Lee Kuan Yew, the first prime minister of Singapore who governed for more than three decades from 1959 to 1990, passed away last month. Lee left a legacy that proved that you can change a culture, you can pull a country out of poverty and you can create a first-world county that’s ranked 7th in least amount of corruption, highest in pro-business, provides economic freedom, ease of doing business, social cohesion, employment, education and the 3rd highest per-capita GDP in the world.
My first visit to that country was in 1992 with my sister Patty, her husband Mahmood, and my then 18-month-old daughter strapped in a backpack as we wandered the streets.
Lee had stepped down as prime minister a few years before my visit, but Mahmood explained that Lee still ran the country. “Don’t spit, flush the toilet, don’t stare at women and always use the crosswalks,” Mahmood commanded as we got out of his car after crossing the Straits of Johor Causeway. “You will be caned and thrown in jail for chewing gum here. Lee has taken a bunch of poor, uneducated backward Chinese and Malays and given them a good life.” I think Mahmood admired Lee for his firm hand that wiped away corruption, instituted the rule of law, and brought economic prosperity and jobs to Singapore. I inferred from my chats with Mahmood that the corrupt (unsavory) lot left Singapore when they realized Lee was serious. Lee realized intuitively or consciously that while culture is allimportant for long-term success, you still need short-term goals, strategy and focus.
FIM Group was an early investor in Singapore, based on the belief that Lee Kuan Yew was “real” and would succeed to the benefit of Singapore’s people and economy. This, in fact, has been true for my entire career, as Singapore investments have consistently been one of our best performers. Companies like Haw Par (Tiger Balm brand) and Eu Yan Sang (healthy living Chinese medicines and vitamins products) have been big winners for our clients, and we still own their shares. Everything is cyclical, so we have sold our shares of Singapore companies when the prices got too high and bought them back when the prices were more reasonable. I have met the chairmen of both of those family-owned companies and have had some lively and extensive chats about Lee, politics and prosperity in Singapore.
What follows are a few of my favorite quotes from Lee Kuan Yew. They should give readers an idea of why he was so successful.
“I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn’t be here today. And I say without the slightest remorse, that we wouldn’t be here, we would not have made economic progress, if we had not intervened on very personal matters – who your neighbour is, how you live, the noise you make, how you spit, or what language you use. We decide what is right. Never mind what the people think.”
“I ignore polling as a method of government. I think that shows a certain weakness of mind – an inability to chart a course whichever way the wind blows, whichever way the media encourages the people to go, you follow. If you can’t force or are unwilling to force your people to follow you, with or without threats, you are not a leader.”
“To straddle the middle ground and win elections, we have to be in charge of the political agenda. This can only be done by not being beaten in the argument with our critics. They complain that I come down too hard on their arguments. But wrong ideas have to be challenged before they influence public opinion and make for problems. Those who try to be clever at the expense of the government should not complain if my replies are as sharp as their criticisms.”
– Third World to First: The Singapore Story: 1965-2000
“You know, the cure for all this talk is really a good dose of incompetent government. You get that alternative and you’ll never put Singapore together again: Humpty Dumpty cannot be put together again ... my asset values will disappear, my apartments will be worth a fraction of what they were, my ministers’ jobs will be in peril, their security will be at risk and their women will become maids in other people’s countries, foreign workers. I cannot have that!”
– Justifying million-dollar pay hike for Singapore ministers
“The task of the leaders must be to provide or create for them a strong framework within which they can learn, work hard, be productive and be rewarded accordingly. And this is not easy to achieve.”
– The Singapore Story: Memoirs of Lee Kuan Yew
"I was also troubled by the apparent overconfidence of a generation that has only known stability, growth and prosperity. I thought our people should understand how vulnerable Singapore was and is, the dangers that beset us, and how we nearly did not make it. Most of all, I hope that they will know that honest and effective government, public order and personal security, economic and social progress did not come about as the natural course of events."
– The Singapore Story: Memoirs of Lee Kuan Yew
Lee Kuan Yew, the “Father of Singapore,” is dead. There are a few people that I had wanted to meet in my lifetime, and he was one of them. I am sad he is gone, but I am most sad for the people of Singapore who lost a man who gave his life, risked public scorn and world ridicule to do what he felt needed to be done. He made hard decisions, and Singapore and the world are safer, more prosperous and lucky because of this wise man.
During our recent FIM Group Investment Strategy webinar (available on our homepage), we referenced the chart below (Figure 1) of five-year government bond yields. It shows how wacky the price of global money has become. Not only are yields near historic lows for U.S. Treasury bonds, but in many parts of Europe you have to effectively pay countries to lend them money (i.e., bond yields are negative!).
I won’t go into to the theories surrounding the global slump in rates (some of which ex- Federal Reserve head honcho Ben Bernanke summarizes nicely on his new blog at www.brookings.edu). Instead, I will simply make the obvious point that these low rates are creating dilemmas for many conservative investors: accept below-inflation returns from traditional vehicles like bank CDs or short-term government bonds and just try to save more, or follow more volatility- tolerant investors up the risk curve into longer-term bonds and stocks and hang on for what will likely be a bumpy ride.
Recent data seems to suggest a little bit of both happening at the moment, with the personal savings rate starting to climb (Figure 2), and demand for stocks pushing broad market valuation measures to decade-high levels (Figure 3).
And it’s not just investors allocating more of their savings to stocks. Publicly listed companies themselves are joining the party too! Figure 4 shows how companies are buying back stock (at high valuations and often with cheap borrowed money) at a pace approaching the historic high made in 2007. The magnitude of this corporate stock buying, as you can see, is many multiples of the billions coming into stocks from individual investors (via mutual funds and exchange-traded funds). Who says individual investors are the only ones guilty of buying high and selling low?
Given this unusual landscape, where many bonds virtually guarantee savers permanent losses (after inflation) and many stocks look stretched, are we stillfinding good investments to own? The answer is an unequivocal yes. We discussed some of these during our webinar.
Our team’s approach to finding good value in any market environment, even one as challenging as this, is really quite simple. We look globally and across most sectors for good-quality, reasonably priced assets that generate resilient cash flows. To do this, we analyze a wide range of quantitative and qualitative factors, including things like management team depth, business model strength and overall financial condition. We estimate “normalized” long-term cash flows based on conservative assumptions, discount these back into today’s dollars, and consider a wide variety of “what could go wrong” scenario analyses.
The search for good value investments involves analyzing far more investments than we will ever buy. Those that don’t fit our quality parameters are passed over, along with those that pass our quality check but trade at unacceptable prices. In some cases, we are willing to accept deeply out-of-favor investments and those with flaws that we believe will ultimately be remedied, or at least less severely discounted, in the market price. Put another way, we have no problem buying investments with “optics” that make them unattractive to other investors if we feel we are sufficiently compensated for doing so.
One of the investments reviewed during our webinar with optics deemed unattractive by the market is Australia-listed Alternative Investment Trust (AIT). AIT is an investment trust that owns a portfolio of investment hedge funds. Prior to our investment, AIT management announced that it would liquidate its hedge fund holdings and distribute the cash proceeds of the liquidations to shareholders. On the surface, that sounds like a failed business. But AIT shares traded for more than 30% below the stated value of its holdings. So while others saw a failed holding company, we saw value that was about to be unlocked through a managed liquidation process that distributed proceeds to us in irregular chunks.
We began purchasing the stock at $0.59/ share in 2011. As you can see in the blue line in Figure 5, AIT’s share price adjusted sharply lower each time pieces of the company were liquidated and distributed to shareholders. Those distributions are represented in the orange stair-stepped line. Because our custodian (Schwab) does not adjust cost basis for these distributions, it appears at first glace that we have a big loser in AIT. But through mid-April, clients for whom we bought shares back in 2011 have received about $0.74 in distributions. The company still has approximately $.11/share in book value remaining and sells for $.09/share.
If we were to sell at today’s market price for these clients, total returns for our holding period would exceed 40% over four years, a respectable return by most standards despite these “messy” optics.
Another position we highlighted on the webinar with less-than-perfect optics at the moment is Canadian holding company Dundee Corporation. Dundee owns asset management and advisory service businesses with a focus in the resources, real estate, infrastructure and agricultural sectors. Its exposure to energy, commercial real estate and the Canadian dollar has led to a situation of massively depressed investor sentiment.
Yet, Dundee has been through cycles like this before, and the company has a long track record of creating value for shareholders. One measure of this is book value per share, represented by the orange bars in Figure 6. As you can see, going back some 25 years, Dundee has successfully increased the company’s book value per share through multiple cycles. The green line represents what the market has been willing to pay for that value. At its current C$11.43/share price, the market price is less than half of the company’s C$23.97 currently depressed book value, a book value that we believe will have plenty of upside in the years ahead as energy and Canadian commercial real estate eventually bounce back.
What we also like about Dundee is that management isn’t just waiting for a turnaround in its key markets. In fact, it recently announced new initiatives in the asset management and merchant banking fields as non-compete covenants expire from a 2011 sale of a previously successful investment management business. We expect that these initiatives will allow Dundee to leverage its investment platform, attract outside assets, and earn structuring and management fees in the years ahead.
AIT and Dundee are two examples of our team’s proactive, value approach to investing where we are willing to accept less-thanperfect “optics” if doing so means great risk-adjusted value for clients. We believe that our client portfolios are chock-full of such value, despite the current, weird world of upside down bond yields and stock markets boosted by bond market orphans and corporate financial engineers.
Financial planning is a dynamic process. Time goes by, things change and you adapt to the changes, but do you stop to consider how these changes affect your overall financial situation? We can get caught up in our day-to-day activities and make decisions out of emotion rather than reason. That’s where your financial planner can help. If your planner is informed of the changes, they’ll be better able to assist you in your financial planning needs. Chances are, even if you don’t think there is anything to review, something might come up during a meeting with your planner. Here are just 25 potential reasons you should meet with your financial planner at least once annually.
If you would like to review your current financial situation in more detail, please reach out to one of FIM Group’s financial advisers.
Algonquin Power & Utilities Corp.
(Ticker: AQUNF, www.algonquinpower.com)
Share Price/Market Capitalization
(03/20/15): CAD $9.94/CAD $2.37B
Company Description: Algonquin Power & Utilities Corp., based in Canada, owns and operates a primarily U.S.-based portfolio of renewable power generation, transmission and distribution assets (from natural gas pipelines to water/sewer).
Investment Thesis: Algonquin offers a rare mix of yield and significant income growth potential with a solid portfolio of mission-critical assets in the energy and water infrastructure space. Algonquin is aligned with long-term North American utility trends through three operating segments: generation, transmission and distribution. These three segments encompass water/electricity/gas distribution and wind/hydro/solar/ thermal generation.
Algonquin’s generation business is non-regulated with a geographic split between Canada and the United States (30% and 70% respectively). Accounting for 50% of Algonquin’s earnings before interest, taxes, depreciation and amortization (EBITDA), in 2014 the generation business has $1.9 billion in assets and 1,050 MW of gross capacity; here, Algonquin believes there is an investment potential of $1.2 billion. For reference, capital expenditures (investments) made by utilities are their main source of returns (where they are allowed to make some fixed return on invested capital). Other facets (e.g., actual power generation) are primarily strong cash producers from the investor’s perspective. Today, 85% of the generation business is under long-term power purchase agreements (containing inflation escalators); Algonquin expects this percentage to increase to 90% in 2018. With a strong development pipeline, Algonquin expects its 2018 EBITDA mix from generation to be 81% wind, 11% hydro, 4% thermal and 4% solar. The bulk of the growth will be within wind generation (~23% from 2014’s 66%).
Algonquin’s transmission business is regulated at the state and federal levels, comprising natural gas pipelines and electrical transmission. Algonquin expects there to be $400 million of investment potential through 2018 in this segment.
Algonquin’s distribution business is regulated at the state level, 100% U.S., and accounted for the other 50% of EBITDA in 2014. Here, Algonquin has $2.1 billion in utility assets covering 488,000 connections through 31 utility systems. Similar to its generation segment, Algonquin believes there to be investment potential of $1.1 billion via acquisitions and organic growth. With a strong development pipeline, Algonquin expects its 2018 EBITDA mix from distribution to be 47% gas (from 56%), 32% water (from 19%) and 21% electric (from 25%).
Algonquin’s strategic plan calls for total annual shareholder returns greater than 10%, growth in assets and EBITDA of roughly 15% (CAGR), growth in earnings per share and cash flow of 7%-10% (CAGR) and dividend increases consistent with these growth numbers. Algonquin plans to keep a healthy spread between dividends paid out and funds from operations. With an efficient capital structure and a solid yield (4.44% as of 4/21/15), we believe that we have identified a utility with a rare trait for the industry, growth beyond mere GDP.
Data Source: Company Filings, Bloomberg
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