Unisteel Technology has not informed any analyst (unnamed or otherwise) that unnamed buyers, including private equity firms, had expressed interest in buying the firm.

The company reiterates that the review of the strategic options available to the company and its subsidiaries is in a preliminary stage and there is no certainty that such review will proceed beyond the preliminary stage or that any transaction would result from it. The company would advice its shareholders to refrain from taking any action in respect of their shares which may be prejudicial to their interests and, to exercise caution when dealing in the shares of the company.

At this point, I started monitoring the news and price of Unisteel.

In the absence of news, the price of Unisteel dropped to around $1.56 over the following two weeks.

Then on 2th May 2008, the price jumped from $1.60 to close at $1.76. This was followed by an announcement from the company:

Unisteel Technology Limited refers to certain media reports made today. The company has received preliminary approaches from certain parties in relation to a proposed transaction relating to the company. Macquarie Capital has been appointed by the company to assist in the evaluation of any proposals that are forthcoming for the consideration of the Board of Directors of the Company. The company wishes to state that there is no certainty that any transaction will materialise. Shareholders are advised to refrain from taking any action in respect of their shares in the company which may be prejudicial to their interests, and to exercise caution when dealing in the shares of the company. An announcement will be issued by the company in the event that there are any material developments.

Following this annoucement, the price of Unisteel shot up to $1.90 on the next trading day.

The announcement was a positive development for the possibility of a buyout offer for Unisteel but the entry price was a bit too high for my liking.

Incidently, that was the highest point reached by Unisteel and it closed at a price of $1.57 at the end of May. At that price, it looked like a good support level and I have taken up a very small position in Unisteel with a view on the buyout offer materializing.

Of course, the buyout offer is by no means certain and I will have to be very nimble with my position should things go wrong.

Click to see the price chart of Unisteel

I took some time to update the transcript of the Warren Buffett interview at IMD that I had compiled earlier. Previously, it probably contained about 60% of the actual interview. Now, it’s almost 95%. You can read it again on the same page:

Warren Buffett Interview at IMD

Thanks to my helpful broker, I managed to obtain a list of the underlying securities for my Lehman Minibonds series 2. The list had 138 entities(!), with ratings from AAA to B and from countries all over the world.

The way the Lehman Minibonds were setup meant that I was exposed to the credit risk of all these entities. If there are a few defaults among them, my principal might be affected. This realisation might turn out to be a shock to those investors who bought looking only at the reference entities.

Thankfully, they are mostly corporate entities and I didn’t see any traces of subprime loans inside them. Some of the companies in the list include:

• Ambac Assurance Corp
• Bear Stearns
• Beazer Homes USA
• Citigroup
• Barclays Bank PLC
• Berkshire Hathaway
• Countryide Home Loans
• Deutsche Bank
• Ford Motor
• Flextronics International (only Singapore listed company in the list)
• France Telecom
• Hutchison Whampoa
• Southwest Airlines
• MBIA Insurance Corp of Illinois
• State of Qatar (Sovereign)
• Exxon Mobil

Nevetheless, some of these companies were badly affected by the subprime crisis. Hopefully (hope can be a fatal word in investing), the number of credit defaults will be less than the number required to cause capital loss in the principal.

If you own Lehman Minibonds, you can try asking your distributor to provide you with the list.

Hot on the heel of DBS, OCBC has announced that they will be issuing as much as $1.5 billion dollars worth of preference shares.

However, unlike DBS, OCBC’s offer will be open to retail investors. Back in 2003, it had done the same with the shares having a dividend yield of 4.2%.

The question to ponder is, “why are the banks raising capital at this time?”

At the end of March, OCBC had a healthy tier one capital ratio of 12.2%, DBS had 9.2% while UOB had 9.9%. The regulatory requirement for tier one capital is only 6%.

Perhaps they see a way to put the raised capital to some good use.

The concept of insurance works on that of risk pooling. Premiums collected go into a common pool and are used to make payouts to claimants. The insurer manages this pool and will invest it to grow the size of the pool.

Holders of participating whole life or endowment policies are entitled to a share of the investment returns from this pool - we call this pool the participating fund or par fund. The returns are added to the value of individual policy holders every year via an annual bonus. Once this bonus has been declared, it is guaranteed. There is also a terminal (or surrender) bonus which will be given when there is a claim or when the policy is surrended.

An insurer might also have a few par fund for different classes of products.

In the past, the returns from these par funds are like a black box. No one (except the insurer) knows how they perform and the only clue you have is the annual statements you recieve which tell you how much annual bonus you have been given.

However since March this year, MAS has stipulated that insurers have to make known the performance of their par funds for the last three years in the benefits illustration. The expense ratio and asset allocation of the par funds also needs to be reflected.

A comparison of the performance and expense ratio of the par funds from three different insurance company reveals the following information:

Performance (% returns)

A : 2005 - 1.7%, 2006 - 5.9%, 2007 - 5%

B: 2005 - 13.2%, 2006 - 15.5%, 2007 - 12.3%

C: 2005 - 4.95%, 2006 - 8.39%, 2007 - 11.0%

Expense Ratio (percentage of the fund value that is spent on expenses)

A: 2005 - 0.08%, 2006 - 0.09%, 2007 - 0.09%

B: 2005 - 0.03%, 2006 - 0.02%, 2007 - 0.03%

C: 2005 - 0.23%, 2006 - 0.26%, 2007 - 0.31%

Clearly, there is a big difference in the performance of the different par funds.

If you look at the benefits illustration of an insurance policy now, it now shows your projected returns using two different levels of estimates for the returns of the par funds. The projection for the par fund cannot exceed 5.25%. This is a good thing as it will be clearer to the consumer that the returns are not guaranteed and also helps prevents mis-selling by the few over enthusiastic insurance agents.

Note that the returns of the par funds is not the same as the return you get on your investment. You will have to calculate your own internal rate of return based on the premiums paid and surrender value.

For example, a 5.25% projected returns of the par fund might show a guaranteed return of $50k and a non-guaranteed return of $15k for you. Your own annualised returns might be around 2-4%.

If the par fund performs better than 5.25%, your returns will be higher. And vice versa.

All these changes will help consumers better understand what they are purchasing when they buy an insurance policy. This is a step in the right direction.