Investments by charities and town councils: Don't overreact

Investments by charities and town councils: Don't overreact -December 11, 2008 Thursday

THE recent barrage of news reports on the investment losses of town councils and other not-for-profit organisations has raised concerns about the role of investment in these organisations.

I hope we do not swing towards the conservative side and narrow the investment options available to these organisations. Investment is never done in hindsight as all investments carry risk. Countries have gone bankrupt, so what prevents banks from failing too?

To use the Lehman Brothers Minibond saga as a cautionary tale to discourage diversifying investments or seeking higher yield investments may not be prudent. It is always possible that one of the other large banks might have failed rather than Lehman Brothers, and if that were the case, could we in hindsight argue that we should not have invested in those banks or placed fixed deposits with them?

We need to interpret investment in the context of prevailing market conditions. When the town councils invested in those instruments, the backdrop was that inflation was expected to be 4 to 6.5 per cent and the best fixed deposit yield was, at most, 2 per cent. Capital-guaranteed product yields were as low as 2 to 3 per cent. Corporate bonds provided a yield of 4 to 6 per cent, but the corporates have different credit ratings.

It would have been imprudent for the stewards of town council funds to play it safe and place their reserves in fixed deposits or government bonds, as the returns would not even meet the inflation rate. Any corporate bond selected could have been another Lehman Brothers.

Whenever we have reserves, it is always a challenge to be a good steward. The safest thing is not to do anything or just place them in fixed deposits, but is this really being a good steward on all occasions? This could be viewed as a good move, so long as the bank is sound. But the current environment tells us the security of banks cannot be taken for granted. We do not have a crystal ball and thus investment is always a calculated risk.

This may be a good opportunity for town councils and not-for-profit organizations to craft good investment guidelines, protocols and safeguards. More important would be to craft target returns and projections so they can stabilise the returns from investment to meet current and projected spending needs.

Most important of all, I hope we do not discourage well-intentioned and competent volunteers of investment committees. In any case, town councils and organisations in the not-for-profit sector do require many more financially competent individuals to step forward to help them better manage their reserves and finances.

Ho Yew Kee

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Letter to NUS Assoc Professor Ho Yew Kee

Posted by wayangparty on December 12, 2008

I am writing in response to your letter published in Straits Times Forum today titled " Investments by charities and town councils: don't overreact ".

Why has the investment losses by Town Councils caused a furore in the community ?

It is the non-transparent nature of the modus operandi behind the Town Councils' investment decisions which raise the irk of many Singaporeans more than the losses incurred itself.

As a investor myself, I am aware of the risks all investments carry and I agree with you that it may not be prudent for the Town Councils to park their reserves in fixed deposits and government bonds whose low returns will be insufficient to keep up with inflation over time.

However, the Town Councils should exercise more transparency and accountability in its use of public monies which after all, come from the taxpayers.

Till now, we still do not know who makes the investment decisions on behalf of the Town Councils, the fund managers involved and how they are willing to invest in a product with a potential for 100% capital loss for only a measly 5% yield.

In the private sector, fund managers who are not performing up to par are sacked or have their bonuses cut. Shouldn't a higher standard be imposed on those using public monies to invest ?

By persistently refusing to identity and punish the culprits, the authorities seem to be sending the wrong message that it is all right for their investment committees to lose a few million dollars since they represent "only" 0.8% of the total amount of sinking funds.

Who is going to answer for the losses ? Without a system of accountability in place, how can residents be assured that a repeat mistake will not occur again ?

The onus now is on the relevant Ministries and Town Councils to make a complete disclosure of their investment portfolio and the personnel charged with the management of the funds. Anything less will continue to breed distrust and scepticism amongst Singaporeans of the yardsticks of transparency and accountability supposedly uphold by the government.

EUGENE YEO

EDITORS' NOTE:

Readers may contact Prof Ho here: bizhoyk@nus.edu.sg

Prof Ho's CV: http://www.bschool.nus.edu.sg/staff_profile//cv.asp?ID=41