Den of The Lion Investor

Societe Generale Asset Management will be launching a new fund this month - the SGAM AsiaPAC Income Plus Fund.

This fund invests in the Asia Pacific developed markets, namely - Singapore, Japan, Hong Kong, Taiwan, Australia and Korea.

Stock selection will be based on dividend yield, valuation and momentum. There will also be a liquidity criteria of market capitalisation over US$2 billion and a daily volume of minimum US$20 million. A final selection of 40 stocks will be purchased. This means that each stock will constitute 2.5% of the fund’s holdings.

Depending on the market conditions, the fund will apply either a “long only” or “covered call” strategy. A cover call means underwriting call options on the underlying assets. The premiums collected will enhance the returns of the fund.

As the name implies, there will be a regular payout of cash to unitholders of this fund. The payout is a guaranteed 8% p.a. coupon based on the fund’s NAV on the anniversary date. This payout will be done quarterly.

For example, the fund has a starting NAV of $1. So for the first year, $0.02 will be paid every quarter.

For the next year, the NAV at the anniversary date will be used to determine the coupon payout. If the NAV is $1.10, $0.022 will be paid out every quarter. Conversely, if the NAV is $0.90, each payout will be $0.018. And so on for subsequent years.

Do not be mistaken that the SGAM AsiaPAC Income Plus fund can give you a guaranteed yield of 8% p.a.

Whenever unit trusts are concerned, any dividend payout is always taken from the NAV.

For example, if a fund has a NAV of $1.20 and pays out a dividend of $0.05, you collect $0.05 and the fund NAV will drop to $1.15. In terms of how much the asset is worth to you, it is pretty much the same whether the dividend is paid out or not. Add in the costs incurred for paying out the dividends and you might actually be worse off.

What is more important is how much the fund can grow on an annual basis. If it can grow more than 8%, you can collect the dividend and still enjoy capital growth of the fund. If it is less than 8%, part of the 8% you collect will simply be a return of some of your capital.

The underlying assets of this fund has an estimated yield of about 4%. Thus, there will need to be a capital growth of at least 4% for your coupons to not come from your capital.

As for the management fee, it is 1.75% p.a. (max 2.0%) for this fund.

A dividend paying fund might be suitable for someone who relies on dividend payouts for living expenses. Even then, that person can simply redeem units for cash even if the fund he invests in does not pay any dividends.

For someone who wants to stay fully invested in the markets, he or she will have an unwelcome problem of reinvesting the dividends. This also means incurring extra costs again. Update: This reinvestment problem might not exist if automatic reinvestment of dividends at no cost is available. 

I feel that the term hedge fund is an misnomer. Why?

Whenever we use the word hedging in investments, it usually means the taking up of new positions to reduce or eliminate the risks (or volatility) in the positions we were already holding.

While hedge funds might take up positions for hedging at certain times, most hedge funds are also highly leveraged funds.

Using leverage multiples both profit and losses. This increase of beta is the exact opposite of what we would expect when we hear the word hedging.

Here are some interesting numbers showing the 6-month returns of both locally registered and international hedge funds.

Singapore Registered Hedge Funds

Top Three

1. Quadriga Superfund Futures C EURO Class R : 19.80%
2. Quadriga Superfund Futures B EURO Class R : 18.37%
3. Castlestone Aliquot Gold Bullion A USd : 17.96%

Bottom Three

1. Penjing Asia A : -38.46%
2. Platinum Turnberry USD : -36.59%
3. Platinum Dynasty USD : -35.08%

International Hedge Funds

Top Three

1. Aster-X Europe Fund : 830.13%
2. Clarke Global Basic Program: 85.10%
3. RAM Agressive : 82.25%

Bottom Three

1. Sprott Hedge LP : -98.92%
2. India Synthetic Warrant : -74.40%
3. Zanett US Equity Hedged Ltd : -63.19%

Just look at the top result for the international funds.

Over leveraging is like playing showhand in poker. Double your money, or lose everything you have.

If you play showhand long enough, it is almost certain that you will end up broke.

Yesterday, I was at a presentation by Deutsche Bank on one of their funds, the Liquid Private Equity Fund. This fund is a sub-fund of DB Platinum IV.

Private equity simply means the co-ownership of unlisted companies. This funding can take place at various stages of the lifecycle of the company. Typically, such an investment has a high minimum amount, long lock up period and high risks.

There are three main approaches for private equity funding:

1. Venture Capital (young and unproven startups)
2. Buyout (purchase or takeover of established companies)
3. Mezzanine Financing (Investing in subordinated debt of privately owned companies)

The DB Platinum IV Liquid Private Equity Fund does not invest in private equity directly. Rather, it invests in stocks of listed companies that invests in private equity. The portfolio is selected by Vescore Solutions AG, which acts as the Asset Allocator for the fund.

The fund’s benchmark is the LPX Composite Total Return Index, which is currently one of the broadest private equity index. The fund has managed to outperform the benchmark by 5.65% since the inception on 8th March 2006.

Since the fund consists mostly of listed companies, the performance will have a positive correlation with the world equity market. The advantages of investing in the Liquid Private Equity Fund are:

1. High liquidity and no lockup
2. Regional diversification
3. Diversification among the three private equity investment approaches

I suppose if you were to invest directly into a listed private equity company, you would already have some form of diversification. The fund has around 40 stocks so it provides an even greater level of diversification.

DB Platinum IV Liquid Private Equity Fund is currently available only to accredited investors.

(An accredited investor is an individual who has total net personal assets exceeding S$2 million or has an income in the preceding 12 months of not less than S$300,000. Sometimes, the ability to acquire securities of not less than S$200,000 in a single transaction can also be considered.)