Mrs. B, recently widowed and in her mid to late 40s, is a senior executive working for a Singapore-based multi-national corporation with SGD 10 billion in global sales. She has a son aged 20 and a daughter aged 18. In 3 months’ time, her son will be leaving for the UK to study in the law faculty of a prestigious UK university for the next 3 years (annual expenses including fees, lodging, air fares and miscellaneous items for an outside of London-based university education can be assumed to be SGD 80,000 per annum, after taking into account potential impact of inflation in the UK over the next 3 years). As for her daughter, all indications are that in another year’s time, she will be studying in one of the government-funded local universities (you can assume SGD 80,000 to be more than adequate to cover her entire cost of education based on SGD 20,000 per annum for a 4-year programme taking into account inflation and increasing costs of higher education in Singapore).

Current situation

Mrs. B has recently received a lump sum payment of SGD 1.2 million from the insurance pay out of her late husband’s life insurance policy. Together with the available family savings of SGD 300,000, Mrs. B reckons that she now has cash funds totalling SGD 1.5 million available for her to invest prudently to meet her various needs.

Investment proposals

Mrs. B has over the past couple of weeks been busy meeting with executives from various financial and investment firms with a view to deploying and investing the available funds rather than just placing them with banks given the current low interest rate environment. Specifically, she has narrowed down her choice to the following 2 proposals:

PROPOSAL 1

Ms. Shelly, who is the Senior Executive Director of Pillar Energy Resources Pte. Ltd. (‘PER’), a privately held firm specialising in energy investments, marketing and distribution, suggests that Mrs. B sets aside funds to invest with her firm. According to Shelly, the expected returns amounted to 3% every 3 months on the total funds invested. As an illustration, clients who invest SGD 100,000 at the beginning of each quarter (the fixed dates are 1 January, 1 April, 1 July and 1 October) will get their original investment amount of SGD 100,000 together with the return of SGD 3,000 at the end of the respective quarter (31 March, 30 June, 30 September and 31 December). If only the principal funds are rolled over every quarter on an annual basis, clients can potentially obtain SGD 12,000 in returns over a 12- month period. At the end of each period of investment, the principal sums invested and the returns are paid back to the investors so that they can decide whether or not to continue investing and if so for whatever amounts in the following and subsequent quarters.

Shelly recommends that Mrs. B invests with her firm an amount of at least SGD 500,000 over a suggested minimum period of 3 years so that the burden of funding her son’s education can be taken care of. She further emphasizes that the investment duration with her firm is relatively short term in nature. Hence, there is no need for Mrs. B to be overly concerned about its liquidity. Moreover, there is no compulsion for her to continuously invest every quarter as she can easily get out at the end of each investment period if she needs the funds. She can always re-invest again in the subsequent quarters should the need arises.

Just a week ago, Mrs. B attended a private presentation held by PER at a 5-star hotel at the invitation of Shelly where she further learned of the following:

a. The minimum amount to invest is an affordable SGD 25,000. Most of Shelly’s clients have invested amounts ranging from at least SGD 250,000 to SGD 1.5 million each over the past 8 years. These clients prefer such investments due to the relatively short duration, considering that each investment period is only 3 months, unlike other investment products which might require longer periods of commitment with much less certainty of returns.

b. As explained by the Managing Director of PER (Shelly’s boss), the invested funds from clients are being held in trust and are secured through first “charges” or “lien” on specific oil fields and gas reservation sites belonging to the firm located in the well-known shale oil area of Dakota in the US. Such investments are fully secured and duly documented. In addition, the oil and gas reserves are properly certified by experts (investors can view at PER’s Marina Bay Suite office the various documents which have been duly prepared and certified by lawyers who are experts in this area). In this manner, an investor can be assured of getting his or her returns as the whole investment process will be properly documented, be above board and entirely transparent.

c. PER has very well-established track records, having tied up with professional middlemen and other connections with the oil majors that have enabled it to pre-sell oil and gas reserves to achieve the desired returns. Since oil and energy prices in general have been depressed for some time previously, and are now stabilised and even on the uptrend recently, the future prospects for the industry and for the firm, in particular, have never looked brighter or better. Hence, investors are assured of the safety features of their investments with the firm.

d. The Managing Director of PER gave an assurance to the audience that there were no currency risks for investors since the returns and the funds being invested would be denominated and paid back in SGD. Similarly, investors would not face any risks or uncertainties in the oil and gas markets as the proven energy reserves have been pre-sold.

e. Some investors with prior experience of investing with PER went on stage to give first-hand testimonials and shared their investment experiences. Some had gone on fact-finding field trips to the actual project sites in Dakota, USA, to witness for themselves the development of the projects they had previously invested in. All these investors have successfully obtained the returns as promised as well as their invested principal amounts. These satisfied investors further indicated to the audience their intentions to commit existing as well as fresh funds with the firm.

As Shelly was aware of Mrs. B’s financial situation, she told her that if she were to invest diligently and sufficiently through her recommendation, both her children’s educational expenses and even her own financial needs could be more than adequately taken care of. In view of the above and considering that Mrs. B (through her late husband) has known and trusted Shelly for more than 20 years, she was keen to take up this proposal to meet her investment goals and various financial objectives.

PROPOSAL 2

Ms. Emily, Executive Director in the Private Wealth Department of First Union National Bank Ltd. (its listed symbol on an overseas stock exchange is ‘FUNB’), proposes that Mrs. B places her available funds with FUNB in a discretionary investment management account that can grow steadily at an average of 5 – 15% p.a. (the figures provided are based on the audited track records of FUNB for such similarly managed discretionary accounts over the past 30 years).

At a previous meeting with Mrs. B, Ms. Emily had explained the workings of a discretionary investment management account as one in which the investments for clients are specifically tailored and managed by FUNB for each investor who opens such accounts and are individually segregated. Its team of economic, stock and investment experts at FUNB is given full discretion or authority with regards to making all the necessary investment management decisions such as allocation of assets, choice of stocks or bonds or currencies to invest in, timing of buying and selling, etc. FUNB will provide detailed records of transactions and send statements with regular reviews to all its clients.

All clients including Mrs. B can, if they wish, give specific instructions to override the investment decisions, liquidate the securities, make partial withdrawals or even terminate the account depending on the wishes of the clients themselves by giving due notice. In other words, a discretionary investment management account is one in which the Bank is given a mandate by the client to make investment decisions on his or her behalf and over which the client himself or herself can still have full control over the funds at the same time.

As initially proposed by Ms. Emily, the funds to be managed by FUNB for Mrs. B will be invested in a diversified portfolio that comprises traditional asset classes. After further meetings with Mrs. B, Ms. Emily highly recommended that the allocations of the portfolio for Mrs. B be proportionately weighted to comprise cash deposits and foreign currencies (5%), local stocks (45%), bonds (10%) and foreign stocks including the US, EU and Greater China (40%) given the forecasts and outlook by the expert panel of the Bank. While FUNB will have full discretionary power to manage the investments on her behalf as it sees fit, Ms. Emily reminded Mrs. B that the individual asset weightings can be adjusted to fit her requirements. This is an ideal situation for Mrs. B as she is freed from the hassles of the investment decision making process and administrative chores, yet at the same time any of her specific requests such as her wish not to invest in say, casino, gaming, tobacco or liquor stocks can be accommodated if these and any other requests are made known either in advance or at any time to FUNB.

The minimum amount accepted by FUNB for such a discretionary investment management account or service is SGD 1 million and above with no minimum investment period or duration except that to close the discretionary account a minimum notice period of 1 month is needed.

Assumptions

The terrace house in the east coast area off Changi Road that Mrs. B and her family currently live in is fully paid for. She has more than adequate insurance policies to cover her entire family for medical expenses, long term disability and premature death benefits as various policies were purchased years ago when she and her husband first started working. Therefore, it can be assumed that insurance coverage will not be considered by Mrs. B in her current investment decision deliberations. Also, it is highly likely that given her current pay of about $ 12,000 per month, Mrs. B will continue in her present job for the next three years barring any unforeseen circumstances such as her redundancy after 3 years and the restructuring of her firm.

For the purpose of this case study, please bear in mind the following:

1. Other than the two investment proposals above, Mrs. B does NOT wish to consider evaluating or investing directly by herself (with all its hassles and administrative requirements) in properties, annuities, listed equities, bonds, REITs and mutual funds (unit trusts) with other insurance companies, banks, brokers, investment houses, independent financial advisers or through online internet accounts.

2. For the sake of simplicity, do not consider bank fees or charges, discretionary investment management account fees, brokerages, stamp duties, commissions and charges, capital gains taxes and income taxes etc. in Mrs. B’s investment decision-making process.

3. As for the economic environment in Singapore, you can assume that the interest rate for short- to medium-term bank deposits is 1 % p.a. while the annual inflation rate in Singapore is in the region of 3 % p.a.

4. Do not take into account the CPF balances and their effects on Mrs. B.

Assignment

Based on your understanding of the investment tools and concepts that you have learned about thus far, explain how you can use the same tools and concepts to advise Mrs. B on allocating and utilising her investible funds of SGD 1.5 million.

Describe and discuss your recommendation(s) (in 800 – 1,000 words) by analysing with whom and how Mrs. B should or should not invest the cash she has on hand given her situation. Compare the relative merits, demerits and risks involved and evaluate the potential outcomes if Mrs. B were to take up all your recommendations. You can also synthesise and give additional suggestion(s) and/or alternative(s) where appropriate (after giving due consideration to the various assumptions outlined above) all of which must be duly supported by sound and detailed arguments.