index investing using SMA

Let's consider 3 methods of investing based on market indices.

We use the 3 years' chart as of Oct 9, 2011 (approximate values used). 14 market indices are used.

A - buy an index when its 30 week simple moving average (SMA) crosses above the 50 week SMA and sell the index when the opposite occurs

B - buy an index when its 50 day SMA crosses above the 200 day SMA and sell the index when the opposite occurs

C - buy an index when its 50 day SMA crosses above the 200 day SMA and sell the index when the opposite occurs but with the 200d SMA turning down

Our benchmark is D, the three year return as of Oct 2011 (approximate).

We see that method B & C have the superior performance compared to A (in green). However both underperform the benchmark for 10 indices (in yellow). This is especially for the emerging markets.

However if we took 4 years instead of 3 years, the results might have been very different. Each method would probably have outperformed the benchmark since they would have avoided the bear market of 2008.

Using method B & C would yield about 10% per annum (including US) over a 3 year period. 4 markets (ASX, TW, Hang Seng and Shanghai) return less than 6% per year! 

Note that if we managed to buy at the exact low and sell at the exact high (our holy grail!) would have return at least 30% per year for most of the markets.

Someone (I forgot who) recommended selling stocks (distribute) when the 30w SMA is below the 50w SMA while buying stocks (accumulate) when the opposite occurs. Based on the results above, I think using the faster moving 50d and 200d SMA would perform slightly better.

However I would also think that selling and buying gradually in such a manner would risk being equivalent to selling and then buying back at the same levels (e.g. sell at 1000, 800, 600 then buy at 600, 800 and 1000.) especially if the index moved sideways in the longer term.

Better of course would be sell mostly in the beginning of the bear and buy mostly at the start of the bull (based on the SMA). The risk to this would be too short bull and bear duration or sideways market in which case the commission will be costly. 

ICAP Investor Day 2011

icapital.biz held the Investor Day 2011 in conjunction with its AGM  at the KL Convention Center. I share some takeways from the talks from the captains of the industry.

(Too bad I didn't have my DSLR with me, otherwise I can post some pictures. Anyone care to donate their unwanted handphone camera to me?)

Ex-CEO of F&N Dato Tan Ang Meng:
- the 4 largest beverage manufacturers in Malaysia now are F&N, Permanis, Coca-Cola and Yeo Hiap Seng (in descending order.)
- carbonated drinks margin is highest at 15% compared to others (Asian drinks, juice) but its market share is going down especially in developed countries (for health awareness reasons) but it still has growth potential in developing countries like China and India
- Japan (Asahi, Suntory, Sapporo, Kirin) is expanding overseas due to their demographics (older population lesser consumption)
- status quo will remain for the moment for Permanis before Asahi starts introducing new products  
F&N 100 plus is a large contributor to its revenue while its condensed milk sales are resilient (thanks to teh tarik stalls)
- values F&N at $7.3b (based on Permanis acquisition) but he thinks Permanis was overvalued while F&N is slightly undervalued due to the pessimism over losing its Coke licensing
- Coca-Cola (just went its own way here) is seen as a threat but will be struggling in the next few years, which is an opportunity for F&N to capitalize on with its large distribution network
- YHS is a good takeover target

CFO of Petronas Dagangan Rozaini Musa:
-  Petdag is #1 in the commercial (supplying to airplanes, industries) and LPG (cooking gas)segment and #2 in retail (petrol stations, after Shell) and lubricants.
- retail still has room to expand while there are plans to expand abroad to Thailand and Indonesia
starting to sell LPG through petrol stations


CEO of Malaysia Smelting Corporation Dato Seri Mohd Ajib Anuar ("The tin man"):
- MSC is the 2nd largest tin metal supplier in the world
- tin is mostly used in electronics at the moment (for soldering) besides tin plates for packaging but has also many other uses and is non toxic
- price volatility is due to its securatization leading to speculative activities
- for smeltering, earnings are on a cost plus basis while for mining it is correlated to the price of tin itself
- US used to keep a large stockpile but now not anymore
- MSC losses in 2010 was due to divestment of its non-tin assets causing impairment
- MSC now intends to focus on tin only, thus earnings will be more stable going forward and plans to develop new mines abroad

As for Tan Teng Boo's view:
- he is bearish on 2H2011 since early part of the year
- although there may be another global recession, which will be worst than in 2008, global economic  depression is unlikely due to the growth of emerging markets (none in 1930s)
-  problem is worst now compared to 2008 because governments of developed nations have run out of policy tools (interest rates are near 0%) while developing nations are suffering from high inflation
- Malaysian economic outlook in the long term depends a lot on whether the promised economic reforms will take place


Padini held a fashion show with many pretty, slim models. If I could bring home that tall, long haired Eastern European (?) girl, now that would be a fantastic takeway :P

ICAP AGM 2011

icapital.biz held its FY2011 AGM yesterday at the KL Convention Center. icapital.biz is a closed end fund of Malaysian stocks managed by Tan Teng Boo.

This year's main issue during the AGM was whether buy back shares of the company due to its persistent undervaluation by the market since the global financial crisis (it has been trading at a discount of around 20% to its nett asset value.) As  Warren Buffett has announced that Berkshire Hathaway intends to buy back shares for the first time in its history, icap has also been evaluating this.

The investors were given a presentation of the pros and cons of a buyback. From their  analysis, a share buyback followed by cancellation of the shares will only have at most a 2% effect of increasing its NAV. In Malaysia, the maximum amount of share buyback is 10% of the shares. A share buyback may temporarily reduce the fund's undervaluation but there is no guarantee that this effect will be long-lasting since the buyback is a one time event. This has been proved by some case studies research in the US.

The other option would be to sell the shares later after the price goes up. This is not good either but I forgot what was their reason (because I did not take notes)... I think it was because this action is unfair to the long term investors in the fund. Maybe it is like giving some of the cash to those who want to opt out of the fund later at the expense of others. Also, the anticipation that the shares will be sold later will depress the price of the fund. To me, it doesn't seem ethical for the fund to do so, as it would penalize those who sold at below NAV either out of desperation or ignorance.

But then, if done at a continued basis, it could serve as a stabilizer to ensure the fund always trades near its NAV. Imagine such a policy being announced, then on the next trading day nobody would sell at below NAV (assuming everybody was well informed). The only sellers are the traders who think the price will go down more. Similarly nobody would sell above NAV except traders. This however may be impractical due to the 10% limit. And maybe it will lead to potential manipulation?

A share buyback will reduce the cash balance of the fund (by about $30m to $85m, my estimate based on its annual report.) That will reduce the ammunition the fund has to buy some cheap undervalued stocks when the opportunity arrives. This is the option preferred by the fund manager.      

The fund's analyst (all their analysts sound and look like fresh university graduates) also highlighted the difference between a company and closed end fund share buyback. If a company buys back all its shares, its taking itself private but its business still continues to generate profit for the company. When a closed end fund buys back shares, it is amounting to liquidating itself.

As a comparison, Berkshire has traded at a premium which has reduced over the years until now it is near 1.1x NAV. Warren Buffett recently announced they will buy back shares at below 1.1x NAV. No one seems to be sure of his reasons, perhaps he is just trying to signal his confidence in the US economy. 

The other issue, which always crops up, is the request to pay dividends. The manager says a firm no to this as it is against the fund's original objective.

To be noted, local retail investors have been selling the fund (based on the decreasing number of shareholders) but some foreign investor have been buying in the past year. 5 foreign investors are among the top 30 largest shareholders.

Well, whatever action taken it depends on the objective. If you want to cash out, then you would want the fund to buy back so you can sell at close to the NAV (or you hope many new investors will come in so that the discount starts decreasing). If you believe in long term capital appreciation, which is the objective of the fund, then you prefer the fund use its cash to buy more undervalued stocks later (and you buy more of the fund while its at a discount). If you want to wait and see, then you wait for the fund to trade at a premium and then consider selling (but when that happens, you'll probably hesitate, right :P)