Tuesday, 5 January 2010

Each Singapore lawyer lost SGD 1,400 in the stock market last year!

Ok, I made up that sensational 'factoid.' But it's not entirely a lie. If one assumes all 3,697 lawyers registered in Singapore equally shared the SGD 5.2 million investment loss incurred by the Singapore Academy of Law, then it's a fact.

Investment portfolios are sensitive subjects. They are potentially a major source of income for a non-profit entity. Ask the Chief Financial Officer of any Ivy League US university which will typically have an endowment worth billions of US Dollars.
In a bull market, everyone's an expert investor, especially with 'other people's money.'  But recessions uncover what audits do not. A fine example of this maxim is the revelation of the large investment loss suffered by the Singapore Academy of Law last year.
It is important that entities, especially non-financial, are aware of the risks they undertake in their investment portfolios.
These risks should be self-regulated. There is no need for the government to come up with rules to manage such portfolios, at least not yet.
Personally, I believe it is important to take personal ownership for decisions. Let's take away as much as we can from the 'regulated' state sphere and move it into the individual's domain.
Below is the complete text of my letter titled "Professional groups should limit risky investments."
The letter was published in the Straits Times on January 1, 2010.

Professional groups should limit risky investments
THE recent report on investment losses incurred by the Singapore Academy of Law is disturbing ('Law Academy racks up $5m in investment losses', Dec 22).
The academy's latest annual report states a net deficit from investment activities of $5.2 million in the last fiscal year. In the same period, the academy's operating income was $9.1 million.
Societies and professional associations have the freedom to invest surplus cash to generate self- sustaining and recurring streams of income. However, the risk characteristics of any investment portfolio must be proportionate to the operating income of the entity.
In the academy's case, the portfolio seems to have placed an excessive amount of funds at risk. It will take some time for the academy to recoup its losses.
Certainly, the last year was a poor one for financial markets. However, it is precisely to protect against such unexpected volatility that the size and riskiness of investment portfolios for non-commercial entities must be carefully monitored.
One way to address the issue is for professional groupings to impose self-constrained limits on the size of the equity portfolio, relative to their income.
For example, the size of the portfolio may be restricted to 30 per cent (or $3 million in the academy's case) of expected gross income. Even with an extreme 30 per cent decline in the portfolio value ($900,000), the academy will end the year with a more manageable annual deficit.
Professional societies such as the Academy of Law must not lose sight of their main objective. Investing or establishing investment portfolios is an ancillary activity. There is the danger of an entity's routine operations being threatened by investment losses if portfolios are too large or risky.
Aggressive investments should be undertaken only when sufficient reserves have been accumulated to weather the potential investment losses.
Imran Ahmed

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