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.

Index Funds

[I received a question on investing in index funds from a reader; what follows is my personal opinion on index investing.]

Q: I was interested in stocks before but decided against it coz (Warren) Buffett and Jim Rogers mentioned in their works that index funds is good enough.

What's your opinion on index? and the American guy who popularised it? (i forgot his name). I read that he is quite a trailblazer.

A: In my opinion, for a person who holds a day job and who does not have the time to investigate individual investments in detail, index funds are a good option because they take the need of having to worry about investments off the investor's hands, and typically have much lower management fees than actively managed mutual funds. In addition, most mutual funds underperform the indexes, so if you stick your money in the index fund you are more or less guaranteed to beat the majority of investors who invest in mutual funds (and possibly who try to manage their investments on their own).

However, being an index investor requires patience and discipline because there will be periods where the broader market moves sideways and there will be periods where there is a latest fad e.g. internet/biotech/oil/China etc. where u see certain sectors booming and outperforming the market. These are times when the index investor needs to shut off the noise and just sit on his investment and not be tempted to sell out of his index investment and join the fad. This can be difficult especially when hear of people making money in short periods while your fund is only moving conservatively.

Rest assured, however that the disciplined index investor who has the patience and discipline to stick to his plan will eventually outperform the investor who chases market fads and who follows the herd to whatever is the 'hottest' investment at the period of time.

A good way to manage this tendency to want to be 'in' on what the crowd is doing, or if you are interested in doing some active trading, is to set aside a small portion of money that you can afford to lose. Meanwhile, the money that you need for the long term purposes such as children's education or retirement etc. should be kept safely in your long term index investment and not be touched. This will enable you to indulge in your natural tendency to want to gamble but at the same time protect you. I personally have read about professional fund managers who have their own small 'gambling' fund in order to prevent their gambling tendencies from doing any damage to their main fund.

As for the guy who popularised index investing, I believe it was John Bogle. I have a lot of respect for John Bogle and I believe he is the authority on index investing; he founded the Vanguard Group which manages index funds and other investments.

Even Harvard Students Don't Seem to Know Any Better

Research by three academics at Wharton, Yale and Harvard suggests that superior investment judgment is not a function of superior access to information, nor is it a function of superior academic intelligence.

The article: “Today’s Research Question: Why Do Investors Choose High-fee Mutual Funds Despite the Lower Returns?” from Knowledge@Wharton, is about experimental research done on Harvard undergraduates and MBA students.

The students were, for all practical purposes, given equal information about four different index funds, all of which contained the same securities. The only difference between the funds was the management fee structure. Yet, they overwhelmingly failed to make the optimal investment decision: to focus their investment into the index fund with the lowest management fees.

The students were misled by irrelevant information showing “annualised returns” (a moot point since going forward, all the funds had the same securities in the same proportions and would thus perform identically, apart from management fees), and also diversified their investment into several funds, even though there was absolutely no diversification benefit to be gained from investing in more than one fund.

This research thus suggests a few important things:

1. Superior investment judgment is not a function of superior academic ability. We can safely assume that the Harvard undergraduates and MBA students represent the cream of America, if not of the world. Yet they overwhelmingly demonstrated inferior business judgment. Hence, If you are evaluating someone as a potential manager of your money, it is irrelevant to look at his or her academic credentials. Superior investment judgment is a function of something else. And that something else is not academic intelligence.

2. One does not need superior information to make superior investment judgments. The notion that one needs to have better information than the next person in order to make a better informed judgment, is a myth. As a result of this research, it seems investing is akin to the game of chess - where the participants in the game both have complete access to all relevant information - the one who wins is the one who has the superior ability to synthesize and evaluate the available information, not the one who has better access to information. Hence, it is wise for investors to avoid any such schemes which claim to have “superior inside information.”

3. Another important implication of this research, and perhaps the most profound of all, is that having complete information does not necessarily lead one to make the optimal investment decision! In other words, markets are not efficient. The efficient markets hypothesis holds that markets adjust rapidly and rationally to take into account available public information, and that market valuations are thus optimal or rational. Yet the research results indicate otherwise: 80% of Harvard students were unable to come to the optimal investment decision, despite them having all relevant information required!

If the vast majority of the intelligent population is unable to make optimal investment judgments given unhindered access to information, how can markets possibly be efficient? The notion that markets are efficient i.e. that securities are always priced rationally, must necessarily be thrown out of the window. This has profound implications for supporters of such theories as the CAPM or MPT (i.e. the vast majority of fund managers) - and provides support, once again, for Graham & Dodd’s theory of intrinsic value i.e. the best way to invest is to purchase securities trading at a substantial discount to their intrinsic value (i.e. when markets are behaving irrationally), and sell them when they are trading above intrinsic value.

In short, this research provides proof that investing is, ultimately, a game of skill, and that those who have superior ability will ultimately outperform those without.