Thursday, July 26, 2007

Temasek & Barclays

Earlier today, it was reported in many news sources that Temasek is taking approximately a 3% stake in Barclays, and that this injection of capital will allow Barclays to raise its bid in its acquisition battle with the Royal Bank of Scotland for ABN Amro. Well, I don't have the exact details of the transaction and I haven't done an exact valuation of ABN Amro, but intuitively, this doesn't look like a particularly good investment.

a. Firstly, there is no gaurantee that a Barclays - ABN combination will generate significant shareholder value over and above hurdle rates as a combined entity, than apart. Many mega-mergers have turned out to be big destroyers of shareholder value, think AOL-Time Warner or Daimler-Chrysler, see this post for more. Temasek is betting that 1. Barclays will be successful in its bid for ABN, and 2. an ABN - Barclays merger will go smoothly and transcend all the corporate culture and other execution issues that often plague mega-mergers.

b. Secondly, Temasek is injecting capital to fuel the 3rd bid in the Barclays-RBS bidding war. Thus, i think it would not be unfair to say that the bid is probably very close to the intrinsic value of ABN to Barclays, and there is quite a bit of a chance that Barclays is paying a sizeable premium. If that is the case, then not only does the Barclays-ABN combination not have to fail, it has to succeed wildly, with a very very narrow margin for error.

Put the two factors together, and intuitively Temasek's injection of capital into Barclays does not make sense to me. Of course I could be wrong, as I haven't done the actual number crunching. But this deal smells awfully foul.

Insurance & Reinsurance

Berkshire Hathaway, Warren Buffett's company, has a significant insurance and reinsurance business, Berkshire Hathaway Re. Reinsurance is insurance that is underwritten by a reinsurer to insure the risks of the primary insurance companies themselves. The risks that reinsurance companies take on are usually called catastrophe risks - so called because they are contracts written to protect the insurance companies from major disasters, such as hurricanes, tsunamis, and terrorist attacks where the damage to life and property is of a very great magnitude.

Reinsurance companies need to be very well capitalised - Berkshire Hathaway easily falls into this category (Mr Buffett has about $40 billion in cash sitting around doing nothing). Without adequate capitalisation, the reinsurance contracts would be of low quality since the reinsurers would be close to insolvency in the event that a catastrophe materialised.

In the case that a single reinsurer is unable to take on all the risk, reinsurance intermediaries, such as Benfield, help to place the treaty contract to multiple reinsurers in order to spread the entire risk amongst several companies, rather than just a single one.

All the major reinsurance intermediaries have a presence in Singapore; I managed to have a chat with a guy at Benfield Asia during a career fair and it was a very pleasant experience.

Tuesday, July 10, 2007

Temasek Holdings and Ng Yat Chung

This article was in the news about a week ago:

July 5, 2007
Ex-defence chief Ng Yat Chung joins Temasek
By Bryan Lee

FORMER defence chief Ng Yat Chung has joined the senior management of Singapore investment company Temasek Holdings.

Lieutenant-General Ng, 46, took up the position of portfolio management managing director on Sunday - a newly created role, The Straits Times understands.

Temasek confirmed the appointment on Tuesday but declined to provide further details.

The appointment comes less than four months after Lt-Gen Ng stepped down as Chief of Defence Force and handed the baton to then Major-General Desmond Kuek.

It mirrors similar movements of other military leaders to civilian positions. Lt-Gen Ng's predecessor, Lt-Gen Lim Chuan Poh, for example, is the chairman of the Agency for Science, Technology and Research.

A career soldier since 1979, Lt-Gen Ng was awarded the Singapore Armed Forces (SAF) Overseas Scholarship in 1980 and has since held many key command and staff positions.

Before taking the helm of the SAF in 2003, he was Chief of Army. He has also served as director for joint operations and planning and Chief of Staff (Joint Staff).

During his four years at the head of the SAF, Lt-Gen Ng was credited with improving the SAF's operational readiness and steering it into the next generation.

Outside the military, he is a member of the board of trustees at the National University of Singapore, chairing its campus planning and development committee.

Lt-Gen Ng is a Cambridge University graduate, has an MBA from Stanford University and recently completed the Advanced Management Programme at Harvard University.

At first glance, the appointment of the ex-Chief of Defense Force to a portfolio management role is puzzling. Commercial investment houses usually do not recruit people from the military straight into a portfolio management role. In fact, we would probably expect to see a stock sell-off in the market of a company like Legg Mason or Templeton if they were to suddenly hire a U.S. army general into the upper echelons of their management team. Being involved in portfolio management requires intuition and judgment built up over several years of commercial experience - there is simply no substitute for feeling the pain of making mistakes and the emotional ups and downs of markets.

However, Temasek is not a typical investment company - I hope Ms Myrna Thomas understands that by now. It manages the Singapore government's investments, and as such represents part of the nation's interests. As seen in the recent Shin Saga, Temasek would have benefited if it had someone who had a strong understanding of the political landscape in the neighbouring region, someone who could have anticipated potential military reaction to politically-linked transnational acquisitions.

If Temasek continues to pursue large sized acquisitions in neighbouring Southeast Asian countries (which it probably will), an astute political and military analyst will help to contribute to the political due diligence that seems to have become an intrinsic prerequisite to political risk management in Temasek's investment process. Furthermore, someone who is known at the highest military levels will help Temasek to weave through the negotiations between the company and the Thai military government.

Who else fits the bill but LG Ng Yat Chung? Nevermind the fact that he would never get a similar position in the commercial world, much as I dislike the lack of transparency in Temasek, I think this is not a bad acquisition of talent by Singapore's state-owned investment company.

However, Ho Ching has to maintain control over the final commercial decision making; LG Ng can only be expected to take on primarily an advisory role, at least for now. Allowing the General a free hand in portfolio management before he gains the requisite experience can amount to taking unwarranted risks with the nation's assets.

REITs in Singapore

REITs (Real Estate Investment Trusts) can be a valuable addition to your investment portfolio if utilised properly. They provide steady, dependable capital gains and dividend payouts and generally have a much lower volatility than the average stock. They also tend to be resilient during economic downturns with smaller dips, and sometimes are able to resist the business cycle because investors know that property retains its value through economic recessions.

REITs also provide the liquidity of the stock market that owning property itself does not provide. In the event that you find yourself needing the money on short notice, or if you a great alternative investment vehicle, REIT stock can be liquidated quickly and safely without having to go through the hassle of an property agent. REITs also remove the need for constant monitoring that owning real estate requires, such as tending to difficult tenants and having to make repairs to the wear and tear of the property.

The only major drawback of REITs is that it does not provide the same upside that investing in other rapidly growing companies provides. Commercial and industrial property (which are mainly what REITs manage) tends to appreciate at a more moderate pace than technology stocks, for example. REITs also not typically the vehicle that speculators and 'flippers' of property what to invest in. But as mentioned, REITs do provide a protection from downside that risky startups do not, and they provide liquidity that real estate by itself lacks.

Singapore is striving to become a center for REITs; there are several REIT stocks listed on the Singapore Exchange. Here is a list of them:

  • AllcoReit
  • AscendasReit
  • AscottREIT
  • Cambridge Industrial Trust
  • Capital Commercial
  • Capitamall
  • First Reit
  • Fortune Reit
  • Fraser Commercial Reit
  • K-REIT
  • Macarthurcook Industrial REIT
  • Macquarie International Infrastructure Fund (not strictly a REIT but has similar characteristics)
  • Suntec REIT
As of writing there are also more REITs coming to the market. If you are thinking of a reliable investment that needs less tending to than other investments, do consider adding a few REITs to your portfolio. The list above provides a good place to start your search.