United International Securities

United International Securities Limited, through its subsidiary, United International Securities Trading (Private) Limited, engages in investment trading. It principally invests in quoted equities; quoted bonds, notes, and loan stocks; and unlisted equity shares, bonds, notes, loan stocks, and unit trusts. United International’s investment portfolio includes companies in the financials, industrials, consumer goods, healthcare, information technology, real estate investment trusts, materials, utilities, telecom services, and energy industries.
The Company was incorporated in Singapore on 14 October 1969, as a wholly-owned subsidiary of Lee Wah Bank Ltd under the name of Lee Wah Enterprise (Pte) Ltd. On 18 September 1978, the Company changed to its present name.

It was a dormant company until 11 September 1978 when the Company acquired a diversified portfolio of marketable securities and resumed its activities as an investment holding company. In October 1978, the Company offered 25 million shares of $1 each at par to the public. The United Overseas Bank group holds about 44 percent equity interest in UIS.

UIS in many ways resembles a mutual fund. It holds mainly marketable securities and does not own a majority stake in any business. All the securities are marked-to-market on the company’s balance sheet, and there is a weekly announcement of the company’s net tangible assets (NTA) via the SGX.

An interesting thing to note about UIS is that its stock has historically traded below NTA. For instance, the NTA per share of the company on 14 Sep 07 was $2.04. Yet UIS shares were traded at $1.75. Theoretically, one could acquire the company’s shares at $1.75 and liquidate the company’s balance sheet at an immediate profit of $0.29 per share.

So, why is UIS persistently trading at a discount to NTA? I am not sure why, but here are some arguments I can think for and against:

A. It is not practically possible for anyone to acquire UIS outright, other than UOB, which already holds 44% of the company. The discount to intrinsic value of the company would be extremely difficult to realize for the average shareholder. The directors of the company seem to understand that UIS is trading at a discount to NTA. The firm has therefore been making consistent buybacks of its shares. This benefits existing shareholders immediately. However, the fact that UIS makes such consistent buybacks indicates that they think UIS is undervalued by the market.

B. Another consideration is that one can theoretically replicate the portfolio of UIS through the open market without having to incur the operating expenses that UIS incurs. This means that the stock can never trade above NAV. However UIS does not make a full disclosure of its holdings, so investors in UIS are effectively delegating their funds to a fund manager.

C. Compared to mutual funds, the expense ratio (operating expenses/net assets) of UIS is slightly more than 1%, which is quite a low number compared to unit trusts which tend to charge about 2% management fees on assets under management. However, the purpose of investing in a mutual fund is to outperform the index. Otherwise, you might as well just stick your money in an index fund. How does UIS measure up?

Over the past 5 years investors UIS would have underperformed the STI. Over a slightly longer period of the last 8 years, investors in the STI would have underperformed UIS. However, UIS also pays out dividends and this is not reflected in the stock price. As I do not have longer term data, it is hard to put out the jury on which is the better performing investment.
D. A further consideration is that UIS also invests in unit trusts. These unit trusts already pay their managers fees. Hence, a portion of UIS actually functions as a fund-of-funds. This is not particularly good for the investor as he is paying management fees twice around: once to the unit trust manager, and another time to the UIS management for selecting the funds to invest in.

E. Yet another consideration is that the fund's portfolio is heavily concentrated in certain sectors. 42% of the fund is in financials and another 20% is in industrials. This is not exactly a highly diversified fund.
Conclusions

As the entire holdings of UIS are not disclosed, and as it is not clear what the investment mandate of the company is, I am not sure that there is a compelling reason to invest in UIS. Furthermore, I am still struggling to understand why UIS trades at such a significant discount to NTA when it has mostly marketable securities and other liquid assets on its balance sheet.

For me, the jury is still out on this stock and I would be glad if readers would offer their opinions regarding this stock. To me, it still seems wiser to simply stick your assets into an index fund which is more highly diversified and has an even lower expense ratio.