Media Release - Official launch of “Fulcrum” Portfolios on 1 June 2009

Sound bite

· The team which pioneered the no-front load wrap account for unit trusts in 2000, now brings wrap accounts for exchange traded funds (ETFs) listed around the world – Fulcrum. The ETFs within Fulcrum allow the investor to go long and short in equities, fixed income, commodities etc. Fulcrum allows the individual investor to invest like a hedge fund but with transparency, control and low cost. Indeed, large hedge funds frequently use ETFs to move in and out of global markets, whether going long or short.

· Fulcrum is an innovation which brings portfolio management choice to the investor, especially those seeking to avoid the costs of active managers embedded in unit trusts. Fulcrum is at the forefront of change in Singapore. A change which has already swept through the developed markets, especially the US – investors and advisers increasingly turning to ETFs to manage and diversify portfolios. Currently, ¼ of the trades on the NYSE are related to ETFs.

What is Fulcrum?

· Fulcrum is a unique portfolio advisory and management service from New Independent, with the goal of achieving absolute returns regardless of market direction, at low total portfolio management costs. Driven by global macroeconomic considerations, Fulcrum portfolios will have the flexibility of investing long and short in equities, fixed income, commodities and currencies globally.

· This will be done by utilizing primarily more than 1000 ETFs exchange traded funds (ETFs) traded on 22 exchanges around the world, but through one consolidated internet-based account. The internet dealing platform is provided by Saxo Capital Markets, a subsidiary of Saxo Bank, Denmark. Saxo Bank has won numerous awards for its internet dealing platform.

· ETFs permit us to go long and short efficiently whilst automatically achieving diversification and avoiding single-stock risks. Yet, whilst permitting the investor to avoid single-stock risks, it allows the investor to pursue targeted sectors as opportune.

· The lower expense ratios of ETFs, as low as 0.15% annually, means investors could save more than 1% per annum versus unit trusts, should they wish to do away with active security selection. ETFs have lower expense ratios because of the absence of active security selection effort that is embedded in unit trusts. Active management of Fulcrum is primarily at the asset allocation level.

· Absolute returns regardless of market direction will be achieved by combining and diversifying among long and short (also called inverse) ETFs.

Why Fulcrum?

· In the medium term, we are expecting the global economy to resume growth by the end of 2009 on the back of the huge stimuli implemented by authorities globally. In this reflationary play, corporate bonds, equities and hard assets will perform well.

· Nonetheless, the monetary stimuli by central banks worldwide are a key inflationary concern in the longer term. Eventually, they would need to be withdrawn – interest rates must eventually be ratcheted up once the economic recovery gains traction.

· This, inevitably, will lead to volatility in global markets as the adjustment takes place – creating opportunities on the short side as well e.g. shorting US treasuries through an ETF has already been very profitable. Unlike a long-only unit trust portfolio, Fulcrum will allow us to exploit this eventuality.

· In the longer-term, Fulcrum combines two important key investing trends which investors and industry cannot ignore:

1. ETFs (diversification at the lowest possible costs) and

2. Alternative investing strategies (flexibility to profit in up and down markets e.g. US treasuries currently).

· Again, within the universe of alternative investing strategies, Fulcrum will focus on historically the most successful of these strategies – global macro strategies.

· Herein, New Independent is uniquely positioned to help clients. Global asset allocation has been the focus of our investment advice to our clients in the past seven years since the founding of the firm. In our long-only portfolios, our model portfolios have outperformed their benchmarks. Much of our advice on global asset allocation has been published, a sampling of which can be found on our website at: http://www.ni.com.sg/our_media_release.asp

· Fulcrum allows the investor the flexibility to invest like a hedge fund but at low cost and with real-time transparency. Fulcrum allows the individual investor the investment scope of large institutions without the need to have very large portfolios and outlays.

· Portfolio theory and practice show we can eliminate specific risk of individual securities by diversifying broadly, thus only having exposure to market risk i.e. the ups and downs of the market in general. Market risk, which is the bane of investors seeking absolute returns, cannot be diversified away in a long-only portfolio. Fulcrum will allow us to minimize and even profit from market risk because of the flexibility to go short.

An Illustration

· At any one time, Fulcrum will be constructed around a variety of strategies. These strategies will be derived from the investment climate and outlook around the world. The following is an example of one such strategy.

· At the beginning of 2008, the outlook was poor for the US but a benign one for the rest of the world. Reflecting this, the US dollar was weakening but US exports were growing because the rest of the world was still prosperous. Overall equity valuations in the rest of the world were not expensive.

· One would therefore expect equities ex-USA to outperform US equities but US government bonds to do well. A typical strategy congruent with this outlook would be to invest in a global equity ETF but short (or eliminate) the US exposure by investing in an inverse US equity ETF. Exposure to US government bonds would be through a US Treasury ETF with a maturity of around 5 years which would be relatively stable. Therefore the strategy would have been translated into 3 ETFs:

1. iShares S&P Global 100 Index (IOO) – 45% of portfolio

2. Short S&P500 ProShares (SH) – 25% of portfolio

3. iShares Barclays 3-7 Year Treasury Bond (IEI) – 30% of portfolio

· Such a construction would position the portfolio for equity upside but provide protection on the downside. The accompanying charts show how things worked out over a 12-month period. Despite the most horrendous year for global equities since the 1930s, the simple 3-ETF portfolio would have lost only 1.8% at the end of 2008.

Fulcrum service choices

· Under Fulcrum three different service choices are available:

A. Discretionary portfolio management (only Accredited Investors) – Fulcrum discretionary wrap accounts (FuD)

B. Investment advisory based on recommended portfolio – Fulcrum advisory wrap accounts (FuA)

C. Investment advisory based on client trading needs – Fulcrum non-wrap accounts (FuN)

· For Service A and B, the recommended portfolios will be structured as absolute return portfolios, with short positions when opportune.

· Service C would be not dissimilar to what a stock broker provides over the phone buying and selling stocks. The advantage is that clients can access not only SGX but 21 other exchanges world-wide.

Risks

· The Fulcrum Portfolio would have a moderately aggressive profile. The target long term mix will be 85% equities and commodity ETFs and 15% fixed income (which would include cash and currency hedging ETFs).

· Currency hedging would be part of fixed income as it serves to offset currency swings on the value of the overall portfolio. For example, we may be bullish on US Treasuries but negative on the value of the USD. This view would be expressed within Fulcrum by buying into a US Treasury ETF and buying into an inverse ETF that would appreciate in value as the US dollar falls against a basket of international currencies. For example, the PowerShares DB US Dollar Index Bearish ETF is an effective way to benefit from a falling US dollar.

· However, Fulcrum could go as low as 0% or as high as 140% (using leveraged equity ETFs) in equities as the opportunities present themselves in markets. The apparent higher volatility would be mitigated with the greater flexibility of mandate – thus, reducing overall portfolio risk.

Account size

· The portfolios would be denominated in USD although our advice and management would target the Singapore dollar based investor i.e. hedging and investing strategies would revolve around the value of the SGD. Denomination in USD is to provide a common-baseline convenience for expressing the value of the portfolio as assets could be acquired across multiple currencies.

· For discretionary portfolio management, the minimum would be US$700,000 (circa S$1 million).

· For non-discretionary investment advisory based on Fulcrum, the minimum would be US$70,000 (circa S$100,000).

· For investment advisory based on client trading needs, the preferred minimum account size would be US$20,000 (circa S$30,000).

Fulcrum Asset Allocation

· In principle, Fulcrum’s non-fixed income ETF strategic and tactical (+) asset allocation as a percentage of the overall portfolio would be as follows:

1. Globally diversified - 15% + 10%

2. Region and country – 40% + 25%

3. Sectors, commodities and short positions – 30% + 20%

· The strategic asset allocation (SAA) of a portfolio is the long-term asset allocation in accordance with the client’s investment risk appetite. The + swings in the strategic asset allocation would be the tactical swings dictated by the different phases of the business cycle. Tactical AA is derived by insights driven by medium-term global economic and political developments and trends e.g. inflation, productivity, corporate profitability, demographics etc.

Target Returns

· The annual absolute return target on Fulcrum would be 11.5% per annum in USD. This would be approximately 10% per annum in SGD. The goal is to achieve this regardless of market direction. An essential part of achieving this goal is the flexibility of going short.

The writer is CEO of financial adviser New Independent. He welcomes feedback at : josephchong@ni.com.sg

This article is for information only. Readers should seek independent advice before making any investment decisions