CFA Society Singapore Quarterly Newsletter 2018-10 (October)

Quarterly Issue 31 | October 2018 | www.cfasingapore.org

ESG | Flat Yield Curve | Trade Tensions @ annual forecast dinner • financial controls for

Non-Profit Organisations

• Town Hall Meeting with Nick Pollard • ARX Survey on REITS Publisher: CFA Singapore, 10 Anson Road, #25-09, International Plaza, Singapore 079903 Email : info@cfasingapore.org

Tel : +65-6323-6679

Editorial & Production: NextInsight

in this issue...

Alvin Lee Executive Director, Head SEA Client Coverage, MSCI

Simon Ng, CFA

Arun Kelshiker, CFA

Freddy Lim

Bryan Goh

CEO, CCB International (Singapore)

Head of Portfolio Strategy Standard Chartered Bank

Co-founder StashAway

Chief Investment Officer Bordier & Cie, Singapore

ESG | Flat Yield Curve | Trade Tensions

8

L-R: Melvin Tan, DCG Capital | Fang Eu-lin, PwC Singapore | Koh Chaik Ming, Forchn International | Sovann Giang, RSM Risk Advisory

Financial Controls for Non-Profit Organizations

14

L-R: Chua Born Jern, Allen & Gledhill | Matthew Song, SGX | Alan Lok, CFA Institute | Lim Shyong Piau,

Lion Global Investors | Lennon Lee, PwC Singapore | Yeow Kit Peng, Ascendas REIT

Town Hall Meeting with Nick Pollard Page 2 | October 2018 | Issue 31

5

ARX Survey on Singapore REITs

20

BOARD MESSAGE

Dear Members,

In the last edition of this newsletter, I shared that our newly constituted board was meeting for a half day retreat to review our vision and formulate our strategies for the next 5 years with a view of moving towards CFA Institute Society’s 2.0 initiative. I am pleased to share with you our CFA Singapore Society’s 2.0 vision and mission.

Vision: Inspiring the investment community to be trusted professionals valued by society.

Mission: To lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society.

In the last quarter, our Society staff have been kept busy bringing to you numerous networking, professional and career development activities. The key events are highlighted in this newsletter.

Save & Invest Portfolio Series Meanwhile, allow me to share what we have done to lead the investment profession by promoting the highest standards of ethics, education and professional excellence in Singapore. The Society’s advocacy initiatives in this area have received strong signals of endorsement from the public, government authorities, as well as members within the CFA fraternity.

Over the last 2 years, one of the Society’s key contributions was our award winning Save & Invest Portfolio financial literacy campaign: Senior CFA members structured, monitored and rebalanced portfolios for 3 individuals representative of retail investors in Singapore facing different financial situations and goals. Using simulated personal investment portfolios of the 3 individuals, our senior members imparted investment management knowhow for retail investors. The series was featured in 22 editions of a dedicated Sunday Times column.

We were pleasantly surprised at how well received our campaign became. Singapore’s mainstream Chinese daily, Lianhe Zaobao, approached us to replicate the Save & Invest Portfolio series for the Mandarin speaking population. We then started the Mandarin financial literary program in November 2017 led by our members Mr Wong Chin Loon, CFA; Mr Simon Ng, CFA; Ms Jessica Soon, CFA; and Mr Tan Teck Leng, CFA. This series will end its run in January 2019.

CFA Singapore Insights Business Times also approached us for a similar collaboration. CFA Singapore Insights was thus born: A column that raises awareness about issues Singapore investors should know and understand. We approached subject experts for their written opinion analysing a “hot topic” in their area of expertise. For instance, when Hyflux defaulted on the distribution due for its perpetual securities earlier this year, the CFA Singapore Advocacy Committee responded with an article on corporate perpetuals, the difference between these instruments and regular bonds, as well as potential risks and factors to consider before investing in them. When SGX approved the dual-listing structure, Mary Leung, CFA (Head of Advocacy for AsiaPacific, CFA Institute) contributed a piece analysing the effectiveness of dual class shares as a competitive strategy.

Since January 2018, the CFA Singapore Insights column has appeared in about 40 editions of the weekend Business Times. The column’s thought leadership articles have been used by CFA members as materials for training or workshops that they conducted. The Monetary Authority of Singapore also approached us for permission to republish CFA Singapore Insight articles on the MoneySense investor education web portal.

The CFA Singapore Quarterly | Page 3

Ethics Challenge As the Millennial generation enters the investment management workforce, the Society seeks to shape a more trustworthy, forward-thinking investment profession that better serves society.

On 22 September 2018, we launched the Ethics Challenge, the first of its kind in Asia. Led by Mr Simon Ng, CFA, this is an inter-varsity competition designed to increase students’ awareness of the ethical dilemmas and issues they may face when they enter the investment management industry. This year, participating teams came from Singapore Management University, Singapore University of Social Sciences, and National University of Singapore.

Ms Sonia Gandhi, CFA, Director at the India Association of Investment Professionals, conducted an ethics workshop for the contestants, who were students from finance or business programs. CFA members who volunteered for the Ethics Challenge included Dr Tony Tan, CFA; Mr Daryl Liew, CFA; Mr Maurice Teo, CFA; Mr Chan Fook Leong, CFA; Mr Kanol Pal, CFA; Mr Sam Phoen, CFA; Mr Vineet Vohra, CFA. The volunteers trained and mentored the participating teams, which were each given an ethics case to analyse

www.linkedin.com/company/cfa-society-singapore

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and evaluate at a presentation at the local finals [to be held – depending on when the newsletter is published] on 27 October 2018.

My Money Public Seminar / World Investor Week We were invited and fielded speakers for My Money Public Seminar and more recently at the World Investor Week. Our member, Mr Chu Toh Chieh, CFA spoke on Investing in Corporate Bonds and Perpetual Securities at the My Money Public Seminar. In the recently concluded World Investor Week, our members represented CFA Society Singapore as panellist members: Mr Wong Chin Loon, CFA spoke on Investing with Confidence and Leveraged Investing while Mr Subhajit Mandal, CFA spoke on Digital Financial Services.

A big thank you to all the volunteers who contributed their time and expertise to the Society’s education and outreach initiatives.

Tan Lay Hoon, CFA President CFA Society Singapore

www.facebook.com/CFASocietySingapore

www.twitter.com/CFASingapore

Town Hall Meeting with Nick Pollard Managing Director, Asia-Pacific, CFA Institute We had a roundtable with 6 to 7 Chief Investment Officers and Chief Executive Officers of various financial firms in Singapore. The conversation wasn’t about returns. It was less about markets. It was all about how do we have a beneficial impact on society.

It was really great to hear that kind of conversation coming to us rather than us preaching to the market about the fact that at the end of everything that we do, there is a customer. And that we have to put the customer at the forefront of our activity.

I was absolutely convinced after that lunch that’s going to happen in a big way in the market here.

CFA Institute has been around for 71 years. Today, the majority of CFA charterholders are in the U.S. The story underneath is that 173,000 CFA program candidates are in the Asia-Pacific region, more than double the figure in

the U.S. 60% of the candidate pipeline is now in the Asia-Pacific region. We have about 30,000 members at the moment in the Asia-Pacific region. In 10 years, we will have about 50,000 members here. This region will become more and more influential. The work that you do becomes even more important in that context because we have over 150,000 members worldwide and only 600 of us are professional members at CFA Institute.

Nick Pollard, Managing Director, AsiaPacific, CFA Institute, was in Singapore on 11 September to share with members the future state of global membership as encapsulated by CFA Institute’s Societies 2.0 Initiative.

We have over 150 societies with 163,000 members, having grown 8,000 members last year. China is driving much of the growth.

Candidates outside China with China passports make up almost 50% of all candidates. For example, in Australia, 75% of all CFA candidates are China passport holders. There is great traction in China for the CFA credential.

In China, the CFA charter has credibility and the Chinese want to be seen as professionals in other parts of the world.

This ambition of a large number of individuals in China is supported

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by the government. In Chengdu, the municipal government gives discounted mortgage loans to CFA charterholders to encourage them to relocate to Chengdu and work there. It wants to show that the city is more transparent, credible, and competent than other markets in China and the rest of the world.

Nick Pollard Managing Director, Asia Pacific CFA Institute Nick Pollard joined CFA Institute in 2016 as managing director for Asia Pacific. Based in the Hong Kong office, he also oversees operations in Beijing, China and Mumbai, India. Mr Pollard is responsible for working with all CFA Institute stakeholders, increasing the number of candidates entering and moving through the organization’s credentialing programs, and working with institutional partners (employers, universities and regulators) throughout the region. He is actively engaged with 21 CFA Institute societies that represent 28,000 members in the region.

Mr Pollard is a seasoned wealth management and banking executive and skilled at growing businesses in Europe and Asia. He brings a unique combination of strategic leadership skills as well as learning and professional development expertise.

Prior to joining CFA Institute, Nick was CEO of The Royal Bank of Scotland’s Coutts Asia division and, most recently, he was the Head of International Learning and Professional Development for Coutts International. Mr Pollard began his career with NatWest Group, subsequently part of the RBS Group, where he gained experience in marketing and talent development.

Mr Pollard earned his B.A. from University College, London and is a Member of the Private Wealth Management Association. He has lived and worked in the APAC region since 2009 and resides in Hong Kong.

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Our biggest challenge is the growing number of “charter pending” -- people who have passed all 3 levels of the CFA exams but do not have the 4 years of pre-requisite experience to become charterholders.

That number is growing quite fast in China and in India. Most societies are fixated on making inroads into that market and how to create employment opportunities and professional experience so that they can go on to become charterholders.

If you think of yourselves as charterholders, the influence you can have on behalf of the CFA Institute on the organization that you work for is something you should never underestimate.

Let’s Measure Up! Our advertising campaign Let’s Measure Up! can be seen in the MRT stations in Singapore.

It is doing very well in that CFA has the highest amount of recognition when compared to other credentialing bodies across the financial service sector. You will see more of this campaign next January.

CFA Member App We have 155 society stakeholders that we reach out through our member app. Only about 50% of our members have registered on it. If you have not already registered, you need to do so because lots of information will be sent out to

you via that app. It is going to become more user-friendly. It is going to get better technology.

You can use it when traveling around the region to find out what CFA societies in other countries are up to and get invites to their events.

Accessibility is one of the metrics that CFA Institute measures itself by. And it’s not just a numbers game. A year ago, when I was in the Mongolian capital of Ulaanbaatar, there were 3 CFA charterholders there. About 100 people from Ulaanbaatar travel to Beijing, Shanghai, and Hong Kong to take the CFA exams. First of all, Mongolia is a relatively poor economy.

Secondly, we have been making it as difficult as possible to become charterholders.

So, now we have a test center in Ulaanbaatar. It’s never going to be huge like our test center in Beijing for 18,000 candidates, but we want to make sure that kind of missionary outreach to make the CFA charter accessible is something that everybody appreciates.

This year, we have new test centers in Barcelona (Spain), Dalian & Hangzhou (China), Hyderabad (India), Ulaanbaatar (Mongolia), Rio de Janeiro (Brazil), and Lagos (Nigeria).

We expect Africa to be in 20 years time where Asia-Pacific is today, as far as CFA Institute is concerned.

We also have new societies in Chengdu (China), Jamaica, and Uruguay.

Organizational Priority Having to administer the exam across the entire world on the same day is a logistical nightmare. Examinations have become more sophisticated in our approach. At the moment, we are looking at how we introduce computer-based

Town Hall Meeting

testing into the CFA level 1 and 2 programs.

Continuing Professional Development One of our challenges is how to provide sufficient lifetime learning to members. Imagine someone taking the CFA program 40 years ago who never learned another thing since calling himself a charterholder.

Would you go to a doctor who has not learned anything about his profession in the last 40 years? You probably wouldn’t, especially if you are paying for his medical advice.

Why would you go to someone like that for professional financial advice?

So our challenge is how to provide continuing education to members.

Most countries have regulations on this such as CPE or CPT. We think about how we can enrich these continuing education courses by working with IBF or MAS to add to their own curriculum so that members have more relevant lifetime learning.

What will the world of credentialing look like in 10 years’ time? Will the professional bodies be able to work

together? For example, if you have passed level 1 in the CFA program, that might give you headway to bypass the basic levels of other credentialing programs.

Advocacy is a key part of the societies’ success. It is something you can’t do it on your own because it also needs collaboration, feedback, and accountability.

How do we create something that is much more useful for practitioners (our customers) and break the Chinese wall that is currently there?

Secondly, the societies need much more resources. Over the next 2 years, we will be putting more professional people to support the board and make sure they are in turn supported by the board to make sure they can act on our behalf.

Society 2.0 CFA Institute is a professional body with 163,000 members all around the world. But there is no way the Institute can know the ground in your markets as well as you. We don’t have the connections that you have. We don’t work for institutions. We don’t have the exposure to regulations that you have.

I think it’s going to be a very exciting phase in the growth of the CFA Institute and the growth of the societies that exist around the world.

How do we turn our value proposition on its head? Instead of the Institute driving our professional body, we are now having the local societies drive it. CFA Singapore becomes the recognized place to go to if you want to understand about ethics or transparency. As part of the local societies, you are the guys who lead advocacy challenges against regulatory policies within your turf.

E

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ESG | Flat Yield Curve | Trade Tensions At this year’s Annual Forecast Dinner, the keynote presentation by Alvin Lee (MSCI Executive Director and Head of Southeast Asia Client Coverage) touched on 3 investing trends: factor investing, ESG, Sustainable Impact.

Panelists for the evening: • Simon Ng, CFA (CEO, CCB International) •

Bryan Goh (CIO, Bordier & Cie, Singapore)

•

Freddy Lim (Co-founder, StashAway)

Keynote Presentation: Update on Factor Investing Tools The concept of factor investing has been around for quite some time. Earlier this year, MSCI launched its Factor Classification Standard to standardize the language and how to communicate about factors.

Using CNOOC as an example, MSCI was able to decompose the year-to-date return of a stock into the following factors that impact the price of a security: market, quality, industry, momentum, stock specific. The same concept can be applied to a portfolio. As one adds more securities into a portfolio, the portfolio behavior becomes increasingly driven by factors and less by idiosyncratic risk or security-specific risk.

The event took place on 30 July 2018 at the SGX Auditorium. The Society’s board member, Arun Kelshiker, CFA, was the event moderator.

Stock price of CNOOC from January to July 2018 decomposed into factors that impact the price of a security.

Page 8 | October 2018 | Issue 31

Factor

Exposure

Equal-weighted

Weights are tilted toward small to mid-caps.

Momentum

Stocks with high price increases in recent trading history.

High Dividend Yield

Stocks with a high dividend yield.

Quality

Stocks with strong fundamentals measured in terms of return on equity, debt-to-equity, and low earnings volatility.

Value-weighted

Undervalued stocks with a low price-earnings ratio, a low pricebook ratio, and a high dividend yield.

Minimum Volatility

Adjusts a parent index to decrease forecast volatility

Diversified Multiple Factor

Index has exposure to various other indices such as value, momentum, low size, and quality.

Alvin Lee Executive Director, Head SEA Client Coverage MSCI

MSCI factor indices and Factor Classification standard enable an investor to assess the extent to which the behavior of its fund managers is explained by core factors. The overall portfolio’s exposure to macro factors such as equities, rates, credit, real assets, pure alternatives, and inflation can also be assessed. Take the case of a pension fund that manages some assets in-house and also hires external fund managers.

The bar chart on page 4 illustrates conceptually the extent to which the performance of its various fund managers is determined by underlying factors.

ESG as a Risk Factor ESG has gone from being rarely mentioned to being regularly mentioned. We are seeing a number of institutional investors become signatories to the UN Principles for Responsible Investing. An increasing number of large investors are looking for an ESG overlay to their investing.

As reported in the Financial Times, Mark Mobius announced intentions to raise US$1 billion for his ESG fund over the next few years. He is looking not only for companies with quality management but also companies with an improving ESG rating.

Alvin has served as Head of Southeast Asia Coverage for MSCI since 2015. Alvin and his team work with institutional investors, asset and wealth managers, and financial institutions to manage the investment, credit, and counterparty risks of these institutions’ investment, trading, lending, and intermediary activities.

Prior to 2015, Alvin has served as Head of Financial Institutions Coverage and Head of Multi-Asset Class Analytics in Asia from 2010 to 2015. He joined the firm in 2010 when RiskMetrics Group became a wholly owned subsidiary of MSCI Inc. Prior to joining MSCI, Alvin spent 11 years at RiskMetrics Group, where he ran the Asia team, whose business lines included portfolio risk management, corporate governance, and environmental and socially responsible investment research, and with four years of product development experience at the New York headquarters. Before that, Alvin was a member of JPMorgan’s Risk Management Advisory team from 1992 to 1998 in both New York and Singapore, where he developed quantitative models for trading activities and advised selected clients on enterprise risk management.

MSCI tracks the extent to which the issuer of a security is exposed to key systematic risks related to ESG matters. This

The CFA Singapore Quarterly | Page 9

Mapping UN SDG to Sustainable Impact PIllar

UN Sustainable Development Goals

MSCI Sustainable Impact Themes and Categories

• No poverty • Zero hunger • Good Health & Well-

•

Nutrition

•

Major Disease Treatments

• Clean Water & Sanitation

•

Sanitation

•

Affordable Real Estate

• Quality Education • Decent Work &

EMPOWERMENT

BASIC NEEDS

Social Impact

Being

Economic Growth

• Reduced Inequalities • Industry, Innovation &

• Education • SME Finance

Environmental Impact

Infrastructure

Simon Ng, CFA CEO CCB International (Singapore) Pte Ltd Simon joined CCB International (Singapore) Pte. Ltd. in 2016 as CEO/Managing Director, after leaving Shanda Group, a private investment holding company with US$8billion Asset under Management where he heads up the Multi-Asset Investment activities.

Prior to Shanda Group, Simon was Pan Asia Deputy Chief Investment Officer of AXA Rosenberg Investment Management, where he started his Investment Management career in 2001. He has served in the Singapore, United States of America and Japan office in his 15 years of service in the firm.

His prior appointment at the firm have included Head of Investment Japan, Head of Portfolio Management in Asia Pacific, senior global product strategist, US strategy engineer, Asia Pacific assistant portfolio engineer, and Asia Pacific operations manager.

Simon obtained his Bachelor of Business Administration from the National University of Singapore and his MBA from the University of Chicago Booth School of Business. He is a Chartered Financial Analyst charter holder.

Simon is a board member of the CFA Singapore Society and also an Independent Director of Arts Theatre of Singapore Ltd.

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• Climate Action • Affordable & Clean Energy

• Life Below Water • Life on Land • Responsible Consumption & Production

CLIMATE CHANGE • Alternative Energy • Energy Efficiency • Green Building NATURAL CAPITAL

• Sustainable Water • Pollution Control

can range from emissions, carbon footprint, water stress to data security or labor relations. It also assesses how the management is dealing with those risks, be it environmental exposure, social exposure, or governance. We found it interesting that companies that managed ESG well experienced fewer deep incidents of drawdown.

MSCI categorizes the 17 UN Sustainable Development Goals into a very broad framework of 5 actionable impact themes as follows: •

Natural Capital

•

Climate Change

•

Empowerment

•

Basic Needs

•

Governance

We believe there is much work to be done to further refine this.

Fund managers may start to think more and more about sustainable impact-oriented themes through their products or activities as the financial community works together to tackle these challenges.

Excerpt of Q&A with panelists: With the flattening yield curve and forecasts of rising rates, how is the bond market likely to be impacted?

Freddy: I think it is a misconception to say that a recession is coming because the yield curve is flattening. If you look at the data carefully, the curve can flatten and invert. It is only when the curve becomes steep again that you get a recession.

When the long-term interest rate goes up, the stock market suffers. When the market has aggressively and fully priced in future earnings, the numerator of your discount factor model is unable to go up further. But the discount factor is dependent on long-term rates.

I might as well be invested in the long-term part of the curve because there is nowhere else to run when the longterm rate goes up.

We like consumer staples and think the sector is still undervalued. The trade war has created concerns about whether food companies can pass on the cost of trade tariffs to consumers. We haven’t seen evidence of any inability to pass on cost increases. We like the energy sector.

Gold is beaten down but we like gold because it provides a lot of insurance against volatility when you have a foreign portfolio. I am invested in gold, energy, consumer staples, Treasury Inflation-Protection Securities.

Simon: Accumulate income-generating instruments. REITS indices in Asia have outperformed the indices of the broad market year-to-date. In a rising interest rate environment, income-generating products tend to underperform.

However, these are the assets that help us to tide over an uncertain market environment.

As a firm, we like to put our bets on private credit (extended to companies on bilaterally negotiated terms). This asset class tends to be very liquid but is less accessible to retail investors. This is a very niche asset class and the investor has to make the effort to source for such types of credit deals.

In the event of debtor insolvency, the repayment priority of private credit is usually between senior and junior debt.

The character of private credit allows us to bargain for terms that will be attractive to our investors when we source for deals.

Arun: Invest in USD emerging markets government bonds.

The major driver of returns from this asset class has always been inflationary expectations. U.S. Treasury moves this

Bryan Goh Chief Investment Officer Bordier & Cie, Singapore

Bryan Goh is Bordier & Cie’s chief investment officer for Singapore. He has over 20 years of investment management experience, with a focus on finding investment opportunities and solutions in underresearched, and overlooked regions of the economic and financial topology. Before joining Bordier & Cie, he served as head of alternative investments at DBS Private Bank for over four years, during which he developed and originated liquid, regulated and transparent mutual fund products for clients.

Prior to that, Bryan was co-founder and partner at First Avenue, a global alternative investment advisory and capital placement firm with business lines encompassing both private funds and direct corporate transactions.

During his time at First Avenue, he also served as its head of origination and due diligence. He began his career in 1994 as an equities trader and later attained a portfolio manager position at Arab Bank PLC in London. In 2004, he joined the OAKS Family Office as a director, and was also appointed as its principal manager for hedge fund investments.

Bryan holds an MSc in Economics, Econometrics and Mathematical Economics from the London School of Economics.

The CFA Singapore Quarterly | Page 11

year have been a little out of sync with inflationary expectations.

The potential upside of U.S. Treasury yields could be limited because inflationary expectations have yet to catch up.

This makes some fixed-income sectors that are more sensitive to interest rates attractive. For example, USD denominated government bonds have high sensitivity to interest rate movements. The yield of USD denominated government bonds issued by emerging markets is attractive at the moment, more than 6%. Spread is compressed at around 340 to 380 basis points.

With a benign outlook for inflationary expectations, this seems to be a fairly attractive asset class.

There has been a lot of speculation on what the outlook would be with a flattening yield curve. As an example, the term premium that is between a 2-year and a 10-year U.S. Treasury note has fallen dramatically to a historical low.

Global growth is pretty much on track. Inflation expectations are picking up. U.S. unemployment is at record low levels. Company earnings are also coming in at a very strong pace.

Arun Kelshiker, CFA Head of Portfolio Strategy Standard Chartered Bank Arun Kelshiker is Head of Portfolio Strategy at Standard Chartered Bank and a part of the Global Investment Committee. He is responsible for advisory portfolios and investment solutions for clients.

His institutional career was with Allianz Global Investors as a senior portfolio manager and former country CIO; where he was responsible for setting up investment processes, strategies and managing client monies.

He has an MBA from the University of Chicago Booth School of Business, US, and a Masters in International Economics and Management from SDA Bocconi University in Milan, Italy. He is a CFA Charterholder and a CAIA Charterholder and has his undergraduate degree from UMIST, UK.

Bryan: Before we can make inferences from the USD term structure we need to explain why the yield curve is so flat. One of the factors is the Fed’s balance sheet. The Fed owns about 35% of the treasury market from 3 months up to 10 years, and 56% of the market with residual maturity over 20 years. This creates a shortage of long dated US treasuries which depresses yields.

At the same time, tax cuts have increased the budget deficit which needs to be financed. Indications are that Treasury will issue mainly in the 3 month to 3 year sector. The yield curve is actually very steep in this sector and very flat after that. As it normalizes, the Fed will not sell any bonds but is letting its holdings run off and reinvesting at a slower pace. This creates oversupply of treasuries in the belly of the curve and undersupply at the long end hence the flattening.

Since the shape of the curve is being distorted by Fed intervention, we cannot infer from it the same economic signals as when the Fed was much less active. Also, on the inflation front, it is not clear that raising interest rates leads to lower inflation. Two years ago, we didn’t have inflation. But after 2 years of rising rates, inflation is slowly creeping up.

How do you think the escalating trade tensions will impact the markets?

I think this trade war that we are looking at is something that began in 2009, not just now. From 2009 to 2016, it was fought by reshoring manufacturing back to Europe and the U.S. The Chinese said: “Our customers are leaving us. We need to turn our focus away from exports.” China restructured its manufacturing resources and its trade dependency has fallen from about 60% to about 40%.

During this adjustment, investment and capex rose sharply as did the debt needed to finance it.

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Today, we have a war fought by tariffs and quotas by the U.S. where trade dependency is about 30% and China where trade dependency is below 40%. The main protagonists in the battle are quite well prepared. The vulnerable regions are in fact Europe (87%), Germany (87%), and some emerging markets. Tariffs don’t work very well because supply chains have become so globally integrated. A case in point is German carmaker BMW, which manufactures popular models in the U.S. for sale in China, which is having to raise the retail prices of its sports utility vehicles in China because of the tariffs.

Looking further, I would expect private enterprise to push the manufacturing reorganization further, producing closer to their market. This could give capex and investment a boost.

Freddy: China’s policy used to be “hide your strength, buy your time”. When President Xi Jinping came into power, the first thing he did was put the administration control in order. He is now the emperor. There is no re-election risk.

Technology has become a national security issue. The Made in China 2025 plan to increase Chinese domestic content of core materials really scares the Americans.

We have underestimated the amount of anti-China / fear of China sentiment in Washington: the fear of what’s going to happen if the U.S. allows China to grow in dominance. Much damage has been done. China has shown its true strength and ambitions in the region. The U.S. has retaliated. This is not an end. The supply chain interruption will be bad for Europe and Southeast Asian countries.

We don’t think the trade war will go away. It’s a cold war.

The best place to invest in right now is in the U.S. (the instigator). If you invest in the U.S., you are buying the story of a small-cap stock in the U.S. being insulated from trade tensions. Conversely, many things in the U.S. do look better right now.

Alvin: The idea about investing in ‘the instigator’ market is understandable from a currency or USD perspective.

But looking at the underlying securities, it is notable that small-caps have already run up in the U.S. relative to the broad market. We did some analysis on which country’s companies would be more vulnerable in the long term.

Actually, our analysis shows that U.S. firms will be more vulnerable in an all-out trade war versus PRC firms given the underlying economic exposures.

Freddy Lim Co-founder & Chief Financial Officer StashAway Freddy Lim is the Co-founder and Chief Investment Officer of StashAway, a Singapore-based digital wealth management platform. He is the architect behind StashAway’s ERAA (Economic Regime-based Asset Allocation), a framework that identifies the right mix of asset classes for a given economic regime and makes forward looking adjustments based on medium term valuation gaps.

Prior to getting into FinTech, he was a Managing Director and Global Head of Derivatives Strategy at Nomura where he built and spearheaded a global team that won the “Global Derivatives - Research and Strategy House of the Year 2015” award by GlobalCapital. Before Nomura, he was a multi-asset portfolio manager at the Singapore arm of Millennium Capital Management. He held similar roles at Citi Capital Advisors and Citi Principal Strategies Group.

Prior to moving to fund management, Freddy was APAC Head of G10 Rates Strategy for Citigroup and Head of Interest Rate Strategy at Morgan Stanley Japan.

For equities across various markets, there are a number of countries where aggregate exposure to international trade is still relatively low.

E

The CFA Singapore Quarterly | Page 13

Financial Controls for Non-Profit Organizations This is the 4th year of CFA Singapore’s initiative to serve nonprofit organizations whose limited resources prevent them from paying for professionals to look into financial controls.

CFA Singapore and the Centre for Non-Profit Leadership jointly organized sharing session on the a best practices in financial governance that non-profit organizations should consider.

Expert panel:

•

Sovann Giang, Senior Director, RSM Risk Advisory

•

Koh Chaik Ming, Managing Director, Forchn International

•

Fang Eu-lin, Singapore

Partner,

PwC

Melvin Tan, Portfolio Manager, DCG Capital, was the event moderator.

The event took place on 23 August 2018 at the National Volunteer and Philantrophy Centre.

Page 14 | October 2018 | Issue 31

Eu-lin: Like commercial organizations, non-profit organizations need procedures to protect their assets and promote compliance with laws and regulations, facilitate effective & efficient operations and reliable financial reporting.

Such internal controls are related to accounting, reporting, and communication processes. They include procedures for handling funds received and expended by the organisation and preparing appropriate and timely financial reporting.

Three Lines of Defense The 3 typical layers management are:

of

risk

First line of defense -- functions that own and manage risks.

This is formed by managers and staff who are responsible for identifying and managing risk as part of their accountability for achieving objectives.

Second line of defense -- functions that oversee or specialise in compliance or the management of risk.

This provides the policies, frameworks, tools, techniques and support to enable risk and compliance to be managed in the first line, conducts monitoring to judge how effectively they are doing it, and helps ensure consistency of definitions and measurement of risk.

Third line of defense -- functions that provide independent assurance.

This is provided by internal audit.

Sitting outside the risk management processes of the first two lines of defence, its main roles are to ensure that the first two lines are operating effectively and advise how they could be improved.

Q: Small organizations cannot afford the 3 lines of defense. How can they implement it?

Sovann: The high number of votes for this question shows that the participants here are most concerned about the oversight function of the

Board and the Committees. This sentiment reflects what I find when I do work for charities.

Role of the Audit Committee The role of the Audit Committee is to ensure the integrity of the financial regulatory system. You can have all the paperwork and documentation but someone still needs to be there to supervise and ensure that things work.

The concept of an Audit Committee in the context of a charitable organization is quite new. Our charity ecosystem still uses antiquated practices from the 1950s and 60s. It still has the Office Bearer, the Treasurer, the President, the Secretary. There is no mention of the Audit Committee. In some charities, particularly in religious organizations, the Treasurer asks: By constitution, I am responsible for financial matters. Why do you need an Audit Committee to watch over my shoulder?

The Code of Governance for Institutions of a Public Character (IPCs) require them to have an Audit Committee unless they are very small. What worries me is there are some IPCs that need an Audit Committee but do not have one yet.

The terms of reference in the IPC code stipulates that the roles and duties of each party have to be clear. Otherwise, there will be constant arguments between the Treasurer and the Audit Committee.

•

Term limit for AC membership to ensure independence

Renewal

Internal Audit •

Adequate & effective monitoring / compliance

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Independent from founder & the management

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Avoid role conflict

Independence

Qualification •

Accounting qualification & / or experience

Sovann Giang Senior Director RSM Risk Advisory

Mr. Sovann Giang heads the RSM’s Board Leadership Advisory team. He advises and conducts training for boards on effective board oversight, corporate governance, SGX Listing Rules, sustainability reporting, charity regulations, risk management, family business architecture, governance, relations and succession planning.

As head of non-profit sector, Sovann has assisted many charities and Institutes of a Public Character (IPCs) in improving their governance practices. His works include advising on corporate structure, constitutional documents, board and committee roles and structure, risk governance and internal control. Sovann is a trainer for Social Service Institute where he facilitates various workshops for board and management of social service organisations. Sovann also works with Chartered Secretary Institute of Singapore, with support from the Charity Council, to deliver risk management workshop for charities.

Sovann has many years of experience serving as both executive director and independent director of listed companies and banks. His board responsibilities include chairman of audit & risk committee, chairman of remuneration committee, and member of risk oversight committee and member of nominating committee.

He was Executive Director of the Singapore Institute of Directors, had served on the Organizing Committee of the Singapore Corporate Awards and co-managed the Best Managed Board Award for Singapore listed companies. Sovann has written many articles on the subject of corporate governance, internal control and risk management.

The CFA Singapore Quarterly | Page 15

Qualifications of the Audit Committee Secondly, the Chairperson of the Audit Committee should preferably have accounting qualifications. The competency of the Audit Committee is important.

Independence and Conflict of Duties Thirdly, other than the Chairperson, Audit Committee members need not be Board members. The composition of the Audit Committee is important. As the Code does not provide further guidance, one problem faced by IPCs is persons who should not be on the Audit Committee are on it.

Fourth point: The person holding the office of Treasurer or Finance Committee Chairperson should not concurrently chair the Audit Committee, or even be in the Committee.

Application to Charities

Fang Eu-lin Partner PwC Singapore

Ms Fang Eu-Lin is a practicing Singapore Chartered Accountant and a Partner at PwC Singapore.

She helps organisations improve their financial reporting, governance, risk and controls.

Eu-Lin also heads the Sustainability and Climate Change Advisory department where she advises clients in the areas of reporting, alignment and impact assessment, risk management and due diligence. Eu-Lin has delivered several training including ethics training to the Singapore and government and MNCs. Eu-Lin serves on the board of governors of Temasek Polytechnic and is the Audit Committee Chairman of Vanguard Healthcare (Ministry of Health Holdings) and Tanglin Trust School. Eu-Lin attended PwC’s leadership programme at INSEAD, and is an alumnus of Harvard Business School.

A Committee proposes an initiative which goes to the management.

If accepted by the management, the proposal goes to the Board for approval. The programme budget comes from the management, which is the first line of defense responsible for execution.

For charities, the second line of defense comes from the Committees, e.g Programmes Committee, Fund Raising Committee, Volunteer Committee, etc. Make sure your Committees meet regularly to do the work they need to. They also need to work with the management and provide supervision.

Eu-lin: There are basic controls you should always have, even for

Sri Veeramakaliamman Temple “Severe Mismanagement” In August 2018, the Commissioner of Charities ordered the removal of removal of the chairman and trustee of Sri Veeramakaliamman Temple from office after an inquiry revealed that the temple’s key office bearers had authorized multiple duplicated payments to its vendors.

The temple had issued at least 823 uncrossed cheques in 2011 to 2014 totaling more than S$1.5 million. The inquiry identified 45 transactions in excess of S$227,000 where the uncrossed cheques were not issued to the names of the intended recipients of the proceeds and no supporting documents were maintained to substantiate that the intended payees eventually received the cash. One of the office bearers, on behalf of the temple, obtained loans totaling S$350,000 without the approval from the management committee, and without written loan agreements with the lenders.

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small organizations who cannot afford the 3 lines of defense.

For example: Segregation of duties. The one who wants to purchase something should not be the one to approve it.

In addition to government assistance such as grants from the National Council of Social Services, you can get support from networks such as the Centre for Non-Profit Leadership or contacts from Board members.

Q: Should the Finance Committee and Audit Committee comprise of the same people?

Sovann: While it is true that non-profit Boards do not have the resources to staff two committees, it is untrue that nonprofit organizations do not have the same revenue reporting issues that listed companies have. Non-profit organizations receive many grants and have stakeholders’ funds. They also have key performance indicators (KPIs) to meet.

It is also untrue that non-profit organizations do not have senior staff on the Board who have a conflict of interest with what to report on. Conflict of interest is, in fact, a big problem in charitable organizations.

The financial controller assists the Board in overseeing the budget process and overseeing financial policies and procedures, such as the signing of cheques. The Audit Committee assists the Board in overseeing the annual audit which includes auditing the financial controls and reviewing the effectiveness of policies and procedures. Therein lies the conflict. If a committee helps to create the financial controls, can they objectively critique them?

Reserve Management Chaik Ming: I am currently conducting corporate governance programmes for state-owned enterprises in China. The points discussed by Sovann and Eu-lin bring up how state-owned enterprises and non-profit organizations face the same challenges in governance issues.

I have served on the Investment Committee of the Singapore Chinese Orchestra (SCO) for nearly 8 years. We are volunteers that manage a pool of funds that the government has given to the SCO to defray their operating expenses. We meet once a quarter to see if the professional fund managers who manage the money for SCO are doing their jobs.

One of the key elements to an effective Investment Committee is its composition. Unlike an Audit Committee, an Investment Committee needs proper representation

Koh Chaik Ming Managing Director Forchn International Mr. Koh Chaik Ming is currently the Chief Executive Officer of Forchn International and Forchn Real Estate Fund Management, a Shanghai-based investment holding company specializing in ports and e-commerce logistics real estate. Forchn also has a SGX-Mainboard listed real estate investment trust, EC World REIT. Prior to Forchn, Chaik Ming held numerous key executive positions, including General Manager and Commercial Director at Shell China, Regional General Manager for Asia Pacific & Middle East for Shell Marine Products, Temasek Holdings’ first Shanghai Chief Representative, Director of Investments in Aviation and Logistics at Temasek Holdings and Operations Planning Manager at M&Ms/Mars in China.

Chaik is currently reading his Doctorate of Business Administration at the Singapore Management University (SMU). He is an alumni of both Harvard Business School (AMP168) and INSEAD (MBA 1999D), and holds a Graduate Diploma of Marketing from the Marketing Institute of Singapore as well as a Bachelor Degree in Mechanical Engineering (First Class Honours) from the University of Alberta in Edmonton, Canada. In his personal capacity, he serves as a Member of the Investment Committee for the Singapore Chinese Orchestra, Advisory Board Member for the SMU Academy and guest lecturer at the Singapore Management University, Tsinghua University, Peking University and People’s University on corporate finance, joint venture management, corporate governance and career development.

The CFA Singapore Quarterly | Page 17

from both the management and the Board in order to have conversations around what we should be doing.

Example: SCO Investment Committee

• Terence Ho -- SCO CEO and executive director. He helps us to understand SCO’s annual operating expense requirements and how the funds are going to be there to defray these expenses.

That helps our job in maximizing the funds available for these expenses. We are not allowed to use the capital. We are only to use cumulated investment income to defray the operating cost. Some of this cumulated income is kept in a kitty that we can draw upon in the years when such needs arise.

• Victor Lye -- SCO’s Chairman who also serves on the SCO

Melvin Tan Portfolio Manager DCG Capital Melvin joined DCG Capital as a value-based investment manager in July 2011. As an investment analyst and partner, he has over seventeen years of investment experience covering equities in Asia Pacific and Japan region. From 2005 to 2011, he was an Investment Analyst at Lion Global Investors covering the Technology and Telecommunications sector within the Asia Pacific ex-Japan markets.

From 2004 to 2005, he worked at Straits Lion Asset Management where he was involved in a number of IT projects including the implementation of the firm’s portfolio management system.

From 2001 to 2004, Melvin worked at Avanade Asia Pte Ltd as a software engineer.

Melvin holds a Bachelor of Engineering from the National University of Singapore and is a CFA charter holder. He is currently a volunteer at the CFA Society Singapore.

Board. Having him on the SCO Board allows us to have a conversation about what the Investment Committee does.

This allows the Board to understand and be assured about the investment strategy employed by the Committee.

The second thing needed in the Committee is industry background. Victor used to be the managing director for GK Goh Securities. He understands the secondary market.

• Michelle Cheo -- runs her own family’s business in oil trading.

She understands futures and hedging instruments.

• Lau Kam Yuen -- audit partner at KPMG. • Kwong Kin Mun -- a wealth management expert from Deutsche Bank.

• Tan Ser Ping -- the father of REITS in Singapore. He understands fixed income instruments that are related to equities.

• Koh Chaik Ming -- I am a private equity guy with years of experience at Temasek and in China.

Such a team composition brings the Committee to a different level.

Also, do not underestimate the role of gender diversity. If you put a bunch of men together, we discuss topics of mutual interest and get distracted. It takes a female committee member to bring the meeting back to focus.

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ARX Survey on Singapore REITS How did Singapore achieve prominence as an international hub of REITs? What should investors consider before investing in a REIT? This article is a survey of the opinions of industry veterans along the REIT market value chain.

Expert Panelists • Matthew Song Senior Vice President & Head of Client Coverage (Equities) Singapore Exchange

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Yeow Kit Peng Head, Capital Markets & Corporate Development Ascendas REIT

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Lennon Lee Partner, Corporate Tax Advisory PwC Singapore

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Lim Shyong Piau Chief Marketing Officer Lion Global Investors

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Chua Born Jern Partner Allen & Gledhill

Moderator Alan Lok, CFA, FRM, MBA Director, Society Advocacy Engagement, CFA Institute This event was organized by AsiaPacific Research Exchange and took place on 12 September 2018 at SGX Auditorium.

Page 20 | October 2018 | Issue 31

Q: What did the Singapore REIT industry do right to attract the vibrant population of REIT listings?

Shyong Piau: The first REIT was listed in Singapore in 2001 and the asset class has grown tremendously since. Other than having a first mover advantage, the REIT yields in Singapore are generally higher than REITs in Japan, Hong Kong or Australia.

Matthew: The REIT market in Singapore started in 1996 when Pidemco Land was transferred to Singapore Technologies.

Ho Ching wanted to find a way for retail investors to have access to property investments that were a unit trust alternative to purchases of residential homes. REITs were the solution, following the example of Australia and the U.S. In 2002, Capitamall Trust became the first REIT to be listed.

Deep REIT market Kit Peng: A large number of good quality and prominent properties are owned by REITs. From the time of its IPO in 2002, the total assets of Ascendas REIT has grown from S$636 million to more than S$10 billion. Because of its size, Ascendas REIT has been included in many indices.

We are able to attract international institutional investors. REITs such as Ascendas have contributed to the growth of the Singapore REIT sector.

One other important factor is that we have good corporate governance.

Today, we have 43 REITs with a combined market capitalisation of over S$100 billion. Singapore has one of the deepest markets in terms of valuation for REITs. We have REITS for a broad spectrum of property sectors ranging from retail, industrial and office to hospitality. In these four REIT sectors, we are comparable to Hong Kong or Japan.

Institutions account for more than 75% of the investor base in Singapore compared to about 50% in Japan.

The number of research reports on

SGX listed REITs is double compared to Japan or Australia.

More and more international companies are coming to list in Singapore. More than 75% of S-REITs have assets located overseas.

Q: Differences of tax structures across jurisdictions is a key reason why certain places are more suitable for REIT listings. Can you provide some insight into this?

Lennon: At the end of the day, what is important to investors is how a REIT’s income is distributed. The REIT assets may go through many rounds of tenancies which may be subject to tax before the rental proceeds stream down to the unitholders. So, the prevailing tax structure is a very important element in terms of how efficiently the REIT assets are deployed. A lower tax rate at each stage of the tenancy is key to an attractive REIT yield.

In Hong Kong, income received by a REIT from its portfolio of properties is subject to corporate tax. 16.5% of rental income received goes to the government. The remaining monies flow down to the unitholders.

In Singapore, there is greater tax transparency and the trustees end up not needing to pay tax. The distributable income that flows down to unitholders is tax-free. Whether the unitholders are taxed depends on whether they are individuals or corporates, locals or foreigners, and so forth. With that, tax planning can be also done at the unitholder level in terms of choosing whether to use a corporate entity to hold the REIT units.

Matthew Song Senior Vice President, Financial Services Singapore Exchange

That kind of flexibility creates opportunities for institutional as well as individual investors.

Q: What are the “must-have” ingredients versus the “good-tohave” for a successful REIT? Kit Peng: At the REIT level, we believe it is very important to continue to acquire yield accretive properties so that we can deliver a stable distribution per unit (DPU). This also allows our net asset value to continue to grow.

Alignment of Interests The other aspect that is important is being transparent and having good corporate governance practices. In our case, other than complying with MAS and SGX regulations, we announce all acquisitions, big or small. Our performance fee is pegged to DPU growth. We have a DPU growth target of 2.5%. If we achieve a DPU growth of exactly 2.5%, we distribute the increase in dividends to unitholders and the REIT manager does not get any performance fee.

Lim Shyong Piau Chief Marketing Officer Lion Global Investors

The CFA Singapore Quarterly | Page 21

Matthew: Investors in REIT markets look at two primary things.

First is yield, the spread over the risk-free rate. The spread right now is about 3.5% averaged across the S-REIT sector ranging from retail REITs to industrial REITs. There are now 43 REITs that we can use as a benchmark.

Next is the growth factor. This can come from organic growth or from the asset manager’s asset enhancement initiatives. It can also come from prospective acquisitions or the sponsor’s pipeline of assets.

The secondary factors are quality of assets, where the assets are located, and the cashflow currency. Capital management is also important as the funding cost will also drive the total returns for investors.

The Singapore REIT market has clearly established its track record in both primary and secondary factors for all segments of investors, ranging from pension funds, long-only funds, hedge funds to retail investors and private banking clients.

Lennon Lee Partner, Corporate Tax Advisory PwC Singapore

The asset owners will continue to do REITs in Singapore because they can predict the yield that they can sell the assets at. That will give them a clear picture of the valuation of the asset intended for sale in comparison to a trade sale. The key advantage of doing a REIT is that they retain control of the asset if they own 25% of the trust and 100% of the trust manager. The issuers also have another stream of revenue from the fund management income that they get from the trust.

From both the issuer and investor perspective, Singapore has clearly established itself as an Asian REIT exchange.

Doing Away with Multiple Layers of Tax Lennon: The parity in tax treatments between investing in individual REITs and REIT ETFs was effective only recently (from 1 July 2018). At the moment, the tax transparency policy only applies to REITs and exchange-traded funds.

For Singapore to be attractive as an investment hub, our tax treatment for transparency has to be aligned to tax exemption schemes such as the TK (silent partnership) structure in Japan.

Otherwise, Singapore unitholders who invest in instruments with the TK structure may be subject to another layer of tax when the dividends are repatriated back to Singapore.

Q: How do REIT managers optimize DPU and upside on share price?

Chua Born Jern Partner Allen & Gledhill LLP

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Kit Peng: We operate many portfolio properties that contribute to our base revenue and property-related expenses. The margin for us is about 70%.

Every REIT has a different fee structure, and this is disclosed in the annual report. That gives investors a lot of homework when deciding which REIT to invest in. A shortcut would be to look at research reports which may report on the expense ratios of the REITs. We have a divestment cycle. When we divested our properties, we have been able to divest at above book value. All this has contributed to Ascendas REIT’s stable DPU growth.

Shyong Piau: For the retail investor, investing in an S-REIT ETF is the cost-efficient way to get broadly diversified exposure to all the different REITs when one’s investment capital is not as large as that of an institution.

A large-scale REIT manager can amortize its operating cost over a larger asset base. We tend not to include the smaller REITS in our ETF portfolio because smaller REITs lack the economy of scale of the likes of Ascendas or Capitaland.

Yeow Kit Peng Head of Capital Markets & Corporate Development Ascendas REIT

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Alan Lok, CFA Director, Society Advocacy Engagement CFA Institute

The CFA Singapore Quarterly | Page 23

The CFA Singapore Quarterly features the latest in thought leadership, best practices, and investor education activities of investment professionals in Singapore. Written by a financial journalist for veterans as well as those aspiring to greater heights as an investment professional, this quarterly newsletter commissioned by CFA Singapore is produced by NextInsight (www.nextinsight.net) and circulated to about 10,000 CFA charterholders and program candidates. Email or call Sim Kih ( simkih@nextinsight.net ) at 6438-2990 for feedback and inquiries.