The latest hype: OCBC 5.1% Preference Shares

OCBC has recently announced it is offering its Class B preference shares to its retail and institutional investors that pays a fixed dividend of 5.1% per annum. These preferred shares are non-convertible and non-cumulative and the fixed dividends are tax-exempt, payable semi-annually.

For the retail investor, the minimum subscription is 200 prefernce shares of S$20,000 and thereafter in multiples of 100 preference shares for $10,000. These shares are perpetual securities with no fixed redemption date, redeemable at the option of OCBC Bank five years from the issue date and on each dividend date thereafter. It carries an investment grade rating of A-/Aa3.

Things you should know before you invest:
* Non-convertible preference shares
This means the preferred shares are not convertible to equity. While this might be preferred by some (preference shares rank above equity in liquidation), it essentially treats this like a fixed-income security, but not a loan. A loan debt is like you lent $20,000 to OCBC and it pays you 5.1% p.a. in interest. However, capital is NOT guaranteed, so it should be compared to a fixed-income security such as a coupon bond.

* Non-cumulative preference shares
There are cumulative and non-cumulative preference shares available. Non-cumulative shares means if OCBC faces cash flow problems and decides not to declare dividends, these preference shareholders forfeit their dividends, i.e. no dividends for the year. This is another feature that makes it different from a plain-vanilla loan. However, one consolation is OCBC has to pay preference shareholders before their equity shareholders, and in previous years, OCBC has been regularly paying its shareholders. So the likelihood of this is small, although not zero.

* No capital guarantee
As mentioned, this is not a loan or fixed deposit (as many retail investors choose to see it). This cuts both ways because it also allows for capital appreciation as well. A look at OCBC's Class E 4.5% preference shares shows that prices are relatively stable and it is currently trading at 100.70.

Also, note that should OCBC run into bankruptcy, preferred shareholders are paid before common equity shareholders, but after taxes, employees and debtors.

* Liquidity
Shares are traded on SGX at 0.1 lots. For large lots, market impact costs might be incurred. It is possible that only 10 lots or 10,000 shares are traded daily. This makes it difficult to sell if you should need money urgently.

* Interest Rate Risk
These shares are redeemable after 5 years on each dividend date. The option to redeem lies with the bank; usually the bank will redeem if the current interest rate environment is falling or the level of interest rates is low so they could refinance at a lower rate. For the preferred shareholder, this means that they have to seek alternative investments as they have a lump sum of cash on hand upon redemption by OCBC. However interest rates are low and they might not be able to get good yields on the cash balances and are subject to the prevailing SIBOR rates.

* No voting rights
Voting rights are given to common equity shareholders. Preferred shareholders typically have no say in the business of the company and are not in a position to fire management/directors. This is another reason why preferred shares are likened to fixed income securities.

* Tax-exempt
The semi-annual dividends, like most other dividends and interest income, are not taxed. Dividend income received by common equity shareholders are already taxed at the company level.


Should I invest?
* Risk appetite
This varies from individual to individual. It depends largely on your risk appetite - if your risk appetite is low and you are risk averse, yet would like some exposure to OCBC, this could be a right investment for you. However, if you have medium to large risk appetites, you might want to choose OCBC equity because you have participation rights, i.e. in a good year, you might receive special dividends and could thus get >5.1% p.a. Also, OCBC equity are more liquid and more volatile than preference shares so capital appreciation (and loss) is much faster. On average, equities return ~10% p.a. over a ten-year period.

* Investment Horizon
If you need the money in a year's time, then you should not invest. You get 5.1% in dividends but after incurring transaction costs and opportunity costs, it is less than 5.1%. Thus, this is best for three-five year term horizon and beyond.

* Your existing portfolio
If you have cash lying idle in bank deposits, then yes you should consider this higher-yielding alternative. This is a higher rate than most fixed deposits and inter-bank rates (since the risk characteristics are different). However, if ALL you have is $20,000 to $40,000 I would advise against choosing this. You should have six months of expenses in liquid bank accounts for emergency funds use. And you should attempt to diversify whatever little you have instead of throwing all your net worth (your eggs) into OCBC preference shares (the only basket).

* Current status
If you are currently a retiree looking for stable income, this is a good addition to your portfolio. However, if you are in your early 20-30s, this can be part of your portfolio to diversify (it works like fixed income) if your portfolio or net worth is large enough. Otherwise, choose other (riskier) investment alternatives.


My thoughts
I applaud OCBC for providing retail investors with this option to invest in their Class B preference shares. They did take our feedback into account especially after DBS only offered their Tier 1 capital to institutional investors.

I might consider applying for the shares but I expect it to be over-subscribed. However I'm ambivalent about whether or not I receive the allotment since my existing equity portfolio has provided me with 9% return to date (7% trading gains + 2% dividend yields which I will update on another post) and my funds are still trading at a 10% unrealized loss. I am hesitant about liquidating my equities to invest in OCBC preference shares, or even my externally-managed funds as I hold a three to five-year horizon for them so I am holding on. Given the relative size of 1 lot of OCBC preference shares and its relative return, it is not attractive in my opinion.

NOTE: Please seek your financial advisor's advice about investing in these preference shares. I have brought up a few salient points for you to take note so you are aware of the questions to ask and you could decide if this is the best investment for you.

For more information on OCBC's previously-issued classes of preference shares, visit this website http://www.ocbc.com/global/investorrelations/Gco_Inv_PrefShareBond.shtm.

Setting my financial goals... baby steps towards financial independence

I have had people asking me, how come I think of retirement planning when I just graduated from university? Most college graduates are working hard at repaying their study loan in the short term.

I must say I am one of the luckier ones. My parents had nil CPF balances (used it to pay for the HDB housing mortgage loan as our flat was bought at the property peak and hence loan amount was very high), so my loan was paid off in cash in full. (To be honest, it was tough on my parents.)

However, for young people like us, time is on our side! Whether you are 25 or 30 or 35 now, there is a good thirty years to retirement at 62, the official retirement age. Using the Rule of 72, generating a 6% annual return means your investment amount doubles in 12 years!

How did I start planning for retirement?

Initially, I started setting aside some money each month, around $400, and plonked them into mutual funds. The funds made money at first, and I continue putting money into these equity funds month after month (in a time of rising prices). However, the recent credit crunch has made me lose a substantial 10% of my investments as of now (it was down over 15% at one point). This is another good thing about starting early: you have the time and patience to ride out business cycles! So I have not sold any of my funds, as I believe it will appreciate in the medium term of 3-5 years. Nonetheless, it made me reassess my net worth and I have since placed a smaller percentage of my net worth in mutual funds (also known as unit trusts), choosing to invest directly in the stock market instead.

So how do I keep track of my retirement plans now?

The first important thing, I believe, is to set a retirement goal. I decided early on that I want to earn my first million dollars by the age of 35 - that would ten years from now, and this is my long-term goal. To monitor my progress towards this large goal, I have set many shorter term goals in between. The hallmark moment came when I first reached a net worth level of S$100,000. That was the first time my net worth crossed the sixth-digit mark, and is a significant milestone in my financial planning management, given that I earn less than half that amount in annual income (not to mention that interim capital losses delayed this special moment).

The following are my net worth targets based on conservative annual returns, i.e. 5% annual returns instead of 6%. Thus, the age that I will reach my S$1 million goal is around 38 years old.

Jun 2008: $120,000
(unfortunately, I am not near this level yet. This is because I made some personal choices, and decided to spend a rather substantial amount on current travels.)

December 2008: $135,000
(Hopefully, with discipline, I should be able to reach this level or near it towards the end of the year.)



To be honest, by then, S$1 million would not mean much, since inflation has been running high lately and probably most of us lower- to middle-income earners are already millionaires by then! However, that point is definitely memorable as it marks a significant step towards financial independence. Using S$1 million capital as base, one could easily double it to S$2 million in 12 years using a reasonable 6% return, and this means this same S$1 million turns to S$2 million when I turn 50 years (38 + 12), notwithstanding that I continue to save up and invest during these twelve years. This should result in financial independence earlier on in my life, so I could choose to work in areas I am interested in, including unpaid jobs.

The Dreams of Financial Independence

I believe my dreams are what motivate me to defer current consumption in favor of future consumption. I want to be financially free, to be able to travel the world and befriend friends from all over the world, learning and understanding customs and appreciating differences in culture. Most of all, I would like to spend my last years in rural areas, leading a simple lifestyle with a slower pace of life, and teaching children during my spare time.

Each of us have dreams, and we should dare to dream. Because only when we dream, then we are able to make dreams happen!

So continue to check back this blog regularly as I make updates on my financial position, and my journey towards financial independence. Importantly, I hope it motivates you to save harder or gives you a pat on the back if you have done well in terms of net worth growth! Join me as I struggle between difficult consumption and investment choices, as I am sure we all do. And let's all work hard towards achieving our dreams!~

Great Singapore Sale 2008

The Great Singapore Sale starts today!

For every Singaporean, it certainly marks a season of shopping with great deals! This year's sale is especially inviting, since retail sales have been slowing down and retailers are introducing deep discounts in an attempt to boost mid-year sales.

Before you head out to the malls, remember to check the newspapers and the website for cut-out or print-out coupons. It takes up only a while of your time, yet this small act can save you a lot of money!

The official website, for example, has a coupon website. Some savings include:
- Get $10 off with every $100 spent at Watson's
- 50% off Leonard Drake Facial or Health Spa treatment

Also, look out for credit card partnerships to reap more rewards! For example, Millenia Walk has StanChart as its credit card partner, Suntec City has ABN Amro, while FrasersCenterpoint Malls encourage you to use UOB cards. The GSS is sponsored by Mastercard, so it pays to use cards with the Mastercard logo as well if there are promotions in-store.

Honestly, I'm getting confused with the myriad of promotions out there - all I know is, always double check for any discounts or rewards before purchase! Remember, the small cents do count! And happy shopping!~