Sunday, October 5, 2014

Saving up for the golden years


OCTOBER 3, 2014

Retirement adequacy has taken centre stage as cost of living increases and life expectancies extend. To build up a retirement nest egg, Singaporeans need to save part of their incomes. But savings alone cannot beat inflation.

Thus, prudent investments are needed to make their money grow.

Investing has similarities with football. Attacking players score goals, but work hand-in-hand with defenders, who prevent the opposition from scoring. Attacking players alone cannot win tournaments. At the recent World Cup, even top footballer Cristiano Ronaldo, an attacker, could not steer Portugal to victory.

Similarly, a portfolio comprising solely of equities is akin to selecting only attackers for the team. This portfolio is unlikely to be balanced, and its risk/return profile can be improved by including bonds.

The Singapore Exchange’s (SGX) recent consultation paper states: “Debt securities are essential in the construction of a well-diversified investment portfolio. Being less volatile than equities, debt securities serve as ... stabilisers in an investor’s asset allocation”.

But the long-standing irony is that retail investors have always been able to buy securities with much greater risks, such as penny stocks. However, safer securities, such as bonds, are virtually inaccessible to the retail investor with the notable exception of Singapore Government Securities.

Currently, investment into most individual bonds require minimum investments of S$250,000, more than many Singaporeans’ entire net worth. Retail investors can buy fixed income products only through unit trusts (an expensive option due to fees) or exchange-traded funds (which suffer from illiquidity and less-than-transparent pricings). Both are not ideal.

Hence, the recent proposal by the Monetary Authority of Singapore (MAS) and SGX to improve retail investors’ access to plain vanilla bonds is welcome. This will give companies the option of making additional offers of new bonds to retail investors, governed under the SGX’s proposed Seasoning Framework.

Under this Framework, bonds initially offered without a prospectus to institutional investors and accredited investors in denominations of at least S$200,000 will also be resized into smaller denominations that retail investors can trade on SGX after a six-month period.

Together with the other recent announcement to reduce minimum lot size of stocks, allowing more retail investors to buy higher-priced blue-chip shares, this marks concrete moves towards improving financial inclusion for the retail investor.


However, the Seasoning Framework sets an almost exclusive standard for likely bond issuers.

Under the framework, companies eligible to issue bonds to retail investors must have market capitalisation of at least S$1 billion or net asset value of at least S$500 million and a proven investor track record through previous listings. This limits participation to only the large companies, comprising less than a third of SGX-listed companies. These firms can easily access both bank loans and capital markets, so they may find difficulty in justifying the extra effort and cost of extending offerings to retail investors.

Given the SGX’s already stringent listing criteria, which safeguards all investors, the authorities should consider expanding the framework’s eligibility criteria to include more listed companies, so that the supply of accessible quality fixed income instruments for retail investors will be increased.

Furthermore, under the framework, retail investors will be allowed to buy bonds only after they have been issued for six months. The official rationale given was to make it easier for companies to offer bonds to retail investors, while maintaining sufficient investor safeguards.

Not allowing retail investors to buy bonds at their primary issue is equivalent to prohibiting retail investors from buying shares at initial public offerings (IPOs). While there is no guarantee that investors buying IPOs have a better chance of making money than later investors, the issue here is one of choice for the retail investor, not to mention that investor class discrimination remains.

Accredited investors and institutional investors have options to buy bonds at primary issuance. But the retail investor is allowed a bite only after the bigger boys have had their fill. Besides late admission, the opportunity is not offered to retail investors on equivalent conditions.

Any additional offers of new bonds to retail investors (a “retap”) occurs at the bond’s prevailing “fair value”, so the retap price may not be the same as the initial offer. While everyone is subject to the same market conditions at primary issuance, it is possible that the retap’s pricing is influenced by prior investors as their early participation may provide superior information. In addition, unless there is a commitment to allocate to retail investors, allocation preference to the big boys may continue. Inherently, an unlevel playing field remains.

The solution already lies in the proposed framework. Any company’s equity securities are already investible by retail investors, with the required information disclosures made known to all (including retail) investors. Hence, the retail investor must be allowed to invest in any bonds that listed companies may issue (with the appropriate bond-specific disclosures), since the bonds are inherently less risky than their corresponding equity securities.

While the bond may have higher liquidity risk, this can be mitigated by increasing the number of market participants, which allowing more retail investors would perpetuate. Moreover, unlike shares, where an investor can realise liquidity only by selling in the secondary market, the nature of vanilla bonds is that the issuer is contractually obligated to the investor to pay periodic coupons and fully redeem the principal at the bond’s maturity. This makes “buy-and-hold” for bonds a relevant, prudent and cost-effective strategy for many retail investors.

When planning for retirement, it is important to have a balanced team of “players” (financial instruments), to help the “team” (portfolio) win. Hence, it is paramount to equip the individual with the right tools and skills to pick the right “team”.

This involves improving financial literacy through effective and demographic-appropriate financial education — mobile and financial games for the young, seminars in dialects for the old. It also includes improving access to existing financial instruments, such as reducing the minimum lot sizes for shares, the latest expansion of bonds access for retail investors and providing a balanced investor-protection framework.

The final part is improving the financial innovation environment by both existing and new institutions, by setting appropriate and proportionate regulation for good financial instruments to develop and flourish, so as to meet the investment needs of a wider representation of investors with different profiles.

Only then will the retail investor have access to picking the proper player for the proper position and have a shot at winning the equivalent of their World Cup — having sufficient retirement savings.


James Chia is co-founder of Innervative, a financial education firm. Lawrence Yong is co-founder of Moolahsense, a peer-to-peer business financing platform.

[Not exactly contradicting the above: ]

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