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INSIGHTS

Investment Education

We believe in facilitating informed financial decision-making by providing the relevant education and knowledge to interested individuals in an accessible, convenient, structured and comprehensible manner.
Visitors to our website are welcome to use the links provided as a form of reference.

Important: All information is provided on a general basis for information purposes only, and is not to be relied on as advice, as it does not take into account the investment objectives, financial situation or particular needs of any specific investor.
Third-party websites provided by hyperlinks on this website are beyond the control of Golden Equator Capital and Golden Equator Wealth (the “Companies”). Accordingly, the Companies accept no responsibility for the accuracy, completeness and legality of the contents of such third-party websites, or for any offers, services and products contained therein.

What is a Bond?

A bond – also commonly referred to as a fixed-income instrument/ security – is a debt investment in which an investor – the lender – loans money to an entity – the debtor – which borrows the money for a pre-determined period of time at a variable or fixed interest/ coupon rate. The rate quoted is a percentage of the par value of the bond – the amount borrowed – and is typically an annualised rate. Bonds issuers – the debtor/ borrower – are commonly government bodies and corporate institutions. The borrowed amount is known as the principal.

For corporations, equity interest is subordinate to debt interest; which means an issuer has to pay off debt interest before distributing any earnings to equity holders.

However, timely coupon distributions are not guaranteed. For instance, a corporation facing short-term cash flow problems may not be able to pay interest on time. Accordingly, a corporation with long-term capitalisation problems may be unable to return the principal at the time of maturity – the time at which the principal is meant to be returned. As such, the coupon rate at issuance is generally dependent on a corporation’s perceived ability to repay interest and principal. Debt-holders generally demand a higher rate on their coupons to compensate for the higher risk of coupons and principal not being repaid. For instance, a company facing bankruptcy has to borrow at a much higher interest rate – issue a bond with a much higher coupon rate – than a company with abundant and stable cash flow.

Bonds can be traded on the secondary market. Their prices are inversely correlated to the prevailing rates on the market for the bond. For more on this, please view bond pricing below.

Types of Bonds

Governments

Government securities are generally considered the safest of all categories of bonds within a country. These are commonly used as a benchmark by bond market investors. However, one should take note of the credit quality of the country issuing the bonds – a U.S corporation may have stronger credit quality than the government of an ailing nation.

Bonds issued by the U.S. Treasury Department are called Treasuries and are backed by the full faith and credit of the U.S Government. These are considered the safest of all investments globally. Fixed income securities issued by the U.S. Treasury are named according to their maturities:

Bills: Maturities of up to one year
Notes: Maturities of one to ten years
Bonds: Maturities of more than ten years

Additionally, Treasury Inflation Protected Securities (TIPS) carry interest rates that are adjusted periodically according to changes in the Consumer Price Index (CPI-U), providing investors with a hedge against inflation.

Agencies

Agency debt products are securities issued by the U.S. federal agencies (owned by the U.S. Government) and Government Sponsored Enterprises (GSEs, privately owned entities created by the Congress). These bonds are typically issued to provide funds for public goods such as housing, education and farming. These securities are typically backed by the government-sponsored or owned agencies, or an insurer of the agencies, but not the U.S Government itself.

GSEs such as Fannie Mae and Freddie Mac are the most active issuers in the agency security market. Maturities for agency securities range from 3 months to 30 years, and they usually pay a semi-annual fixed rate coupon.

Corporates

Corporate bonds are issued by public and private companies to meet both short-term and long-term financing needs. These needs include operating expenses and capital expenditure. Maturities for corporate bonds typically range from 1 to 30 years, and they usually pay interest semi-annually.

Credit ratings of BBB or Baa and above are considered investment grade, as the companies are assessed as likely able to meet their debt obligations. Credit ratings lower than BBB or Baa are considered speculative, with potentially higher returns but higher risk as well. Please refer to the credit ratings chart below for a breakdown of credit ratings by ratings agencies.

Municipals

Municipal bonds are issued by states, cities, counties and towns to fund a variety of public works projects. General Obligation (GO) bonds are backed by the full taxing authority of the issuer, while Revenue bonds are backed by future income generated by the project that is being financed.

Mortgages

Mortgages are debt instruments issued when real-estate is bought on a loan. The mortgage is secured by the collateral of the real estate property and the borrower/ real-estate buyer is obliged to pay back interest on the loan. Mortgage-backed securities are created from a pool of mortgage loans. These typically originate from financial institutions and the security-buyers essentially become the lenders to the property-buyers/ borrowers with the institution as a middleman.

Debt Hierarchy

Seniority of claims of assets is shown in the ranking below.

Subordinated Debt has a lower priority than other bonds of the same issuer in claims of assets, and therefore has a higher rate of return than senior debt.

Lower Tier 2: No deferral of coupons.
Upper Tier 2: Interest deferral. Cumulative
Tier 1: Interest deferral. Non-cumulative.

Perpetuals, bonds with no maturity dates, are typically considered Tier 1 capital.

Why invest in Bonds?

Bonds with good credit quality provide a steady and reliable stream of income to the investor. Bonds are also seen as a form of diversification from equities in a portfolio. Equities are generally more volatile than bonds; volatility in the stock market typically results in a flight to safety and quality with investors rotating their assets from equities to bonds with steady and credible streams of income.

Bond Pricing & Technicalities

The value of a bond is the present value of its future (coupon) payments and the principal repayment. To illustrate:

Year 0:
An investor buys a bond with a face value of $10,000 (the principal) with a fixed 10% annual coupon and a maturity date in 3 years. The coupon rate set at 10% is based on the issuer’s, underwriter’s and originator’s evaluation of the risk associated with the payment of coupons and principal.
Coupon Payment/Year = 10% X $10,000 = $1,000
Value = 1,000/ (1+0.1) + 1,000/ (1+0.1)^2 + 1,000/ (1+0.1)^3 + 10,000/ (1+0.1)^3
= $10,000

Year 1 (1 year later):
The same bond has now been trading in the secondary market for a year. At this time, the market perceived the risk associated with the payment of coupons and principal to be only 6% (this could be due, for instance, to the debtor company receiving cash from the sale of one of its unprofitable operating assets). With 2 years left of 10% coupon payments, the bond is now priced at:
Value = 1,000/ (1+0.06) + 1,000/ (1+0.06)^2 + 10,000/ (1+0.06)^2
= 10,733.36

The bond price has appreciated by 7.33%. The investor may sell off the bond on the secondary market for a profit.

Intuitively, this is explained by the fact that if the company were to issue a new bond at year 1 with a 6% rate, the old bond from 1 year ago providing a 10% rate should be worth more.

As a result, if a new investor were to buy the old bond from investor A at $10,733.36, the premium he pays, in spite of the 10% coupon, would make his effective yield-to-maturity 6%. This is simply solving for r in the same equation:
10,733.36 = 1,000/ (1+r) + 1,000/ (1+r)^2 + 10,000/ (1+0.06)^2

Key terms to note

Credit Quality

Moody’s*

Standard & Poor’s**

Fitch Ratings**

Prime

Aaa

AAA

AAA

Investment grade

High grade

Aa

AA

AA

Upper medium grade

A

A

A

Lower medium grade

Baa

BBB

BBB

Non-investment grade, speculative

Ba

BB

BB

High yield

Highly speculative

B

B

B

Extremely speculative, currently vulnerable

Caa

CCC

CCC

Highly vulnerable to non-payment

Ca

CC

CC

In default

C

D

D

* The ratings from Aa to Ca by Moody’s may be modified by the addition of a 1, 2 or 3 to show relative standing within the category.
** The ratings from AA to CC by Standard & Poor’s and Fitch Ratings may be modified by the addition of a plus or minus sign to show relative standing within the category.
Common Reference Rates
LIBOR – London InterBank Offered Rate
EURIBOR – Euro InterBank Offered Rate
SIBOR – Singapore InterBank Offered Rate

What is Mutual Fund?

A mutual fund is a collection of stocks, bonds, and/ or other securities in which the fund management invests in on behalf of investors. Each investor owns a portion of, or share of, the holdings of the fund, and receives a proportionate amount of the fund’s investment returns. A mutual fund’s returns comprise of dividends or interest paid on the securities in its holdings, and any capital gains or losses in the sales of securities. Additionally, if the fund holdings increase in value, the price of shares of the fund (known as the Net Asset Value or NAV) increases as well. Investors can then sell their shares of the fund for a profit.

Mutual funds are managed by fund managers, who direct the investment of the fund according to an objective that is specific to each fund. Mutual funds can bring diversification to smaller investors who would not otherwise have the capital to invest in all the individual holdings of the fund.

Types of Mutual Funds?

Common types of Mutual Funds include:

Money Market Funds: The least risky category of funds, these funds invest in short-term debt securities such as government treasury bills, and commercial paper issued by banks and large corporations. Money market funds are fairly liquid and generate lower rates of return than other types of funds.

Fixed Income (Bond) Funds: These are funds that invest in debt securities or bonds. While their capital appreciation is generally less than equity funds, the objective of investing in fixed income funds is to earn a steady cash flow. However, the riskiness of fixed income funds vary according to what types of bonds that they hold – some comprise of government securities, some corporate debt, while some primarily invest in high-yield junk bonds (non-investment grade). Additionally, fixed income funds are subject to interest rate risk – in the event that prevailing market interest rates go up, the value of the fund will decrease.

Balanced Funds: These are funds that hold a balanced combination of equities and fixed income with the purpose of providing a mix of capital appreciation and stable income.

Equity Funds: These invest in corporate equity. The funds are usually classified by the size of companies invested in (small-cap, mid-cap or large-cap) and investment style (value, blend or growth). These funds can be actively managed, whereby the fund managers aim to build a portfolio of equities that is purported to beat the overall market performance.

Index Funds: These are funds that attempt to replicate the performance of a market index such as the S&P 500. By replicating the index, these funds take a passive approach to investing and generally provide the best diversification.

Fund of Funds: A fund portfolio that is made up of other funds, these funds offer even greater diversification, but are more costly due to the added layer of management and operational fees.

Resources:
http://www.morningstar.com

Why invest in Mutual Funds?

Professional management: Mutual funds provide the relatively inexpensive option of having professional money management. This saves the investor the time spent on researching stocks, portfolio monitoring, and reinvesting dividend income.

Diversification: Mutual funds allow for diversification. Investors, through mutual fund shares, can achieve the desired diversification that they might not be able to achieve via buying individual securities separately.

Economies of scale: Fund managers typically buy and sell large amounts of securities at a time, and are therefore able to pay lower rates of transaction fees than an individual investor. While mutual funds provide a host of benefits and can be relatively inexpensive, investors should pay careful attention to other fees charged by the mutual fund manager, such as front end fees, management fees and redemption or back end fees.
Liquidity: Most mutual funds are tradable at the end of every day when their net asset values are adjusted according to how the market value of the fund holdings have changed during the day. This allows investors to buy or sell their shares every day.

Key terms to note

Net Asset Value (NAV): NAV per share is the value of one share of the mutual fund, which fluctuates as the fund holdings change. The cost of buying shares of a mutual fund is equal to the current NAV plus any front-end load; the amount received when one sells the shares is the current NAV minus any back-end load.

Front-end load: This is the sales fee that is charged at the time of purchase of mutual fund shares.

Back-end load: Also known as deferred sales charges, these are charged if one sells a fund within a certain time frame, and usually decreases the longer the fund shares are held.

Total Expense Ratio (TER): This ratio is essentially the total cost of the fund; managing and operating fees, legal fees, trading fees and etc., divided by the fund’s total assets. It is a gauge of how much it costs to manage the assets.

Open-end funds: These are funds that do not have a restriction on the number of shares it can issue. These funds can issue or buy back shares at any time to meet (new) investor demand, and the price of a share of the fund is equal to its NAV at the end of a market day. Most mutual funds are open-end.

Closed-end funds: These are funds that have a limited number of shares. After the initial issue, shares in these funds may be traded on the secondary market between investors at any time during the market day. The price of a share of the fund is its NAV, plus a premium or minus a discount, depending on market demand. In other words, the fund’s shares trade just like a stock on the stock market and provide even greater liquidity than open-end funds which are tradable at only the end of every day.

What is Hedge Fund?

Investors generally take part in hedge funds in the form of a limited partnership – where they are only liable for their paid-in capital. Hedge funds aim to achieve absolute returns on their investments and strategies; they invest in a diverse range of assets, and employ a variety of investment strategies. Hedge funds charge relatively high fees, normally 1-2% of assets for management fees and 20% of profits.

The history of the hedge fund began in the 1950s when funds began short-selling equities to hedge the traditional long-only positions. Concurrently, leverage was used and performance-tied compensation schemes were introduced. The use of short-selling, leverage and performance-tied compensation naturally created the potential for superior returns, with the notion of superior returns driving the evolution of hedge funds over the decades and accordingly spawning a myriad of investing and trading strategies.

Types of Hedge Funds

Long/Short equity: These funds aim to be long in stocks that are expected to appreciate in value and to be short in stocks that are expected to depreciate in value; in doing so overall net market exposure is minimised.

Short selling: These funds only take on short positions as a bet on a bearish movement in the market. There are also equity-short specialists whereby the fund manager is typically well-versed in accounting and can detect fraud from a company’s financial statements.

Event arbitrage: Hedge funds that invest in corporate restructurings, mergers and takeovers, divestitures, and other corporate events. The returns of such strategies are driven by the successful completion of the events, rather than by movements of broad equity or fixed income markets.

Distressed & Special Situation: These hedge funds invest in companies (their equity or debt) in order to profit from mispricing in the complex restructuring process that takes place in situations such as financial distress.

Global Macro: These hedge funds place bets based on macroeconomic conditions, such as the direction of commodities, stock markets, interest rates and currencies.

Fixed income: These funds invest and/ or trade in fixed income instruments. Some funds hold the instruments for the long-term, seeking to generate stable returns, while some funds arbitrage mispricing between the instruments.

Features and Advantages of a Hedge Fund

Absolute Returns: Hedge funds have the ability to short sell products, allowing them to protect/ hedge long positions during market downturns or to profit from them. As such, they are judged by their ability to produce absolute returns regardless of where the market has been heading.

Fund Manager Expertise: Hedge funds are typically run by prominent fund managers with sophisticated investing and trading strategies. Many of these managers have been able to build up their fund assets based of a history of producing good returns.

Interest Alignment: Because the hedge fund manager usually has a significant amount of his personal assets in the fund, the manager is incentivised to produce superior returns for investors.

Leverage: Many hedge fund strategies involve the use of leverage. This allows for potential superior returns.

Diversity: The wide variety of hedge funds and their different strategies provides investors with a myriad of investing and trading styles to invest in.

Similar to private equity, the profile of hedge fund investors is that of either an institutional investor, or someone who is experienced in the financial markets; in other words, an “Accredited Investor”.

Key terms to note

Absolute return: Hedge fund performance is measured in absolute terms, independent of market direction or benchmarks.

Hurdle rate: This is the minimum return the manager must make for the investors before he is entitled to performance fees.

High water mark: This is the peak in asset value that the fund has reached and is used in reference to manager compensation. For instance, a manager may not be entitled to his bonus if he loses $1,000,000 off the latest high-water mark. However, if he then recovers $1,750,000 for the year, then he is entitled to his bonus of the $750,000 ($1,750,000 – $1,000,000) above the high-water mark.

Lock-up period: This is the time period that an investor must stay invested in the fund, before he is allowed to redeem his holdings. This is important for the manager, especially when has strategies that are executed over a long horizon; a sudden withdrawal of assets would greatly disrupt his ability to execute and employ such strategies.

Additional Resources:

Eurekahedge

Insider Monkey

What is Private Equity?

Simply put, private equity refers to investments in non-listed companies. Private equity funds are typically structured as a limited partnership, and managed by a fund manager (the general partner). During the term of the investment, investors are required to fund capital calls up to their agreed commitment amount. The fund holds its underlying companies until they are sold, usually through an initial public offering (IPO) or a trade sale. After the sale, the fund then distributes the sale proceeds to each investor.

Private equity funds charge management fees to cover the costs of managing the committed capital. The fees are usually paid quarterly. As a general partner, the fund manager is also entitled a portion of the profits, termed “carried interest”.

Private equity investment has a long-term horizon, ranging anywhere between three to twelve years. Because the investee companies are private, the investments are not liquid, and therefore must be made with careful due diligence and expertise.

Types of Private Equity

Venture capital: Venture capital funds invest in young entrepreneurial and rapidly growing companies with little revenues, focusing on less mature industries and businesses. The fund managers also add value to the company through active involvement with the management team, providing guidance based on their own experience and expertise.

  • Venture capital investments can be further categorised into:
  • Seed Stage: This is the very first stage of funding, often before there is a real product or service developed. Seed stage funds typically provide modest amounts of capital to inventors or entrepreneurs to finance the research & development process and to launch an early version of the product/ technology/ concept. At this point in time, the venture capital firm (VC) will assess the feasibility of the proposed idea. This is the riskiest stage of VC investment and also the one with the highest failure rate. As a result, VCs typically ask for a high portion of equity here to compensate for the risk.
  • Early Stage: This refers to the second stage of development whereby funding is usually utilised for expenses associated with initial marketing and product development. Early-stage VC investors tend to target companies that have some sort of management team in place, some level of product/ market studies and which have shown signs of promising traction with their product. I.e. the business is seeing its first revenues but has yet to show a profit.
  • Expansion Stage: This is the period whereby capital and financing provided by VC investors are used to fund commercial manufacturing, and initiate more extensive sales and marketing strategies so that the business can expand to the next level and become more successful. By this time, the company should have demonstrated significant revenue growth, but may or may not be showing a consistent profit.
  • Later Stage: This is the period whereby VC investors continue to invest in the business throughout the company’s life cycle, helping it to grow to a stage whereby public financing is attracted through a stock offering (a.k.a. IPOs). Alternatively, the VC investors may help the company pull a merger or acquisition with another company.Companies such as Apple, Federal Express, Intel and Microsoft are famous examples of companies that received venture capital in the early stages of their development.

Growth capital: Growth capital is the stage between late stage venture capital and buyout deals. The focus of investments in this stage is on companies with strong growth potential in gaining market share, and fund managers offer their management teams support in their growth and acquisition plans.
Mezzanine: Often used to finance a company’s expansion, mezzanine capital typically comes in the form of subordinate (convertible) debt or preferred equity. Mezzanine capital is generally provided with short notice, without much due diligence on the capital-seeker and with little or no collateral; these are compensated for by high coupon rates.
Buyout: Buyouts refer to the acquisition of an existing company, or of a division of a larger company, through a company that is formed solely for the purpose of the buyout. Types of buyouts include management buyout, value or operational buyout, financial buyout, and leveraged buyout.
Special situations: These funds invest in securities of a company undergoing a special situation such as restructuring – for example, spinning off a business unit or undergoing a liquidation due to financial distress.

Why invest in Private Equity

Enhance returns: Due to the illiquid nature and high risk of the underlying investments relative to public equities, private equity has the potential to generate high returns not normally attainable from more traditional investing methods.

Diversification: Private equity investment performance generally has a low correlation with public equity and fixed-income investments, offering risk and return diversification.

Value Creation: By investing in unlisted companies that are at the beginning of their growth cycle, PE funds allow investors to take part in the growth of a company.

Control: PE fund managers can also dictate terms much more easily and hold management accountable to performance targets and milestones. They can potentially negotiate for seats on the board and typically wield more authority than public company shareholders. Similar to hedge funds, the profile of a private equity investor is either an institutional investor, or someone who is experienced in the financial markets; in other words, an “Accredited Investor”.

Key terms to note

Commitments: Fund managers raise capital from investors by seeking a commitment of a certain amount from each investor, a process known as “fund raising”. When a fund has reached a target size, it is usually closed to further investments.

Capital calls: Funds need to ‘call’ money from investors once it starts investing in companies. These calls are usually made in a number of instalments, as and when funds are needed.

Disbursements: These are the investments by funds into the target companies.

Exits: Private equity funds may exit their investments in the companies through a trade-sale, an IPO, a merger or acquisition.

IRR: The internal rate of return (IRR) is a gauge of profitability of the fund’s investments. Calculating such a return requires the determination of the fund’s holdings (and their values).

What is a Trust?

A Trust is a legal arrangement in which the Settlor (the asset holder/ client) transfers legal title of his/ her assets (the Trust Assets/ Funds) to an individual or institution (known as the Trustee). The trustee holds and manages the assets for the benefit of others – the settlor may specify the people who will benefit from the assets, including him/ herself or others (known as Beneficiaries). The legally binding document that outlines the terms of the trust agreement is called the Trust Deed, Deed of Settlement, or Declaration of Trust. It is also common practice for the settlor to appoint a Protector so as to reserve some control over the trustee. The protector may be given a wide variety of powers, including the discretion to remove and appoint trustees and settle their remuneration, and to approve the addition or removal of discretionary beneficiaries.

The relationship between settlor and trustee is known as a fiduciary one. A fiduciary (the trustee) is someone who has undertaken to act for and on behalf of another party in a particular matter in which circumstances give rise to a relationship of trust and confidence. The trustee is required by law to act in the best interest of the beneficiaries, and to invest the trust assets prudently.
What can I transfer to a Trust?

Trusts can hold a wide range of assets, including cash, securities, shareholdings in a financial holding company, life insurance policies, real estate, and in some cases, fine art. These assets can be located almost anywhere in the world.

Key features of a Trust

Legal ownership: Ownership of assets is transferred to the trustee with the beneficiaries having beneficial interest.

Unlimited liability: Trustees have unlimited personal liability for all liabilities and expenses incurred in their management of assets. The degree of this liability, however, can be limited in the trust deed.

Right to information: Beneficiaries have the right to information on the assets and accounts held by the trust.

Perpetuities period: Trusts can continue for a maximum of 100 years.

Income accumulation: Income of the trust can be accumulated for the duration of the trust, unless the trust deed either prohibits the accumulation of income, or directs the income to be accumulated for a period shorter than the duration of the trust.

How will the Trust work?

Trustees typically hold the trust assets for the settlors’ benefit during their lifetime, and for the benefit of the beneficiaries after the settlors’ lifetime, until the assets are distributed according to the provisions in the trust deed.

Settlors have the choice to keep the trust flexible to adapt to significant changes in life. The settlor can also empower others to change aspects of the trust provisions or revoke the trust when necessary.

The settlor may elect to retain investment powers, appoint an investment manager, or empower the trustee to make investment decisions.

Types of Trusts

Note that the following types of trusts are not mutually exclusive; for instance, a testamentary trust is an irrevocable trust and can also be a private trust.

Express/ Implied/ Resulting trusts: An express trust arises when a settlor deliberately and consciously decides to create a trust over his/ her assets either now, or upon his/ her death. Almost all trusts are express trusts. An implied trust, as distinct from an express trust, is created when some of the legal requirements for an express trust are not met but an intention on behalf of the parties to create a trust can be presumed to exist.

A resulting trust is simply a form of implied trust which occurs when:

A trust fails, wholly or in part, and as a result of which the settlor becomes entitled to the assets; or
A voluntary payment is made by A to B in circumstances which do not suggest gifting. B becomes the resulting trustee of A’s payment.

Revocable/ Irrevocable trusts: Settlors retain powers to amend or terminate a revocable trust, change the beneficiaries, and withdraw trust assets. On the other hand, an irrevocable trust cannot be cancelled once it is set up, and may only be terminated when all the trust assets have been distributed according to the terms of the trust deed.

Discretionary/ Fixed trusts: Settlors can give the trustee discretionary power to react swiftly to changing circumstances – for instance, the mental state of the beneficiaries – in a discretionary trust. In a fixed trust, little discretion is given to the trustee, as the interests of the beneficiaries are fixed under the terms of the trust deed.

Charitable/ Purpose trusts: Charitable trusts must have as their object certain purposes such as alleviating poverty, providing education or carrying out some religious purpose, etc.

On the other hand, purpose trusts – also commonly known as non-charitable purpose trusts – are trusts that have no beneficiaries but exist for advancing non-charitable purposes of some kind.

Inter-Vivos/ Testamentary trusts: Used in real estate planning, inter-vivos trusts have a duration that is deemed at the trust’s creation and can entail the distribution of assets to the beneficiary during or after the settlor’s lifetime. Testamentary trusts, on the other hand, are created through explicit instructions in a deceased’s will and go into effect upon an individual’s death. Testamentary trusts are irrevocable.

Bare trusts: The beneficiaries have the absolute right to the capital and income generated by the trust assets; the trustee has no discretion in directing income.

Life interest trusts: Income from transferred property is paid to one person, the Life Tenant, during his/ her lifetime and thereafter is transferred to another person.

Private trusts: Private trusts have one or more individuals as beneficiaries.

What is a typical Trust Structure?

Why use a Trust?

Trusts are confidential, tax-efficient, flexible and provide a host of benefits:

Inheritance planning: Trusts offer wealth protection through the generations, with the assurance that the assets will be passed on to the chosen beneficiaries under the specified conditions. Assets in a trust are generally not subject to domestic inheritance laws, therefore allowing the settlor to make provisions for family members, friends, charities and other organisations.

Guard against disputes: Trusts contain a clear inheritance plan that can help heirs avoid family and matrimonial disputes and thus reduce the risk of legal conflicts. Beneficiaries are able to receive their inheritance without legal delays, costs and publicity that usually accompanies probates.

Professional management and protection of assets: In the event of the disability of the settlor or other unforeseen circumstances, the trustee will manage the trust assets according to the instructions already provided. Trusts can provide long-term oversight for young children and guard against the loss of assets by heirs in the event that they make decisions that are not aligned with the settlor’s interest for the beneficiaries’ long-term benefit.

Privacy protection: Assets are held in the trustee’s name, which ensures confidentiality for the settlor and the beneficiaries. Trust arrangements are not publicly recorded, and therefore beneficiaries can receive their inheritance without public disclosure.

Minimise taxes: Favourable tax treatment enjoyed by trusts can minimise a range of local and foreign taxes including income tax, wealth tax, capital gains tax, estate tax, and gift transfer tax.

Asset consolidation: Trusts can hold a wide variety of assets, allowing the consolidation of global assets. Financial statements are generated for the settlor’s ease of asset record-keeping.

Philanthropy: Trusts can be created for charitable reasons.

What is a Private Investment Company?

A Private Investment Company (PIC), also known as an Offshore Company, is a corporation established to hold investment assets. A PIC is typically incorporated in a tax-neutral offshore jurisdiction such as the British Virgin Islands (BVI) and Cayman Islands. A PIC typically has fewer than 100 investors, has no intention of making an initial public offering (IPO) and members have significant funds invested elsewhere. PICs are generally meant for wealthy individual investors.

Shareholders of a PIC own a specific percentage of the assets held in the PIC and can appoint and dismiss directors, while directors have management oversight of the PIC, can enter into contracts, and may delegate the operation of bank accounts to others (known as Authorized Signatories).

The beneficial ownership, management and signatories of the PIC can be structured in flexible ways, or can simply be retained by the client; yet, it is a separate legal entity that offers privacy and wealth protection benefits.
What can I transfer to a Private Investment Company?

PICs can hold a wide range of assets, including cash, securities, life insurance policies, real estate and, in some cases, fine art. These assets can be located almost anywhere in the world.

How does a Private Investment Company work?

The client may determine who to appoint as directors, shareholders, and authorised signatories (if required) of the PIC, where shareholders retain the ultimate rights of ownership of the PIC and its assets.

The client may give investment instructions, or choose to appoint an investment manager to act on his/ her behalf. The client can also add or withdraw assets at any time.

In certain jurisdictions such as the BVI, there is no requirement to file annual returns or financial statements, hold annual meetings of directors or shareholders, or conduct audits.
Typical jurisdictions of Private Investment Companies

Popular jurisdictions for PICs include the BVI, Cayman Islands, Cook Islands, Hong Kong, Labuan, Mauritius, Samoa, and Seychelles.

What is a typical structure of a Private Investment Company?

Why use a Private Investment Company?

PICs can protect financial privacy, limit liabilities, and structure tax efficiently. They are most commonly used for asset preservation.

Limitation of liability: As the PIC is a separate legal entity from its directors and shareholders, the clients’ personal assets can be protected from legal liabilities.

Basic inheritance planning: Shares in a PIC can be owned jointly with right of survivorship, where the ownership will automatically be transferred at the death of one owner to the surviving owner(s). However, if the PIC is owned by one person, assets in the PIC will be subject to probate with the death of the sole owner. For optimal and complete inheritance planning, it is recommended that a PIC be set up within a trust structure to ensure that assets are passed on according to the client’s specific conditions.

Privacy protection: Assets are held in the PIC’s name, which ensures confidentiality for the shareholders and any of the beneficial owners. Correspondence regarding investment transactions that the PIC enter are addressed to the PIC, thereby safeguarding security in the event that mails get intercepted. The only public documents are the Certificate of Incorporation and the Memorandum and Articles of Association, which shows the name and registered address of the PIC.

Minimise taxes: PICs are generally not subject to taxes in the jurisdictions where they are incorporated. Assets held in a PIC can be protected from a range of taxes including income tax, estate tax, inheritance tax, and capital gains tax.

Ease of asset transfer: Transfer of assets is facilitated by simply transferring shares in the PIC, effectively eliminating transfer taxes.

Asset consolidation: PICs can hold a wide variety of assets, allowing clients to consolidate global assets and simplify financial record keeping.

Comparison between Trust and PIC

Features

Trust

Private Investment Company

Control

Control assets through Trustee

Direct control of assets

Management

Professional management of assets in the absence of the Settlor

Appoint Directors to manage assets

Inheritance

Seamless and complete inheritance planning without need for probate.

Assets subject to probate if the sole/ remaining owner passes on.

Confidentiality

Assets are held in the Trustee’s name, and trust arrangements are kept private.

Assets are held in the PIC’s name, and names of Shareholders and Directors are kept private.

Taxation

Minimise taxes

Minimise taxes

Cost

Annual administration fees for trusts range between 0.1% – 1% of the total assets.

Generally less expensive than trusts.

Setting up a Local Company

Singapore’s efficient and business friendly environment has attracted many companies to set up their operations here. Strategically located in the heart of Southeast Asia, Singapore offers businesses quick access to a huge market with tremendous potential, all within a few hours flight.

One of the most compelling reasons for doing business in Singapore is its low effective personal and corporate tax rates. Singapore companies are not subject to capital gains or dividend taxes.

In addition, Singapore offers the international business community a diverse and fascinating culture and quality lifestyle. Read here for more information on Singapore and reasons why Singapore is a choice location for incorporating a business.

The following information will be useful in preparing to incorporate a company in Singapore, an easy process that only takes 1-2 days.

Types of Companies

Sole Proprietorship: The simplest form of business entity – a sole proprietorship – has only one owner who holds the controlling authority to the company, and who is responsible for all the assets and liabilities belonging to the company. Although it is easy to set up and administer, the owner has unlimited liability, hence the owner’s personal assets are exposed to the business’s debts. Additionally, sole proprietors do not enjoy the same tax exemptions that are offered to corporations.

Partnership: A partnership has two or more persons operating a business with the purpose of generating a profit and sharing it among themselves (the partners). Partners are liable for all assets and obligations at risk.

Limited Partnership: A limited partnership, like a partnership, involves two or more partners – but only one is liable for the invested capital.

Limited Liability Partnership (LLP): A combination of a Partnership and a Private Limited Company, an LLP structure is suitable for professional services such as law firms, architecture firms and accounting firms. The partners have limited liability – no one partner is generally liable for another partner’s actions – and filing and compliance requirements are simpler than that of a Private Limited Company.

Private Limited Company (PLC): Most Singapore companies are registered as Private Limited Companies, which have separate legal statuses from their shareholders and directors. Shareholders are not liable for the debts of the company beyond the amount of share capital they have contributed. PLC has the right to own properties, and enjoys local tax incentives.

Requirements for Private Limited Company Formation

The following needs to be considered before a Private Limited Company can be incorporated

Company Name

The company name must be approved before the incorporation of the company.

At least one Resident Director

A resident is defined as a Singapore Citizen, Singapore Permanent Resident, or a person who holds an Employment Pass or Dependent Pass. Directors must be at least 18 years of age. There is no upper limit to the number of additional local or foreign directors a company can appoint. Foreigners who wish to incorporate a company in Singapore but do not have plans to relocate to Singapore may engage professional firms for the services of a local nominee director. Among other duties, a director of a Singapore company is expected to act honestly at all times, avoid conflicts of interest between his/her interests and the company’s, ensure the registration and compliance of shares-related processes, maintain a registered office and maintain proper and audited accounting reports. When such responsibilities are breached, a director may be sued for damages and/ or sentenced to imprisonment.

Minimum one Shareholder

Shareholders can be locals or foreigners, and can be a person or a business entity. Directors can also be shareholders. The maximum number of shareholders a Private Limited Company can have is 50.

Appointment of a qualified Company Secretary

The company secretary must be a natural person who is a resident in Singapore, and cannot be the sole director/ shareholder of the company.

Minimum S$1 Paid-Up Capital

Paid-up capital, or share capital, can be increased any time after the incorporation of a company.

Local Singapore Registered Address

The registered address of the company can be a residential or commercial address, and cannot be a PO Box.

Financial Reporting

The company needs to determine and establish its financial year-end. A resolution to appoint an auditor will also have to be signed upon the company’s incorporation. A company may, however, be exempt from statutory audit if it qualifies as a small company. A company may qualify as a small company if it is a private company in the financial year in question and, if it meets at least 2 of the 3 following criteria for the latest 2 consecutive financial years:

Total annual revenue less than or equals to $10M
Total assets less than or equals to $10M
No. of employees less than or equals to 50

In such a case, unaudited financial statements would have to be produced.

Procedure for Private Limited Company Formation

Provision of Incorporation Documents

Among others, identification documents, proof of address, certificate of incumbency and a register of shareholders and directors are some of the key documents required. A few company names, with preferences stated, is also necessary. The name approval process usually takes less than an hour, if the name is not identical to an existing local company name, does not infringe any trademarks, and is not obscene or vulgar. An approved name will be reserved for 60 days from the date of application.

Registration of Company

Once the company name is approved and incorporation documents are signed, the filing and approval process by the Registrar of Companies is usually completed in a few hours.

Issuance of Registration Documents

An email notification confirming the incorporation of the company will be sent by the Company Registrar, and is treated as the official certificate of incorporation in Singapore. Hard copies are not required in Singapore; however, if a hard copy is preferred, the request can be made online for a fee of approximately S$50.

Liaison with 3rd party service providers

The incorporated company may begin engaging with 3rd party service providers who are integral to the company’s operations and compliance. These include, and are not limited to, auditors, accountants, tax agents and legal advisors.

Opening of Corporate Bank Accounts

With the successful registration of the company, one may then proceed to open a corporate bank account in any of the banks in Singapore. Some popular banks include local banks DBS, UOB, and OCBC, and multinational banks such as Standard Chartered, HSBC and Citibank. A certificate of the company’s incorporation and identification documentation of the directors would be necessary.

A business profile containing the particulars of the company is usually obtained for a small fee. Together with the email notification, these are sufficient in Singapore for all legal and contractual purposes.
In all, the procedure for business formation in Singapore is a swift and efficient one.

What is a Universal Life Plan?

Specially designed with the unique needs of high-net-worth clients in mind, Universal Life Plans are a type of life insurance, where the premium payments above the cost of insurance are credited to the cash value of the plan. It is a permanent life insurance offering the low-cost protection of term life insurance as well as a savings element.

Universal Life policies are typically available in significantly larger face values than the typical insurance solutions.

Providers of Universal Life Plans

Companies that offer these exclusive products include AIA, Manulife, and Transamerica. Plan features may vary across the different providers.

How does a Universal Life Plan work?

Every month, the cash value is credited with interest, while the cost of insurance and associated fees are debited. Some plans have a “no lapse guarantee”, where the plan remains in force even though the cash value drops to zero.

The premium paid into the plan thus represents this cash value which is accumulated on the basis of the current interest rate. The current interest rate will not fall below the guaranteed interest rate regardless of global economic conditions.

When the plan matures, the policy holder will receive the proceeds of the plan. In the event that the plan matures after the policyholder’s lifetime, the death benefit plus all accrued dividends, less any indebtedness, will be paid to his/ her beneficiaries.

Why use a Universal Life Plan?

Universal life plans are flexible, provide large insurance coverage and may be used as collateral for banking facilities.

Wealth preservation: Policyholders can be assured that sufficient wealth is set aside for future generations. They can ensure liquidity will be present when needed by themselves (or beneficiaries) at a particular time.

Competitive Premiums: The premiums are typically far more competitively priced than those offered by retail insurance policies. Premium differences of up to 50% are not uncommon.

Interest credit: While offering life assurance, the plan continues to pay interest to the policy holder. Also, accumulated interest can be used to help pay premiums. For instance, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums.

Guarantees: While the interest credit rates vary over the life of the policy, plans generally have a minimum guaranteed level between 2%-3%. Such rates are guaranteed regardless of global economic conditions. Conversely, while the insurance cost rates may vary as expected mortality rates get updated, they are typically capped at guaranteed maximums.

Flexibility: As the policy holder’s circumstances change, the death benefit, savings element and premiums can be reviewed and altered. Policy holders have the flexibility of maintaining or changing the desired cash value amount in the plan. The frequency and duration of premium payments can be adjusted too.

Sophisticated structuring options: Universal life plans can be structured within or with trusts and offshore vehicles which are common and advantageous wealth management channels for high-net-worth individuals. They may also be used as collateral for banking facilities.

What is a Private Family Fund?

Predominantly used by high-net-worth families who wish to pool their wealth so that it may be managed more efficiently, these are customised to the family’s personal and professional needs and ever-changing circumstances.

These have various structures to cater to families’ different investment needs, and often consolidate investment portfolios for family members to enjoy economies of scale made possible from the pooled administration of assets. Private bankers and fund managers assigned to such funds provide access to various asset classes – listed or not – and products to meet different needs. With no standard investment strategy, they help to allocate assets according to different circumstances.

Benefits of Private Family Funds

Members of the fund are able to benefit from personalised investment management by the fund manager. For instance, funds may be segregated into compartments with different managers – each having their own focus. Elder members of the family can have their assets invested in lower-volatility fixed-income instruments while, on the other hand of the spectrum, younger and more financially sophisticated members of the family can invest in private equity for higher potential returns.

The fund may be set up so that family members can borrow against the fund for liquidity and enjoy certain levels of privacy with their involvement with the fund. There is flexibility in structuring members’ ability to exit the fund – the usual 3-5 year lock-in period does not exist for PFFs.

Financial market regulatory bodies also oversee the fund’s operations so transparency is granted to the family members, and the NAV of the fund is calculated regularly by fund administrators.

What is Quantitative Trading?

Quantitative Trading refers to the utilisation of mathematical models to define optimal time-frames, volumes, costs and risk levels for the purpose of creating and executing trading strategies. With pattern recognition as a premise, individuals can use simpler statistical models to make bets, but quantitative trading remains the domain of hedge funds and institutions with the resources to crunch and compute large amounts of input and to back-test and simulate strategies comprehensively.

Strictly speaking, the use of mathematical models to develop trading and investing strategies began as early as the 1930s, when forward-thinking investors would select stocks based on a defined set of criteria pertaining to the financial strength of the company. The use of numbers and statistics to scope investment and trading opportunities then advanced greatly in sophistication during the 1970s, when technological progression accelerated. Exchanges began using trading programs to improve order execution. Simultaneously, computers allowed for the swift analysis of large data-sets, with the latter being made increasingly attainable with the advent of the Internet. Quickly, the origination of quantitative trade strategies was limited only by one’s imagination, and researchers went from crunching financial statement data to analysing moon phases.

Types of Quantitative Trading

Common industry techniques used – with the aid of high-performance computer programmes – include algorithmic trading, statistical arbitrage and high-frequency trading. Note that these techniques are not mutually exclusive and are in fact often used in conjunction with each other.

Algorithmic Trading: This is the use of computer programs to follow a set of instructions and criteria for executing a trade in order to make a profit. The parameters that may be fed into the programming criteria are endless, with price and volume being two common components.

High-frequency Trading: Often used interchangeably with algorithmic trading, this is the use of high-speed computer programs to execute trades that are latency sensitive; i.e. – the profitability of the trade is highly dependent on the program’s ability to execute it before any other person/ program.

Statistical Arbitrage: This is the use of statistical models to predict movements in prices; for example that a difference in prices between two similar company equities is temporary and will revert back to a mean.

Why invest in a Quantitative Trading Fund?

With quantitative trading, trades made are based on statistical models and are void of emotion or bias. A large volume of trades can also be made simultaneously, within micro-seconds. Trades are also executed on a semi-to-fully-automatic basis, taking away the risk of human error.

Expected Return and Risk: Because of the mathematical basis of quantitative trading, expected returns and risks can be precisely estimated. Probabilities are attached to each trade, and fund managers can generally, through math, pinpoint with precision the basis and risk for each trade.

Dynamism: Quantitative trading strategies generally have a limited shelf-life because competitors eventually discover the strategies and cause trades to be overcrowded. There is a naturally instilled awareness of the strategy decay and hence a strong incentive to innovate continuously. Through investing in a quantitative trading fund, investors can expect their risk and returns to be dynamically diversified.

Top Talent: Because of the potential profits to be made from quantitative trading, the industry has attracted the brightest and smartest minds in fields ranging from statistics and econometrics to computer science and astrophysics. Investing in the top funds allows investors to let the brightest minds generate returns for them.

Regardless, trading with technological and statistical edges have their disadvantages as well.

Realised versus Forecasted: Intuitively, the fundamental criticism of analysing numbers and data to place bets on the future is that the past is not always an accurate predictor of the future. While a 3 standard deviation event/ opportunity may imply a strong probability of normalisation, the definition of ‘future’ implies that there is nothing to say that a 10 standard deviation event (against the ‘logical’ position) cannot occur before the normalisation.

The demise of the once-illustrious Long Term Capital Management (LTCM) – which was tellingly founded by Nobel Prize winners – sheds light on this point.

Secrecy: Because of the risk of trade overcrowding, quantitative funds are fiercely protective of their trades and strategies. As such, an investor would not expect to know the details of the fund’s trades, and in many ways can be said to be investing in what he/ she does not understand.

Resources: Long-Term Capital Management