INCEPTION OF NUS INVEST VIRTUAL PORTFOLIO

Ow Tai Zhi, NUS Invest Exco     This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Purpose
The NUS Invest Virtual Portfolio (thereafter referred to as “portfolio”) provides a platform for all NUS Invest members to share and discuss investment ideas, and track the performance of collective investment decisions made upon these investment ideas.

The portfolio seeks to outperform the returns of Straits Times Index (STI) on a consistent and long-term basis within a set of given risk parameters.

The portfolio is constructed based on financial concepts widely used by institutional fund managers to allow members to learn and appreciate how portfolio management is carried out by investment professionals.

Investment Decision-Making
A meeting was convened on 28 Oct 2008 where NUS Invest Exco members collectively formulated the portfolio’s initial stockholdings in a top-down process of (1) asset allocation, (2) industry allocation and (3) stock selection.

The portfolio will be rebalanced quarterly for active management. The quarterly rebalancing emphasises longer-term and value investing and seeks to minimise short-term speculations, which yields inconsistent returns and are high-risk in nature.

A quarterly investment forum open to all NUS Invest members will commence beginning Jan 2009 where external research analysts and investment professionals will be invited to provide market outlook and trading pulse. NUS Invest members can suggest investment ideas for open discussion via this forum. Based on the deliberations and inputs, an experienced investment panel will ultimately vote to make the collective investment decisions related to the portfolio.

Performance
Performance is measured by alpha or value-add (VA), which refers to the excess returns of the portfolio relative to a benchmark (STI). Alpha is measured in basis points or percentage, where 100bps is equivalent to 1%. [eg. If STI is down 14% and the portfolio is down 12%, 200bps or 2% alpha is generated!]

The concept of relative returns based on alpha disregards absolute returns. Absolute returns are for small-scale retail investments and not appropriate for institutional portfolio management. [ie. we are not concerned with absolute returns in this case, our aim is to generate more profits than the general market in bull markets and conversely to make less losses in bear markets]

Risk Management
Risk management is an important part of portfolio management. Without appropriate and stringent risk controls, rogue-trading or overly-risky investments may deplete the entire portfolio unexpectedly. The risk parameters built into the portfolio is tracking error and cash management.

Tracking error refers to the standard deviation of the difference between the performance of the benchmark and the replicating portfolio. The portfolio is limited to a tracking error of <90%. [ie. the standard deviation of the difference between the performance of STI and the portfolio is less than 10%]

Cash management refers to the proportion of portfolio funds kept as cash reserve vis-a-vis the proportion that is invested, in this case in equities. This limits opportunity loss of not participating in market movements and controls the deviation between the performance of the benchmark and the replicating portfolio to a certain extent. The portfolio is limited to maximum 5% cash holdings. The portfolio is restricted from cash overdraft and it cannot invest beyond the portfolio funds available.

How Alpha Is Generated
Alpha is generated via relative bets (overweights / underweights) in (1) asset allocation (cash vs equities), (2) industry allocation and (3) stock selection.

Asset allocation refers to the process in which investors set targets for how their investment portfolios should be divided across the different asset classes like cash, equities, fixed income, commodities, etc. In this aspect, the portfolio only holds cash and equities.

Industry allocation similarly refers to the process in which investors set targets for how their investment portfolios should be divided across the different industries like financials, consumer services, industrials, etc. The portfolio takes into consideration the weightage of the various industry components to the STI.

Stock selection refers to the process in which investors set targets for how their investment portfolios should be divided across the different stocks within each industry. [ie. whether and how much to invest in each of DBS, UOB and OCBC within the financials>banking industry] The portfolio takes into consideration the weightage of the constituent stocks within the industry components but it is not restricted from investing in non-constituent stocks, if there is attractive value.

The portfolio conceptually uses relative value strategy or commonly known as long-short strategy. This strategy was introduced by hedge fund managers and currently is widely used by mainstream fund managers. The relative value strategy is a low-risk, non-directional market-neutral investment strategy that exploits pricing discrepancies between a pair of related securities or industries. Fund managers go long on the undervalued security or industry and go short on the overvalued security or industry. [eg. within the financials>real estate developer industry, go long on Hong Kong Land which is undervalued and go short on Yanlord Land which is overvalued]

When Is The NUS Invest Virtual Portfolio Starting?
A meeting was convened on 28 Oct 2008 where NUS Invest Exco members collectively formulated the portfolio’s initial stockholdings in a top-down process of (1) asset allocation, (2) industry allocation and (3) stock selection.

The portfolio inception date (start date) is targeted to be 3 Nov 2008 (Monday). Monthly performance of the portfolio will be tracked and posted online at the NUS Invest official website. More details will be released via the NUS Invest newsletter, so do stay tuned.

DISCLOSURES & DISCLAIMERS

1.     This research material has been prepared by NUS Invest.

2.     NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest.

3.     The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material.

4.     Nothing in this research material constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

5.     No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice.