Investment Returns and Risks: The balancing act

Investors July 04th, 2017
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Investment Returns and Risks: The balancing act

As the conventional ideology of “high risk, high returns” continues to be both – challenged and embraced by investors, some case studies suggest that lower risk investments can defy the adage and gain better returns over time.

In our recent article, we explored the difference between two investment products – corporate bonds and Short-term Listco Notes (STLN). One similarity between both products is that the issuers are companies which are listed on the SGX-ST. So what are some of the general characteristics of such issuers?

General Characteristics of listed companies
Companies listed on the SGX-ST (or Listcos for short) are heavily regulated by the SGX-ST and thereby held more accountable to their shareholders and lenders.

  1. Transparency of information
    Under the Catalist Rules and Mainboard Rules of the SGX-ST, companies listed on the SGX-ST are compulsorily required to announce their quarterly and annual financial statements to the SGX-ST within 45 days after the end of the quarter or 60 days after the end of the year (as applicable).In addition, under the Catalist Rules and Mainboard Rules, it is requisite for these companies to immediately announce to the SGX-ST any material events including joint ventures, mergers or acquisitions; the acquisition or loss of significant contracts; the public or private sale of additional securities of the Listco; or the borrowing of a significant amount of funds.This enables investors to obtain more information about the operations and financial profile of a ListCo issuer.
  2. Corporate Governance
    The Code of Corporate Governance (which is under the purview of the SGX and the Monetary Authority of Singapore) sets out a number of recommended principles of corporate governance practice including the appointment of independent directors to the board, fair dealing policies, and internal audit processes.Under the Catalist Rules and Mainboard Rules, Listcos are required to disclose their corporate governance practices and provide explanations for deviations from the Code of Corporate Governance. They are also subject to higher levels of corporate governance disclosures than companies which are not listed, and this also enables investors to obtain more information about the operations of a Listco issuer.
  3. Visibility of Cashflows
    As described above, Listcos are required to announce their quarterly and annual financial statements, and to immediately announce material events including the acquisition or loss of significant contracts – giving investors a better understanding of the company’s operational progress.
  4. Wider Avenues of Financing
    Listcos having already gone through the rigorous process of listing have wider avenues of financing available from both equity and debt capital providers. As listed companies, they have immediate access to the public equity markets for fund raising. This means that a channel for raising equity financing from public investors is available for them to tap.

STLNs, therefore, offer a different risk-reward profile from private unlisted companies and offers a useful additional tool to the prudent investor for diversifying and managing the investor’s portfolio. In the risk-reward paradigm, it follows that the higher the risks, the higher the expected returns. Returns expectations therefore commensurate with an investor’s perceived measure of risks. In the assessment of risks, one needs to consider accompanying mitigating attributes, else expectations of the required returns may be inflated and opportunities might be missed.

The success of any investment depends on two factors: the balance between returns and risks. Having a well-diversified portfolio with instruments of various riskiness can balance the act between investment returns and risks.

STLNs is a new investment instrument that can add diversity and interesting properties to your portfolio.

 

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