Scam - Profitable Plots

The world is full of traps.  There are even trap waiting for the unaware when you are watching English Premier League on TV.

Previously I subscribed to Football Channel when Starhub still carried English Premier League.  During half times, the viewers were bombarded by a Profitable Plots commercial, urging viewers to "Buy UK land" and projecting astronomical returns for investors.  Profitable Plots was a land banking firm set up in 2004 by 4 British expatriates and a Singaporean.

The TV commercial was done by some of the famous names in football, including Bryan Robson, Steve McMahon, etc.  Beside the commercial on cable TV Football Channel, Profitable Plots also held roadshows at major shopping malls and also was one of the sponsors for Liverpool Football Club when they visited Singapore.
 
The scheme "Buy UK land" basically means you invest in plot(s) of land in UK, then wait a few years for the land to appreciate.  The locations were marketed as being in prime positions (plots of land near Heathrow Airport) for development and would quickly appreciate in value.  When a developer purchases your plot of land for development, you could then reap profits from the sales of land.  The company claimed returns can be as much as 300% in 3-5 yrs times.

One day our group of friends stayed at the bar "overtime" after a premier league game and discussed whether it is good to invest into Profitable Plots?

Some said Profitable Plots must be legitimate as they have been advertising extensively on cable TV football channel and doing multiple roadshows at major shopping malls.

Some said Profitable Plots must be reputable as such famous names in football are representing and advertising for them.

Some of us, including me, who had less beer and were still level-leaded, were against investing into Profitable Plots.  The reasons were:

1. Profitable Plots claimed the plot of lands being in prime areas for development.  But we can't verify it.  For all we know, the plots may be swamp-land, forested-land, wasteland, cemetery, "ulu" or off the beaten track places, etc, that will never see development. 

2. The plots of lands are in UK.  It is very difficult to monitor and check development status.

3. Similarly, in event that Profitable Plots goes into bankruptcy or defaults on repayment on our investment, it will be very difficult for investors to reclaim capital.

After our discussion, none of us invested into Profitable Plots.

Later, it was finally found out that Profitable Plots was one big scam.

Instead of prime position lands, in reality, investors were putting their money into plots located on farmland, in the Green Belt, within an Area of Outstanding Natural Beauty or on the sides of hills.  These lands have no chance for development.

Sadly, an estimated 1,000 Singaporeans and 4,000 foreigners had invested with Profitable Plots.

Scam - Sunshine Empire

While looking for passive income streams, I had a close encounter with Sunshine Empire and its "MLM" (Multi-Level Marketing) products.

I stayed in Toa Payoh then and on one fine day at HDB Hub, I saw a grand new office/company.  Looking into Sunshine Empire's office to check what they are selling, I was invited in by a sales person for product presentation.

I could not remember the product details now, but I remember in the presentation, we were told that Sunshine Empire had attractive product packages with high rates of return.  I remember a "Silver Product" and a "Gold Product" that enables a investor to recoup his investment within 1 year.

The minimum investment was $12K, and the investor gets $1000 back every month, and this monthly payout continues for the next 8 years.

Also, I was told that Sunshine Empire was not just an MLM company.  They are also developing theme parks and underwater hotels (Wow!) in Malaysia and Asia.  The high returns were generated from these investments and businesses.

We were also asked to introduced family members and friends, so that we can enjoy rebates on the products that we purchased.

I did not want to purchase their investment products on the spot and told them I would go home and "think about it".

After going home, I did some research and found that Sunshine Empire was open for business only in 2006.  This is a new company, no history and track record.  I do not even know whether their products are legitimate or not? 

The return on investment (ROI) just sounds too good to be true; and in such cases, usually it would not be true. 

I have decided against investing in Sunshine Empire and my money stayed in the low interest paying Fixed Deposit.

Later, it was found out that Sunshine Empire ran a Ponzi scheme using funds from new investors to pay existing ones.  Using slick marketing and hard-selling technique from a team of well dressed sales people, Sunshine Empire actually amassed up to $180 million from 20,000 people in their 15 months of operation. 

Sunshine Empire's founders were tried and sentenced in court, but the investors have lost their money in this ponzi scheme, some with their life savings.

Lesson learnt -
When investing in any investment scheme, especially those that promised high returns and short investment time, find out the following:
1. Is the investment product legitimate?
2. Is the company subject to regulation?
3. How are the returns generated? From new inflows of funds or from actual investments?
4. When will returns be paid? How much is guaranteed and who is the provider for the guarantee?
5. How long is the period of investment? Are there any penalties for early withdrawal?
6. Any way to monitor the investment’s performance? Any reports?

Still, the best investment plan would be staying out of these abnormally high ROI products.

Unit Trusts

In my early investment days, I have invested in a few counters of unit trust.  I was a newbie then and naively listened to advices given by those bank relationship managers.

Those advices included:
1. Stocks are volatile and not safe
2. You do not have experience or time to actively manage your stock portfolio.
3. Unit trusts are not so volatile and safe, as they invested into high yield bonds and blue chip stocks.
4. Experienced fund managers actively manage the unit trust portfolio.

Those days I thought it was a good deal.  The fixed deposit interest is so low that it cannot beat the inflation rate, and so basically the money is just rotting away inside the FD.

Moreover, I needed to travel frequently then and so have limited time to monitor the stock market.

I have invested into 3 funds, Asia Ex Japan (70%), Pan-European (15%) and a technology fund (15%).  I can't remember those fund names now after more than 10 years has passed.

However, later I discovered it is not really the case for unit trusts as per those advices from bank relationship managers.

Firstly, there is a substantial sales fees.  The investor needs to pay 2-5% sales charge upfront on initial purchase.  Meaning for a capital sum of $10K, you could lose up to $500 even before you make a single cent.

Secondly, there is an annual management fees, typically about 1-2%, which the fund manager get it directly from the unit trust (dividends received from bonds and blue chips).  Irrespective of the unit trust's performance, we need to pay the management fees.  So, in this way, the Passive Income portions from the unit trust investments go to the fund managers.  The unit trust investors just get the capital gains, provided that the unit trust appreciate in unit cost.  Therefore, the investors take all the risks for capital gain, while the fund managers get steady incomes.

Thirdly, unit trusts are not safe harbour at bad times.  They also fell like stones to the bottom of the seas during SARS.  One of my unit trusts fell from $10+ per unit to just $1+ per unit.  I think the most likely cause was a lot of panic selling from investors redeeming that unit trust, and the fund manager has no choice but to sell off the stocks in the unit trust's portfolio even though those stocks were at rock bottom values.  Therefore, a unit trust investor who does not panic and does not want to sell during those crises could only watch helplessly the panic selling off by fellow investors, which drags the unit trust value lower and lower.  And worst, the fund managers do not have fund for opportunity investment into those rock bottom blue chips. 

Fourthly, after the crisis is over and the fund managers receive fresh funds as investors return.  However, the stock market has already rebound and they already missed the boat as the best investment chance is long gone.  Therefore, the upward recovery of unit trusts is slow and always lagged behind recovery of the stock market.

My Asia Ex Japan fund recovered fastest and I sold off all my unit trusts at break even point.

Lesson learnt from this experience:
1. We have to take charge of our own investment.  Nobody care more about your investment than you youself.
2. Unit trusts do not qualified as a viable passive income source for me.

JP Morgan Asia Confidence Notes - Lesson Learnt

We are supposed to diversify our investments, or not putting all eggs into one basket.  This could reduce exposed risk, and in case one investment failed badly, will not affect the overall health of the full portfolio.  Definitely we would not want one bad egg to affect all the eggs in the basket.

However, those toxic structured products that were sold before Lehman Brothers' collapse, although having many component companies in their fund structures, did not work this way.  Just one bad egg (Lehman Brothers) and the whole product failed.

Same with JP Morgan Asia Confidence Notes.  When we invest money into 4 markets, we hope to diversify.  And if one market fared badly, we do not want it to affect the whole investment. 

However, in JP Morgan Asia Confidence Notes's structure, any one market will drag the whole portfolio down.  Since if any one market fall 50%., the trigger event would activate, and does not take into consideration performance of the other 3 markets.

In this way, instead of one chance for failure, we have actually exposure to 4 times chance for failure.

There are just too many factors that would affect the market.  Some we can think of, and some we may not imagine yet.
1. Regional or World-wide financial crisis.
2. Regional conflict (war) that have potential to drag in more and more countries.
3. A superbug that is more virulent than SARS.
4. Freak election that overthrow the Singapore government 

Of course not all structured products are bad, we need careful consideration before investing.  Definitely, purchasing one with your life savings, on the spur of the moment, during a short bank visit is a big no-no.

JP Morgan Asia Confidence Notes (Part 3)

I invested $50K into JP Morgan Asia Confidence Notes in June 2008.  I received the first quarterly payout of $937.50 in September 2008.

Almost immediately after I received my first quarterly payout, in mid September, Lehman Brothers collapsed.  After that event, the global financial market began a period of extreme volatility and all the stock indices fell sharply.

Suddenly, most of the structured products, which were previously promoted and sold as "high returns and low risks" have became hot potatoes and their risks greatly escalated. 

On Sep 18, 2008, The Straits Times reported that a structured product sold by DBS, High Notes 5 - with a promised annual return of about 5 per cent, was at great risk and warned that the investors may lose their entire principal in that Lehman-linked product.

Subsequently, other structured products have fallen one by one.  News received that another DBS structured products - High Notes 2 have fallen and investors may received just about 10% of their principal.

Then, more important to me, the structured products from JP Morgan are failing.  Pinnacle Notes Series 3 has fallen and Series 2 and 6 are also sinking.

Finally, I received a call from my "personal banker" that one of the indices in JP Morgan Asia Confidence Notes has dipped below the 50% barrier, and the "trigger event" may happen on the next observation date.  See attached graph below.

What options do I have?

1. I can hold the product until 2.5 years and hope that the worst index is above the 50% barrier then.  No loss to my principal in such event.

2. I can redeem the product immediately, but will suffer about 20% loss on my principal.

Although option 2 is undesirable, I still need to consider it because if the worst index ends below 50% initial level, I will  lose more than 50% of my invested principal.

At that time, I was on overseas assignment and the second option was not available to me, as I could not sign an agreement for early redrawal.

A small miracle happened for me and other JP Morgan Asia Confidence Notes investors, the worst index climbed back above the 50% barrier at the December observation date.  I received the second quarterly payout of $937.50 in December 2008.

I thought the worst was behind for JP Morgan Asia Confidence Notes, as the indices were rising slowly after Dec 2008.

However, the roller coaster ride was not over.  In February 2009, the indices fell again.  The worst index was teetering close to the 50% barrier as the March 2009 observation date approached.

Another miracle happened at the March observation date.  The worst index was just above the 50% barrier, an even more close shave and narrower escape than at the December observation date.

After March 2009, the worst was really over and all the indices rose slowly and steadily.  There was no more danger at the remaining observation dates.

During the 2.5 years tenure of JP Morgan Asia Confidence Notes, none of the indices ever reach their initial index values. 

I have collected the full 10 quarterly payouts, a total of $9,375 and the full principal of $50K on the product's maturity.

One last note, my "personal banker" did not survive through this crisis and was no longer at the bank when I withdrew my principal when JP Morgan Asia Confidence Notes matured in December 2010.

JP Morgan Asia Confidence Notes (Part 2)

How exactly did JP Morgan Asia Confidence Notes work?  I have thrown away the product brochure.  But I remembered it was something like:

JP Morgan Asia Confidence Notes are tied to Singapore, Malaysia, Thailand and Taiwan stock indices and pay 7.5% p.a. coupon fixed on a quarterly basis, but is callable every quarter.

Scenario 1 : If the indices go above the initial index values

At the quarterly observation date, if all the 4 indices have gone above the initial index values, the bank has the right to "call" the product, i.e., the bank will redeem the product by returning the investors the principal with that quarter's coupon payment.   In more details, the notes would end if the closing levels of all four indices at the observation date - either concurrently or separately on different valuation dates including preceding ones - is higher than their respective initial levels.

For example, at observation date 1, if just Singapore and Malaysia indices are above their initial levels, the notes continue the quarterly payout.  At observation date 2, Thailand and Taiwan indices are above their initial levels, even though Singapore and Malaysia indices have fallen below the initial levels, it would trigger the "call" or "buy-back" event.

Outcome: Investors receive 100% principal, with quarterly payouts until early "call" of the product.

Naturally, investors will not wish for this scenario as they will not receive the full quarterly payouts for 2.5 years, a total of 10 quarterly payouts.

Scenario 2: If the indices stay between 50% and 100% of initial index values

If scenario 1 did not occur, at all quarterly observation dates during the 2.5 years, if all the 4 indices are below the initial index values, and above 50% initial index values, the bank will continue to the quarterly payouts.

Outcome: This is the best case scenario.  Investors receive 100% principal after 2.5 years, with a total of 10 quarterly payouts.

Scenario 3: If any of the indices fall below 50% at observation date

During the 2.5 years, if any one of the indices fell 50% from the initial index value at the quarter observation date, then the trigger event happens.  At this point in time, the product will stop quarterly coupon payment.  Investors do not know their loss, because they need to wait till the end of the 2.5 years to see where does the worst index ends.   

Scenario 3A: If the worst index ends above the initial index value

At the end of the 2.5 years (Final Valuation Date), if the worst index ends above the initial price, then no loss is incurred.  Investors receive 100% principal.

Outcome: Investors receive 100% principal, with quarterly payouts until trigger event.

Scenario 3B: If the worst index ends below the initial index value

If the worst index ends below the initial price, the loss will be the difference between the initial index value and the index value at the end of 2.5 years.  In other words, if worst index is 40% initial value, investors would get 40% principal.

Outcome: Investors receive (Final Index Value / Initial Index Value) x Principal, with quarterly payouts until trigger event.

This would be the worst case scenario, but no chance that the indices would fall to zero.

The next post will talk about how my JP Morgan Asia Confidence Notes actually performed during the 2.5 years. 

I never know that it is going to be a journey on the Knight Bus of Harry Potter tales, where you never quite know what will happen next.

(Part 3 to come...)

JP Morgan Asia Confidence Notes (Part 1)

Let's talk about my experience with the purchase of a structured product.  Of course that was before the collapse of Lehman Brothers, Sep 2008.

It was one day in June 2008 when I renewed my fixed deposit at the bank.  That day I learnt that the bank have assigned a "personal banker" to "take care of all my financial matters" with the bank.  This "personal banker" told me that interest rate for FD was too low, and introduced a structured product for better returns.

The JP Morgan Asia Confidence Notes has the following structure:

1. Tenure of 2.5 years
2. 7.5% p.a coupon fixed – payable quarterly.
3. Based on Singapore, Malaysia, Thailand and Taiwan Indices movement.  The buffer level for Principal to be affected is 50% of index (index level at start of tenure) for any of the 4 countries.   Meaning one of the indices must fall by 50% (at observation date) for the Principal to be affected.

4. Early callable every quarter (at observation date), if all of the indices go above the initial index level.

The minimum investment amount was $50K.  Although the "personal banker" told me that the principal is not protected, I was given a strong impression that it was safe and low-risk.

This was also the opinion of most of the financial "gurus" and analysts at that time.  Most people did not believe that the indices would drop by 50% during the next 2.5 years.   Most people thought that the most likely outcome was that the bank would "call" the notes early before the 2.5 years tenure is up because all indices go above the initial index level.  One analyst even regretted that the minimum investment amount was too high, so that not more people can reap the benefits.  

Decided against putting all my eggs in one basket, I invested $50K from my FD into this JP Morgan Asia Confidence Notes, while the remainder stayed in the FD account.

This portion of investment with JP Morgan Asia Confidence Notes will be earning 7.5% p.a, with payment every quarter.  The portion with FD will be earning a miserable 1%.

But in this world, anything can happen......

(To be continued......)