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CASE STUDY ON MR. M

Background information

Mr. M, who is in his mid-40s, is a senior manager working for a multi-national corporation with USD 25 billion in global sales. He has a daughter aged 19 who will in 3 months’ time be enrolling in a reputable Australian university programme for the next 4 years (annual expenses including fees, lodging and miscellaneous items for a Melbourne based university education can be assumed to be SGD 75,000 a year). Mrs. M, previously a full-time homemaker when their only child was younger, has just re-entered the labour market, working in the accounts department of a local logistics firm.

Current situation

Due to the structural challenges faced by the parent firm in the US and in the light of the industry slowdown, Mr. M’s job has been made redundant. However, prior to his retrenchment, he was able to sell off his shares in the firm using the options that he had accumulated during his long years of service. After conversion, the sale proceeds amounted to SGD 1.5 million. In addition to having sold his shares, Mr. M also received SGD 300,000 in unemployment benefits from his employers. Together with the family savings of SGD 200,000 which he had originally intended for use on a rainy day, Mr. M reckons he now has funds totalling SGD 2 million in cash available for investment to meet his various needs.

Investment proposals

Mr. M is attracted to the proposals made by the following financial professionals:

1. Ms. Angela, Senior Marketing Director of Awesome Energy Pte. Ltd. (‘AEPL’) which is a privately held firm specialising in energy investment, distribution and marketing, suggests that Mr. M sets aside funds to invest with her firm. According to Angela, the expected returns amount to 3% every 3 months on the total funds invested. As an illustration, clients who invested 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 could 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 what amount in the following and subsequent quarters.

Angela recommends that Mr. M invests with her firm an amount of at least SGD 500,000 for a minimum period of 3 years so that the burden of funding his daughter’s education can be taken care of. She further emphasizes that the investment duration with her firm is relatively short term in nature. Hence, he should not be overly concerned about its liquidity. Moreover, there is no compulsion for him to continuously invest every quarter as he can get out at the end of each investment period if he needs the funds and invest again in the subsequent quarters.

Just a week ago, Mr. M attended a private dinner presentation held by AEPL at a 5-star hotel at the invitation of Angela where he learned of the following:

a. The minimum amount to invest is SGD 50,000. Most of Angeline’s clients have invested at least SGD 500,000 to SGD 1.5 million over the past 6 years. They prefer such investments due to the relatively short duration, considering that each investment period is only 3 months, unlike other investment products which may require longer periods of commitment with much less certainty of returns.

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

c. AEPL has very well established track records, having tied up with professional middlemen and other connections with the oil majors that allow it to pre-sell oil and gas reserves to achieve desired returns. Since oil prices have been depressed for some while and have stabilised recently, the future prospects for the industry and for the firm in particular have never looked better. Hence, investors are assured of the safety features of their investments with the firm.

d. The Managing Director of AEPL further assured the audience at the presentation that there were no currency risks for investors since the returns and the funds being invested will be denominated and paid back in SGD. Similarly, investors do 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 AEPL went on stage to give first-hand testimonials and shared their investment experiences. Some had gone on fact-finding field trips to the project sites in Dakota to witness for themselves the development of the projects they had previously invested in. All these investors had successfully obtained the returns as promised as well as their invested principal amounts and they intend to make further investments.

As Angela is aware of Mr. M’s financial situation, she tells him that if he were to invest diligently and sufficiently through her recommendation, his daughter’s education needs and his own financial requirements can be more than adequately taken care of. In view of the above and considering that Mr. M has known and trusted Angela for more than 20 years, he is keen to take up this proposal to meet his financial goals.

2. Mr. Benjamin, who works as Senior Vice President in the Private Wealth Management Department of Evergrow Worldwide Bank Ltd. (its listed name is ‘EWB’), proposes that Mr. M places his available funds with EWB in a discretionary investment management account so that it can grow at an average of 5 – 15 % p.a. (this is based on the track records

of the bank’s performance for similarly managed investment portfolios over the last 25 years).

At a previous meeting with Mr. M, Benjamin explained the workings of a discretionary investment account as one in which the investments are specifically tailored, managed and segregated by EWB for each individual investor. While the team of economic, stocks and investment experts at EWB will make all the necessary investment management decisions and provide detailed records and statements with regular reviews, there can be occasions when the clients as investors can give instructions to override the investment decisions, liquidate, withdraw partially or even terminate the account depending on the circumstances by giving due notice.

The funds to be managed by EWB for Mr. M will be invested in a diversified portfolio that comprises traditional asset classes such as local and foreign stocks, bonds, and liquid investments in local and foreign currencies. The weightings of the portfolio for Mr. M as suggested by Benjamin will be cash deposits and equivalents including foreign currencies (10%), local stocks (40%), bonds (10%) and foreign stocks including the US and EU (40%). Even though EWB will have full discretionary power to manage the investments on his behalf as it sees fit, the individual asset weightings can be altered to suit Mr. M’s requirements. Any of his specific requests such as his desire not to invest in casino, gaming or liquor stocks can also be accommodated if these and any other requests are made known in advance to EWB.

The minimum amount accepted by EWB for such a discretionary investment account or service is SGD 1 million with no cap on the maximum that it can manage for clients.

Assumptions

The house in Bukit Timah that Mr. M and his family currently live in is fully paid for. He has more than adequate insurance policies to cover his entire family for medical and long term disability and premature death benefits as various policies were purchased years ago when he first started working. Therefore it can be assumed that insurance coverage will not be considered by Mr. M in his current investment decision deliberations. Given the circumstances, it is unlikely that Mr. M will be able to find a similarly well-paying job like his last one for the foreseeable future.

Note that for the purpose of this case study, Mr. M does not wish to consider purchasing or investing directly in properties, annuities, listed equities, bonds, REITs and mutual funds (unit trusts) from insurance companies, banks, brokers or investment houses or through online internet accounts. For the sake of simplicity, there is no need to consider bank fees or charges, discretionary investment management fees, brokerages, stamp duties, commissions and charges, capital gains taxes and income taxes in Mr. M’s investment decision-making process.

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 about 2 to 3 % p.a.

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 Mr. M on allocating and utilising the investible funds of SGD 2 million.

Discuss your recommendation(s) (in 800 – 1,000 words) by considering with whom and how Mr. M should or should not invest the cash he has on hand given his situation. Analyse the relative merits, demerits and risks involved and discuss the potential outcomes if Mr. M were to take up all your recommendations. You can also 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.

Additional Guidance Notes For Students

1. In presenting your recommendation(s) to Mr. M, please remember to state the relevant steps involved in arriving at such a conclusion(s). This should include providing details of your analysis in determining Mr. M’s various needs, requirements and objectives and how your recommendation(s) meet these criteria.

2. You should demonstrate your understanding of the investment concepts and tools that you have learned about (refer to your course Study Guide in case of doubts) in preparing your recommendation(s) with sound reasons and explanations. Consider the following in your write-up:

a. Have you conducted a thorough evaluation of Mr. M’s financial health regarding his investment profile, stage of life cycle investing, liquidity needs, risk tolerance, etc. before deciding what his financial objectives should be?

(Please note that mere listing or repeating of Mr. M’s circumstances as provided in the case is not the same as profiling. Profiling requires you to analyse and come to conclusions that fit his requirements regarding products, risk tolerance, time horizon for investing, objectives, liquidity needs, etc.)

b. Have you carried out a proper analysis of the proposals and considered the various risk factors or possible alterations in terms of asset allocation and diversification to meet Mr. M’s needs as previously analysed by you under 2a above?

c. Have you prepared your recommendations based on your understanding and analysis and showed Mr. M the potential results or consequences of your suggestion(s)?

d. What potential issues or problems will Mr. M face if he accepts your recommendations? Are there any other mitigating factors or actions that Mr. M can take to reduce the uncertainties or risks if he were to fully accept your recommendations?

3. You can state additional assumptions which are reasonable and appropriate if these help you to further enhance and make sense of your advice to Mr. M.

(Any assumptions made which are not directly given in the case study itself should be relevant, reasonable and properly explained.)

4. Please consider using graphs, charts and tables, etc. where appropriate to clearly illustrate the various points in your presentation. Bear in mind that such graphical representations not only save on the words you use but also can be an efficient and effective means of communicating your ideas to Mr. M provided that they are relevant, up to date and have clear explanations.

5. You must use proper referencing and citation formats where applicable.

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