Investment Commentary from IPP
I got a recent mail from my financial advisor from IPP regarding the recent happenings to Lehman Brothers and AIG. Here’s the latest client communication.
client-communication-2008-09-17-back-to-basics
Lehman Brothers
The #4 investment bank filed for Chapter 11 bankruptcy protection, which effectively buys the 158-year old US bank time to sell off its assets to creditors. Lehman’s collapse has been the main reason behind the massive selling of not only equities but commodities (notably crude oil) around the world, with financial institutions bearing the biggest brunt. Fitch has (belatedly) downgraded Lehman’s credit rating to ‘D’.
Lehman sold hundreds of millions of dollars worth of Minibond notes (through multiple series) in Singapore. In the case of bankruptcy, Lehman, as the swap guarantor, will unwind all notes ahead of maturity (early termination), the residual amount being equal to the liquidation value of the underlying securities after swap termination value. One of the master distributors provided guidance on the mark-to-market value that range from 30-40%, which is what investors will receive (gross of whatever fees). We have not recommended Minibond notes.
Merill Lynch
Merill enjoys a sweeter deal: Merill offered to sell itself to Bank of America, for a princely sum of US$50b (representing 70% premium over Friday’s share price). We see no impact on Citrine and Jubilee notes, both of which we have not recommended.
AIGIF Acorns
Under financial duress, AIG being #1 US insurer has been given a US Treasury lifeline of US$80b in various forms (collateralized subsidiaries, proxy banks). We are still waiting for an official announcement from AIGIF, but we could expect AIG to sell its non-core assets. We expect continuity in the life of the Fund, even in the case of change of ownership (i.e. AIG selling off its investment management arm), as what ABN Amro recently did (ABN sold its asset management arm to Fortis with no impact on the running of ABN unit trusts). The Fund invests only in Asia-Pacific equities and fixed income. We maintain our recommendation of the Fund.
DBS Enhanced Income Fund
The Fund has <2% exposure to Lehman’s senior short-term paper that mature in Oct-2008 and Nov-2009. Portfolio Manager believes that Lehman’s papers, currently marked down to 30-40%, could well recover to 60-80%, with time, once the Fed swings into action[1] to avoid a banking crisis. Portfolio Manager has guided short-term impact being a manageable -1% to -1.3%, based on current mark-to-market value. The Fund is well diversified, holding over 100 debt securities that are staggered by maturity. The Fund also owns Merill debt, which would be a positive contributor, given the higher credit rating of Bank of America. Several positions in financial institutions have been marked down, but Portfolio Manager will hold all debt securities to maturity. The Fund is biased towards S$-Singapore issuers. Cash position stands at 15%. We maintain our recommendation of the Fund.
Action:
Current investors should stay invested, but must bear in mind of risk of further downside. By adopting an all or nothing approach, investors may miss out on the early stages of equity recovery (which tends to be fierce).
New money should opt for conservative allocation favoring high cash allocation and supplemented with monthly RSP.
Apply the “sleep test” – move (partially) to Bedrock-2 if you can’t sleep well. Use monthly RSP into your most volatile unit trust funds. Tranche investment works, but you may need many tranches as equity markets remain extremely volatile into next year. Continue to re-balance your diversified investment portfolio.
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