By: Paul Sutherland, CFP ®
Late in February, my 17-year-old son, Keeston, joined me for a company research trip to Singapore and Indonesia with a very quick stop in the Philippines. His teachers did not mind him missing a few days of school when they realized he would sit in on 10 meetings in two days in Singapore and have a full-day site visit in Indonesia. What follows are some of the notes and observations from our trip.
OMG! Another Real Estate Company!
Our first appointment was with the founder, major stockholder and CEO of asiatravel.com. We talked about the innovations made in his fast-changing business, and how they had 25 fulltime skilled programmers to keep their website relevant and fresh. He discussed the competition and challenges and why he feels asiatravel.com is linked effectively to the Asia market for tourism. Thankfully this was our first meeting, and Keeston found that chatting with the brilliant (although a bit geeky) founder of a $100 Million+ company was “pretty cool.” We went to lunch with him “Asian style,” and I counted 12 items on Keeston’s plate that I’m sure he had never eaten before. Still weary from 30 hours of air travel and layovers, I think Keeston’s “yuck” meter was weak, and he ate it all.
So began a series of nine more meetings crammed into two days, followed by a site visit to Indonesia with the accountant for Gallant Ventures to see their properties on Bintan Island. Six of our meetings were with real estate companies, so Keeston became familiar with occupancy, cap rates and some of the nuances of real estate. Starhill REIT (Real Estate Investment Trust), which owns premier retail properties and office space in Singapore, Malaysia, China and Australia, was our first visit. As we walked around their Singapore flagship mall, the Wisma Atria, with a Starhill executive, we learned why a Nike shop can’t be located next to Coach, Louis Vuitton or fancy watch and jewelry shops. We also learned that third floor rents can not be one-third of floor one rates and how to maximize the value of the second floor by creating entrances and way finding. Keeston enjoyed learning about the “tricks” of the way to mange a mall and the knowledge and enthusiasm that our guide had for his craft.
We then met with an industrial REIT that specializes in space for manufacturing, and Sabana REIT, which has an ethical overlay to its mandate that, among other things, requires that it avoids any income derived from cigarettes, gambling or alcohol. The president of the REIT proudly explained how they are the first Sharia-compliant REIT in Singapore.
Maximize Investment Income and Growth
As I have already discussed in other articles, real estate is about business, and as a business it must be looked at through a prism of the business person who is trying to maximize investment income and growth. But how do you compare properties?
Keeston and I met with the above three REIT companies and three others that specialized in India’s high-tech real estate parks (Ascendas India real estate), Japanese residential properties (SAIZEN) and serviced apartments (Ascott). Each company had different characteristics; however, the bottom-line is that there is one real tool that helps to baseline the expected returns from each investment: cap rates. One executive said his company just sold their properties in Beijing because they had [only] a 2% cap rate. Keeston asked the executive why he would sell a property in Beijing where everything was growing, and he replied that he felt growth was going to stall in Beijing, and that rental income at 2% on the sales price of the underlying property showed how disconnected the prices of assets were to the revenues they generate in some areas of China. As readers can see in the Real Estate Cap rates and Values Chart (above) people can bid a property up if they are willing to take a lower cash yield and a higher expected return from capital growth.
Everything is comparative, and nothing goes up beyond its economic equilibrium price for long. For example, property values in Japan dropped in some cases by 80% even though property’s cash income was stable. Why? Many people were buying on the “greater fool” theory figuring that prices would go up forever in Japan’s prime markets – “after all, they can’t make any more real estate.” People can say, however, that “earning 2% is silly when I can get 6% in Singapore – a stable country with a solid business climate.” When enough do, investment capital moves to higher yielding properties and the prices of lower cap rate real estate falls. The Ascendas India Trust and Lippo Malls Indonesia have cash dividend yields above 7%, and their economies, like Singapore’s, are growing. The cash yields on the six REITs we visited ranged from just under 6% to more than 9%, and nearly all of their income derives from Asia, which is comforting for FIM Group’s investment committee, as we feel the U.S. dollar is going to weaken against most Asian currencies.
FEAR of the Unknown
If you read the news or listen to talk show hosts, you can easily assume that Indonesia is full of terrorists, India is ungovernable and China is going to “own” the world. At one time the U.S. “owned” the world and books written in the late ’70s speculated how Japan was going to take the leading economic position. If you listen to news overseas you could conclude that the U.S. was a militaristic, meddlesome country whose cities were full of murderers, drug addicts and unemployed people who were not well-governed. I am confident in assuming that everyone reading this article does not fear going to his own mailbox or worry that a homeless, unemployed drug addict is going to break into their house. We also are aware that some of our politicians are less eloquent than those in other countries, but somehow manage a democracy. Today, a “common” perception is that China is great and the U.S. and Europe are “losing it.” The other perception is that as China grows so does all of Asia and if you aggregate Asia you’re right - if you don’t you’re wrong. Such oversimplification and generalization leads investors to completely miss tremendous opportunities. Singapore, Malaysia, India, Indonesia, Taiwan and other Asian countries have their own economies, own governments and are not appendages to the People’s Republic of Communist China. They will grow and prosper regardless of what happens in China. Will China’s economic cycles affect them? Yes. Are their destinies and well-being tied to China? No.
The Short Term
In the short term, people always panic. We are wired that way. I have been reading Thinking Fast and Slow: A New Way to Think About Thinking. Beneath the biases of intuition your “experiencing” self and your “remembering” self shape your life. As a readaholic, Thinking Fast and Slow was very helpful to help pass the time while traveling. It also helped me to realize why so many people will “get conservative” just before the markets rise and “get aggressive” after they have gone up a lot.
By: Barry Hyman, MBA
There are two issues of Barron’s magazine sitting on my desk as I write this. The cover of the January 30, 2012, issue reads “Don’t Lose My Money!!!”. The cover of the February 13, 2012, issue reads “Dow 15,000.” Don’t get me wrong, Barron’s is a great publication and an excellent source of intelligent, often contrarian thought, but the apparent schizophrenia of these covers begs the question: What is investing really about?
Is investing about predicting what “the market” is going to do? Is it about fear and taking the sure bet over opportunity? Is it about groupthink, following the crowd, taking the path of least resistance and believing what appears to be obvious? If you read biographies of and the writings by the truly great successful investors throughout history, you’ll find none of them followed any of those lines of thinking. What you will read about is diligent research, conviction that favors economics and human behavior over the current headlines of the day, and a faith that not only “this too will pass,” but the opportunities the “this” creates are what lead to investment success.
Today’s “this” includes the economic crises in Europe, political dysfunction in the U.S., nuclear aspirations of Iran, out of control and rising debts in the U.S. and abroad, corruption and unethical practices, etc. Many people feel these conditions are capable of derailing the current nascent economic recovery in the U.S. and stock market values globally. Investors who fall prey to the opinions, thinking or emotional responses I described earlier are at best conflicted these days.
I am not referring merely to individual investors. In a recent article written by the chief investment officer of an investment management company, the author cites some of these “theses” as his worries. His company’s response is to keep a sizable amount of investment assets in cash and cash-like investments. That makes some people comfortable. Touting their so-called defensive posture is good marketing. After all, such stores of money are a sure thing, right? Are they?
Let’s play out the doomsday scenario. What happens if governments continue to bail out failing borrowers, including individuals, enterprises and other governments, causing debts to rise? The Keynesian* solution is for governments to flood economies with liquidity by lowering interest rates and increasing the money supply (so-called “printing money”). The normal result of such an “easy money” policy is a decline in the value of currency, which usually leads to inflation. What happens during inflation? The purchasing power of cash falls and the price of goods and services rise. That is precisely the conditions during which investors lose by holding cash or cash equivalents. But the emotional response to fear and lack of certainty is to take the fetal and unfortunately self-defeating position of moving to and remaining in cash.
While “cash is king” is in the minds of the investing public, prices of stocks become and remain depressed. Despite the market value of their stock, solid companies continue to pay and often increase the dollar value of the dividends they pay out. Thus, the current yield of the dividends stocks pay increases when the stock prices fall. When stock ownership is out of favor, as it has been on and off several times in the past decade, the high yields stocks pay eventually attract investors and their prices ultimately recover.
Investors who take advantage of these ever-repeating cycles – by buying investments when their prices are low relative to their values and favoring those whose cash flow and dividend yields are high – benefit doubly. First, while they patiently remain invested, holders of investments continue to collect (with the option of spending or reinvesting) the income, which at current rates dwarfs the income cash earns. Then they benefit again by the eventual increase in the price. In order to participate in these benefits, investors need to remember that eventually rationality will replace reactionary folly.
By contrast, investors who take the socalled “safe” route of moving to cash miss out in four ways: 1) They earn little on their cash; 2) The purchasing power of their cash erodes to inflation and thus they become poorer; 3) They miss out on the appreciation of eventual rising stock prices; and 4) They forgo the opportunity to lock in high yields, an opportunity that vanishes when the prices of investments ultimately rise.
This cycle has repeated itself over and over since the beginning of records. Yet each time there is consternation, there are voices in the media encouraging people to resume the fetal position. I hear a lot of that these days. “The global markets are going to crash in 2012 or 2013,” “The dollar is going to collapse within a year,” “We are in the second of the three legs of a bear market,” and the ever present “This time it’s different.” Believe it or not, these are exactly the same things people have said in every market cycle going back to at least the 1800s. Reaction to it is what creates opportunities for real investors. But it is imperative that investors understand what investing is and what it is not.
Investing is not about “Don’t Lose My Money”. It is also not about whether or when the Dow is going to 15,000. Rather, investing is about locking in current and future cash flows when the price to do so is such that over one of these cycles, the holder of such investments maximizes the probability of achieving the three benefits described above. It requires the fortitude to ignore the year-to-year volatility that ensues.
As I write this on February 17, FIM Group portfolios hold a higher than normal level of cash. Not because we are bearish on owning stocks, but because we have recently sold several of the investments we held to raise cash to deploy in other investments in the weeks to come. Yet despite having such a large portion of temporary cash, which reduces our portfolio yield, our portfolios are still generating two to four times the yields of the 10-year Treasury and the main U.S. stock market indices. We own many investments yielding in excess of 5%, 6%, 7% and even 8% in dividends. We are extremely confident that regardless of what markets do, our portfolios are positioned extremely well to provide substantial long-term returns.
By: Renee Egelski, AWMA®, CFDP®
As the April 15 tax deadline approaches, we’d like to remind you that you have up until that time to contribute to your traditional and/or Roth IRAs for the 2011 tax year. This is also a good time to review the rules of the two savings plans.
A traditional IRA is a personal savings plan that offers tax benefits to encourage retirement savings. Currently, an individual can contribute up to $5,000 per year. If you are age 50 or older, you can contribute an additional “catch-up” contribution of $1,000. Contributions may be fully or partially tax-deductible, depending on certain factors (outlined below). Investment earnings in a traditional IRA grow tax-deferred, but distributions are subject to federal and possibly state income tax (excluding the portion that represents nondeductible contributions). Mandatory distributions – called required minimum distributions (RMDs) -- from traditional IRAs are required beginning on April 1 after the year in which you reach age 70½. The RMD is calculated based on the prior year’s year-end account balance and life expectancy. Once you reach age 70½ you can no longer contribute to a traditional IRA. Beneficiaries of traditional IRAs can either take a lump sum (taxed as ordinary income, but not assessed a 10% penalty), or re-title the account as an inherited IRA, and continue to allow the assets to grow tax-deferred until withdrawal. RMDs will apply.
A Roth IRA is another type of personal savings plan that offers tax benefits to encourage retirement savings. The same contribution limits as traditional IRAs also apply to Roth IRAs. With a Roth IRA, however, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax-deductible, but if certain conditions are met, distributions will be completely income tax-free. Unlike traditional IRAs, required minimum distributions (RMDs) are not required at age 70½, and you can contribute to a Roth IRA after age 70½ if you still have earned income. Beneficiaries of Roth IRAs receive tax-free distributions from an inherited Roth IRA.
1) Can I contribute to both a traditional IRA and a Roth IRA?
The annual IRA contribution limit for any year (including the catch-up amount) is a combined limit that applies to all of your IRAs. For example, if you have both traditional IRAs and Roth IRAs, your total contribution to all of your IRAs cannot exceed $5,000 (or $6,000 if you are age 50 or older).
2) When can I withdraw from my IRAs?
You may make withdrawals at the age of 59½, unless the distribution is an approved exception (such as disability, medical expenses in excess of 7.5% of income, qualified higher education expenses, qualified first-time homebuyer up to $10,000, etc.). Otherwise a 10% early withdrawal penalty is assessed. In addition, Roth IRAs have a five-year holding period requirement.
3) Can my child contribute to an IRA?
Yes, if he/she has earned income. If this is the case, it is a good idea to start an IRA as early as possible to take advantage of compounding interest. For example, if an investor starts saving $2,000/year from age 16 to 24, he/she will have $585,975 by age 65, assuming an 8% annual rate of return. Conversely, if an investor waits until age 30 to start saving $2,000 year, and saves through age 60, he/she will have $332,900 at age 65.
- If an individual is not an active participant of a qualified (and some other) retirement plan, he/she may deduct his/her full contribution.
- If an individual is an active participant of a qualified (and some other) retirement plan, the following phaseout ranges apply for deductible IRAs. Single taxpayers: $56,000- $66,000; joint taxpayers: $90,000- $110,000.
- If one spouse is not an active participant of a qualified retirement plan, the phaseout range for that spouse is $169,000-$179,000.
Roth IRA Phaseouts:
- Single: $107,000-$122,000
- Married Filing Jointly: $169,000-$179,000
- Married Filing Separately: $0-$10,000
All contribution limits and phaseout incomes mentioned are applicable for the 2011 tax year. The contribution limits are the same for 2012; however, the phaseout incomes are slightly more for 2012.
There is no Spotlight for this issue.