Individual REITs: worth my while?

REIT: Real estate investment trust.

No, it is not.

Why – Two Reasons

Singaporean REITs (S-REITs) operate via the externally managed model. This could mean a conflict of interest between the management and investors. The conflict could occur because managers earn more fees by seeking out more capital injections and expanding the business for instance. This could result in weaker performance or shareholder dilution. However, Goola Warden opined that S-REITs fees are mostly in line with investor interests; further some REITs pay their managers fees in REIT units/shares, which also syncs manager and investor interests. (Attracted by fees, foreign sponsors continue to list, boosting SGX’s position as global REIT hub. 22 Jul 2019. The Edge Singapore).

Dilution occurs when a company issues new stock which results in a decrease of an existing stockholder’s ownership percentage of that company.

Reviewed by Akhilesh Ganti. (updated Mar 29, 2019). Dilution. Investopedia. 

…there are good reasons why companies will dilute. Some of the really common ones are, for example, to pay for an acquisition. Sometimes it’s to raise money. Maybe you need that to service your debt, or something like that. Another really common reason why shares become diluted is the conversion of stock options granted to employees or board members. A bunch of companies will give their executives, or their employees in general, the option to convert these securities into common shares. And when they actually do exercise that option, it dilutes the current shareholder base…

…It’s largely a bad thing. Most people are not pleased when they hear that they’re being diluted. But it actually could be a good thing, which is kind of an interesting case. Say, for example, your company is overvalued, and you know it… and the company goes to pay for an acquisition using stock. That’s smarter than doing that using cash, because the shares are worth more than the cash value. At that point, you could be very happy to see that, because this slice of pie that you have accumulated is suddenly a bigger pie. It’s cut up more ways, but the pie is bigger, so that’s a good thing. But in general, it’s not the best. Many times, you can perceive it as a transfer of wealth from the retail investor to the insiders, when you have the exercise of stock options.

Motley Fool Staff. (Nov 27, 2016 at 8:23AM). What Is Shareholder Dilution? The Motley Fool. 

In addition, Warden refers to the “plethora of fees that REIT managers charge”. So to reduce investing complexity (read: headaches), I reckon it best to skip investing in individual REITs altogether.

MF Global (brokerage) – $ Lessons

What did MF Global do? MF Global (MFGLQ) traces its roots back to a sugar trading business founded in 1783. For most of its recent history, the firm operated as a “futures commission merchant,” brokering trades in the commodities market.

Farmers and other participants in these markets post collateral to their accounts with firms like MF Global in order to secure futures contracts allowing them to buy or sell a certain product in the future at a predetermined time and price, insulating them from the volatility of the markets. Traders also use the futures market to make money by speculating on commodities prices.

In more recent years, this business became less profitable for MF Global, and in 2010, the board installed former New Jersey governor and senator Jon Corzine as CEO in order to revitalize the firm.

Corzine’s plan was to remake MF Global into a “broker-dealer” that traded with its own money and also provided underwriting and advisory services, similar to Goldman Sachs (GS, Fortune 500), where he was once CEO. This business evolved alongside the traditional futures commission merchant arm of the firm.

How did things fall apart so quickly? Anxious to take MF Global to the ranks of Wall Street’s elite, Corzine pushed the firm to borrow money and take on big bets on European government debt.

MF Global didn’t actually lose money on these bets themselves — none of the governments whose debt it held have defaulted, and all the firm’s bonds were set to mature before 2013. But these risky positions — and the leverage used to take them on — sparked a panic among investors when they came to public attention in October.

MF Global’s warning bells
In essence, MF Global was felled by a classic “run on the bank” — as news of its risky bets spread, trading partners called for increased margin payments and clients took their business elsewhere, leaving the firm scrambling for cash to make good on its obligations.

Corzine eventually attempted to sell MF Global, but a potential deal was scuttled by the discovery that hundreds of millions worth of customer money, mostly from commodities trading accounts, was unaccounted for. This revelation forced the firm to file for bankruptcy on Oct. 31.

Where’s the missing money, and were laws broken? While MF Global’s bankruptcy filing was the eighth-largest in U.S. history, the real controversy over the past few weeks has been the missing customer money.

In the commodities market, customer funds entrusted to firms like MF Global are supposed to be sacrosanct, protected even in the event of a bankruptcy. A firm can invest these funds for its own purposes, but only provided that it puts safe forms of collateral in place, such as U.S. government bonds, to keep the value of accounts whole.

If these procedures aren’t followed, the use of customer funds for a firm’s own purposes is a serious violation of industry rules that may also carry criminal liability. The trustee overseeing the brokerage’s liquidation says more than $1.2 billion in customer funds from roughly 38,000 accounts remains missing.

The MF Global money chase
Exchange operator CME Group (CME) says MF Global employees have admitted to CME staff that the firm tapped at least $700 million worth of these funds for its own use in the week before its bankruptcy, apparently without the proper collateral in place. CME head Terry Duffy has also accused MF Global of falsifying its account statements to conceal the shortfall, and claims Corzine knew of at least some transfers from customer accounts…

Sorting through the MF Global debacle. James O’Toole @CNNMoney. December 19, 2011: 8:57 AM ET.

What you can do to prevent such trauma

… several investment advisers who now tell their clients to do extensive research on any firm where they’re planning on putting their money. But one piece of advice they now give is an old one: don’t put all your eggs in one basket.

Lessons for Investors in MF Global’s Collapse. Bucks Editors. Nov 25, 2011 5:51 PM. The New York Times.

A former investor in the defunct MF Global Singapore has recovered most of the $270,000 he placed with the brokerage.

Mr Vernon Khoo, who had traded in what are called contracts for difference, feared he would never recover his cash when he found that it had been placed with MF Global Australia during the trading process. He thought his funds were kept in Singapore in segregated accounts.

MF Global had about 7,000 customers when it went under on Nov 1, 2011, in the wake of the bankruptcy of its United States-based parent MF Global Holdings…

…full recovery was made possible after the liquidators negotiated for the return of customer funds from the bankrupt parent’s affiliates.

In addition, more than 250 unsecured creditors, including 80 employees in Singapore, and trade creditors, who are owed a total of US$63 million, could recover 100 per cent of their claims. Previously, they could expect to get back only 91.6 cents to the dollar at best…

Mr Khoo, who is awaiting his final payment of $32,000, said he has learnt to control the amount he places with a brokerage house.

“If the largest brokerage in the world can close overnight, it is quite scary,” he said. “Overall, my open positions closed in the money. I started getting paid in 2012, and have been getting payments over the past few years.”

Grace Leong. MF Global clients to get funds back. Mar 8, 2016, 5:00 AM SGT. The Straits Times. Singapore.

See also:

  • MF Global chief Jon Corzine ordered overdraft to be cleared with client funds. Anna White. 10:31PM GMT 23 Mar 2012. The Telegraph. UK.
  • What The Sad Saga Of MF Global Teaches Us To Do Differently. Hersh Shefrin. Jan 7, 2017, 08:00am. Forbes.

Cartoon Learning & Thinking

Recently I used 5 cartoons to provide an overview of the Cold War (for General Paper/Singapore GCE A Level syllabus i.e. pre-university). This was a first for me. (Earlier I also experimented with ‘This Day in History’ to induce learners’ interest, in other words, it was to capture or hook class attention before entering the main topic).

By way of reflection, I read (before class) and re-read (after class) That’s Funny: Political Cartoons in the Classroom by Thomas DeVere Wolsey [Teaching Visual Literacy. (2008). Corwin Press. Chapter 6]. This post records my notes and thoughts.

(p. 117) Wolsey begins expounding on Cartoon Thinking (paraphrased where possible)

  • Look at all the details from the cartoon, as far as possible
  • Link to existing knowledge on the subject/topic
    • (p. 120) Where students lack the background knowledge to recognise, say a figure in the cartoon, the teacher should give a direct answer.
  • Infer (guess) the causes and effects
    • (p. 120-121) Teachers may need to inject questions about the arrangement of the cartoon characters, their size, the word/thought bubbles etc.
  • Create “personal connections”
    • (p.122) Encourage students to produce their own questions that fuse the themes in the cartoon to their present concerns; this builds in depth learning.
  • Use (other) evidence to buttress the inference (guessing)
    • (p.122) Consider showing similar cartoons by the same artist (thus additional cartoon exposure is one cure: and I agree!)

I believe alternatively that we could use cartoons that contradict the initial cartoon to activate discussion.

Previously, I had also used one cartoonist biography to spark learning.

(p. 123) Based on a 7 Jan 2006 interview with Social Studies teacher John Little, with time students become more competent at cartoon analysis and gain more joy from it. They likewise become more inclined to view the news to aid their cartoon discussions in class. Hence, information gathering remains vital (and unsurprisingly so).

See also:

Lee Edwards and Elizabeth Edwards Spalding. (2016). A Brief History of the Cold War. Regnery Publishing.