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Investing out of the box

29 - 05 - 2016 | Lorna Tan | The Straits Times

Most of us are familiar with the asset classes of cash, stocks and bonds. Outside these conventional assets is a whole universe of alternative vehicles (alternatives) which include tangible assets such as art, antiques, coins, wine and forestry, as well as financial ones like hedge funds, commodities, private equity and derivatives.

Most alternatives are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity.

They usually perform with low correlation to stocks and bonds, which explains why pensions and private endowment funds may allocate a small portion of their portfolios to alternative investments such as hedge funds.

In addition, alternatives improve diversification, which is useful in avoiding losses during more volatile market phases.

Within alternatives, do note that there are regulated and non-regulated ones.

Most financial experts would caution that alternative investment in unregulated products is not for the layman. This is because investors will forgo the protection afforded under the laws administered by the Monetary Authority of Singapore (MAS).

Investments outside the jurisdiction are all the more complicated because you then have to consider the legal systems operating in the country in which the investment is made, whether you understand them and whether they give you adequate protection.

Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his own direct stake in the asset, such as a small plot in a large tract of land or even specific trees on a plot of land.

Despite the risks involved and partly due to the lacklustre performance of traditional investment assets, investors continue to rush into alternatives that are accompanied by potentially beefier financial returns.

But no matter how exotic and attractive the investment is, you should still do your due diligence.

For instance, find out if the company has a good reputation of running the business.

What are your investment objectives, horizon and risk tolerance? What is your means of recourse if the investment goes bust?

The Sunday Times highlights three non-regulated alternatives.

AGARWOOD AND OUD OIL

Agarwood is a dark resinous wood found in Aquilaria trees which is highly prized and sold worldwide. Popular by-products include oud oil, incense, beads, handicrafts and other precious artefacts.

In the wild, agarwood is formed after the tree has been attacked by a fungal infection or physically harmed by wild animals or lightning. However, the infection has only a 1 per cent to 7 per cent chance of occurring, and when it does, the dark resin can take 50 to 100 years to form in the trunk, branch and roots, said former forex trader Benjamin Song, who set up One Plantation Capital (OPC) in 2014.

That means finding naturally produced agarwood is extremely rare. So, OPC inoculates mature trees - which it leases or bought from plantations in Cambodia and Laos - that are at least five years old to ensure the production of the agarwood.

Firms offering such investments, such as Asia Plantation Singapore and Tropical Forest Venture (TFV), have sprouted in Singapore. The former has been placed on the MAS alert list while TFV investors have filed police reports after the firm folded.

How it works:

The earlier agarwood investments provide investors with saplings that require a waiting period of up to seven years before profits are seen.

An investor paid about $230 per sapling or $550 per semi-mature tree. In return, he could expect potential returns of three to seven times when the saplings matured in six to seven years.

At OPC, the minimum investment amount is $10,000 for 10 semi-mature aquilaria trees. The firm then inoculates and manages the trees for 31/2 years before harvesting them. OPC will assist to sell the trees at $1,700 each, which means investors receive $17,000 for a $10,000 investment or 170 per cent total returns.

OPC offers an insurance cover - 130 per cent of the purchase price - which protects its investors in case of default. The performance insurance bond is a blanket (rather than an individual plan) cover whereby OPC is the insured and its corporate and individual investors are the beneficiaries, according to Mr Song.

Arranged by Hong Kong-based insurance broker SAG Brokers, the insurance is from Indonesian insurer Asuransi Asei. The insurance applicant is another entity, Malaysia-based Gold Assurance Asset Management Company.


CROWDFUNDING

Crowdfunding, or peer-to-peer lending, refers to a process, usually via an online platform, where people who need money can meet those who have it. It involves raising money from many people looking for ways to earn interest on their savings, to fund a business project or venture.

Crowdfunding has grown in popularity in recent years, mainly fuelled by the tightening in lending criteria of traditional lending sources during the global financial crisis.

Over the past year or so, crowdfunding platforms of various sorts have mushroomed in Singapore.

There are at least 13 companies with a presence here - from more recognised names such as MoolahSense, CapitalMatch and CoAssets, to newcomers like EziFund, a real estate crowdfunding platform which made its debut last month.

For now, the MAS regulates only securities-based crowdfunding platforms, which have to obtain a Capital Markets Services licence in order to operate here and service mostly accredited investors.

Crowdfunding platforms such as MoolahSense and Funding Societies do not come under regulation, and are open to the wider public.

How it works:

Typically, a company puts out a sum that it needs to borrow, and the platform, after carrying out its own screening process, lists the request as a campaign. The firm also states what it is willing to pay in interest.

Investors sign up and state how much they are willing to lend and what they expect to be paid.

The campaign ends when enough investors have pledged their cash, which gets transferred to the company. The firm then repays the investors through fixed monthly payouts.

For investors, it is a great way of generating yield on small amounts, as little as $100 a pop. Interest rates typically hit anywhere between 10 per cent and 15 per cent, and the tenure of the loan tends to be short, as little as six months.

For firms, they do not necessarily pay cheaper interest rates but it may mean easier access to funding.

Investors should note there is no guarantee loans will be returned. Many firms using crowdfunding sites tend to be small, and even some of the bigger names may not be in the best of financial health.


LANDBANKING

Landbanking involves firms buying large plots and subdividing them into smaller parcels, making it easier to sell to investors as they can be priced at affordable levels.

How it works

Firms typically sell undeveloped plots, usually rural land overseas, which could potentially be sold later for a profit.

Investors are often told the land is on the outskirts of a city where urban development is likely.

When development plans are drawn up, investors can then sell their plots to developers willing to pay higher prices for the land.

It looks a winner, yet the pitfalls are plenty as many who had invested in Singapore-based Profitable Group would attest.

The firm had offered investors an opportunity to invest in plots of land in the United Kingdom, luring them with promises of a fixed 12.5 per cent return within six months. Two directors of Profitable Plots have been jailed for a total of 15 years for cheating investors.

Despite the bad publicity, some people have profited from their landbanking investments, albeit usually after a long wait.

Recently, the Walton group of companies - which focuses on land in North America - went a step further and made its investment products syariah-compliant.

This is done through endorsement by the Financial Syariah Advisory and Consultancy. Pergas Investment Holdings assisted in this as it has a dedicated advisory focusing on structuring investments to align with syariah principles.

Mr Gary Tom, president Asia of Walton International Group, said it is a significant initiative as some of the clients are Muslims who can now be assured the products are syariah-compliant. It also provides an opportunity for Walton to offer the products in the Middle East.

The minimum investment at Walton is US$10,000 (S$13,800) per unit and the size of the land varies depending on the properties or projects.

For Walton pre-development land investment's fully exited projects, the weighted average internal rate of return is 12.32 per cent, and the returns ranged from 4.75 per cent to 28.51 per cent. To date, the average duration of fully exited projects is 8.71 years, with a range ofabout two to 19 years.

Walton has more than 42,000 customers in Asia, of which over 21,000 are from Singapore.


Proposed rules to protect investors

The MAS has said that it will be regulating investment schemes such as gold buybacks and collective landbanking. The proposed changes are expected to be tabled in Parliament this year.

The proposed regulation covers collectively managed investment schemes that are in substance similar to traditional regulated investment funds such as mutual funds but do not pool investors' contributions.

Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his own direct stake in the asset, such as a small plot in a large tract of land or even specific trees on a plot of land.

If investors do not have day-to-day control of the property and the scheme is managed as a whole like a collective investment scheme, it is likely to fall under the proposed MAS regulation.

Under the proposed rules, some schemes may no longer solicit funds from the public but can do so only from investors who are deemed more sophisticated.

A full assessment of how a scheme is operated will need to be done in order to determine if it would likely fall within the proposed MAS regulation.

In addition, the authorities are looking at more regulations in the crowdfunding space.

INVESTOR ALERT LIST

Meanwhile, the MAS investor alert list provides a listing of unregulated entities that may have been wrongly perceived as being licensed or authorised. The central bank assesses public feedback such as consumer complaints as well as documentary evidence on the entity before placing it on the list.

The list, which can be found on the MAS and MoneySense websites, acts as an early warning alert to investors. It is not exhaustive and is periodically updated. The fact that a company is not listed does not mean that it is credible.

So consumers must exercise caution when dealing with all unregulated entities, not just those listed.

The list includes such firms as Efzinitus Capital, which offered an investment scheme with monthly returns of 8 per cent, Shenton Wealth Holdings, Shenton Holdings and Singliworld.

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