Bond Revolution in Singapore – Lesson 3 : Taking Charge

Bonds in Our Lives

Many of us do not realize that bonds are everywhere in our lives. Love it or hate it, our foray into the world of bonds begin with our bank accounts which are I.O.U.s  from the bank.

I have been giving thought to the audience I am writing for. Ideally, this should not exclude anyone and no one should be left behind.

Every citizen of a country has same ownership in the local currency bonds of their country. That is because the integrity of the currency is a national concern and not just the central bank’s. The people of Greece and Spain are certainly learning it the hard, and of course the Argentineans could have told them so.

For all of us with savings between 50,000 to say, 5,000,000 , we should fall into the sort of mass affluent category . People endeared by bankers for the fat juicy margins they represent because they are not rich enough to argue too much, I guess.

It  is important to note if you have $50,000 lying around that is giving you about $25 bucks in interest a year at 0.05%, that it is giving the bank  4-5 times more if they lend it out overnight, 10-20 times more if they lend it out to another bank for 6 months etc.

Market Awareness

It is a lack of information, I realize, that dissuades the general public from investing in bonds, and rightly so, for the very simple reason that bonds give the low margin of returns to the financial advisor, are mostly traded OTC  and invariably lock up cash for longer periods of time. If I am in the business of banking, I would probably have a bias against selling too many bonds over other higher margin products.

Retail investor education in bonds has hardly taken off, in my opinion. This is despite the tremendous growth we have seen in the capital markets of Singapore and her growing status as a global financial centre.

Yet the truth is that we should not be putting our entire savings into bonds. With sad reminders like the following to keep us vigilant.

Bloomberg : Spain Bank Bailout Means Forcing Losses On Cooks, Pensioners

Bonds and Close Alternatives

• individual bonds – corporate or sovereign
• bond funds / unit trusts
• money market funds
• credit linked notes
• bond hedge funds
• endowment policies
• fixed deposits

We may not be aware that many of the “principal not at risk” term deposits with insurance coverage are heavy on the fixed income element as well.

Hidden Risks and Costs

After Lehman Mini Bonds and Morgan Stanley Pinnacle Notes scandals, one would be aware of the dangers of,

1. The product you are buying and what constitutes it,
2. The party you are transacting it and,
3. The custodian of the product.

Unit trusts and funds have management fees which differ from fund to fund. As a rule, each fund has to declare their Total Expense Ratio (TER).

This makes them more transparent than hedge funds and thus available to the general public.

My Basic Gripe About All These – CONTROL

It is a blessing to work in a transparent environment and I have come to appreciate it for all it is worth. That is why I cannot, for the life of me, buy into a unit trust or fund because the price is not something you readily can work out by yourself and you are leaving it in the hands of the fund manager.

Hedge funds do not make sense to me because there is even less control and you are entrusting your money to a possibly very nice hedge fund trader who is not suicidal. And I do know some of them.

I can also hardly comment about endowment policies either. Everything does not appear to be guaranteed these days but they continue to point out to you the nice numbers in the non guaranteed returns column.

Bonds – you know exactly what you are buying and are fairly liquid. What I do not like is the random bid-offer spreads that bankers charge. They  like to think retail investors would not mind between 100 and 101 when it represents a significant amount of yield.

Conclusion

$25 or $100  on your $50,000 ?

We are not Santa Claus or Santa-rinas here.  We are in the business of managing our money too and pleading ignorance is not an excuse. And the truth is, it is not that hard.