Oldfolk and Olam – Houston, We May Have A Problem

Dear Oldfolk, I have been re- reading your comments in more detail and I believe “Houston, We May Have A Problem”.

Let me paint my impression of your situation which could be misinformed but perhaps relevant to someone else out there reading this.

You bought into the Olam 6% 2022 paper late last year, their final issue of their massive issuance year (> SGD 1.6 bio) just weeks before the fiasco erupted. Within a month, thereabouts, you found your investment gone sour by, at one stage, up to 15-20%.

Let me now digress a little into my simplistic analysis of your investment decision.

6% is a rich yield for a senior bond given that some Reits are not even paying that much. You were yield hungry and allocated a decent share of your portfolio to it after a sales pitch by your banker. The 10 year time frame did not matter to you then because it was at a time when interest rates were near bottom.

Part of your investment decision was based on the Temasek ownership component of the company and that it is mainboard listed which makes you familiar with the stock as well.

Thus it was an easy call.

You are nervous now because you worry that the bonds would tank some more. I am assuming that you did not buy the bonds on leverage but I am not sure if you were advised by your banker to do so.

In summary, you are uneasy about the bond price but because you do not need the money, you are just holding on. Yet , as far as cash management is concerned, you would like the peace of mind knowing that you can get your principal back in case you need to.

Point 1. You are not alone and you are lucky you are not a victim of fraud.

Market Watch : Chasing yield, finding losses and fraud
CNBC : Chasing a big payoff, savers lose on complex bets.
Daily Telegraph : Banks mis-sold more than 90pc of rate swaps, says FSA
FT : FSA loses patience with annuities pricing

My diagnosis is that this is a case of miscommunication. I will not use mis-selling here because it is a taboo word in banking these days and will invite alot of unnecessary attention.

MAS, I know you are reading this.

Your investment needs and requirements were perhaps poorly interpreted by your financial advisor which brings us to Point 2. No one is at fault.

Banks arrange for bond issues. They do not care who buys them as long as they are sold to legitimate investors. As long as they show they fulfilled the requirements for duty of care, a loose term, they are blameless.

It is not just about Olam. It is all the other bonds out there as well.

Should the authorities start paying a bit more attention to the financial advisory business these days because the public is getting increasingly involved in bond space as banks continue to offload loans balance sheet ?

And the issue of pricing.

Some fund managers I know gave Olam 6% 2022 a wide berth yet it was such an easy sell to retail customers that they re-opened the issue subsequently (heard the retail take up rate was breathtaking).

I operate on a no free lunch mentality. When something is good, there must be a catch. And also, the do not put your eggs in one basket mindset. So even if its a free lunch, better diversify.

Finally Oldfolk,Ā  I would like to apologise for bringing up your predicament. However, I am sure that your problems would fall in pale with many others out there. And, who knows, this could spur some action for better investor protection in the future.

And also because I know that the company is fond of suing people, which excludes them from my investment radar now or anytime in the near foreseeable future, I will shut up now.