All About Price: Reversion To The Mean

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. For this post, I will talk about one of the theories used in deciding a buy or sell call: the reversion to the mean.

According to Investopedia, reversion to the mean (or mean reversion) “is a theory used in finance that suggests that asset price volatility and historical returns eventually will revert to the long-run mean or average level of the entire dataset”¹. From the definition, we can see two things: firstly, mean reversion implied that the price of an asset (or security in our context) would go back to its long term mean or average value. Secondly, we could expand the mean reversion theory to apply on other measures and ratios such as returns, dividend yield, price-to-book, etc.

 

The gist of mean reversion is that, no matter how much a value fluctuates across a period, it would fall back, or rise up, to its average at certain points in time. In the context of price, investors (and traders) would use it as a tool to determine when to enter or exit a particular security. When the price goes up beyond the average, it is deemed that the security is overpriced and hence it is time to sell, ceteris paribus. Conversely, if the price goes below the average, it is time to (re)enter the counter, ceteris paribus.

 

Online stock charts, such as those from Yahoo Finance, let you find out what are the average values for almost all securities globally. Called moving averages, there are a few types, and the common ones used are simple moving average (SMA) and exponential moving average (EMA). The difference between these two is that SMA takes in all the values over a prescribed period, while EMA applies more weightage to recent or current values. Some investors/traders use two moving averages, whether SMA and EMA or SMA/EMA over two different timeframes.

 

Going beyond moving averages, we would be stepping into the realm of technical analysis (TA), in which SMAs and EMAs are just one portion of the entire scheme of things. For this post, I shall not proceed further.

 

Employing mean reversion via moving averages is one of many indicators an investor has in his/her arsenal, and it must not be the sole determinant in making a buy/sell call. Fundamental analysis (FA) in my opinion is important, especially if you are investing for the long term. A number of investors whom I know utilizes both FA and TA (commonly known as FATA) in making the buy/sell call, which to me is acceptable if the indicators, tools and rationale behind them are sound and valid.

 

Mean reversion using moving average, just like any other indicators, is backward looking, and we must not forget the common phrase uttered in the investment/trading circle: past performances are not indicative of future results. However, with proper and systematic FA or FATA, whether using The Bedokian Portfolio or other methodologies, you can be considered in the “guesstimate” group of investors who roughly know how things may pan out in the future, as compared to those who rely on little or no analysis at all.

Check out the other posts in my All About Price series.

All About Price: Introduction & Valuation of Value

All About Price: Buyer/Seller Remorse and Premorse

All About Price: The 52-Week High/Low

1 – Chen, James. Mean Reversion. Investopedia. 18 Aug 2021. https://www.investopedia.com/terms/m/meanreversion.asp (accessed 23 Jan 2022)

 

The Mapletree Merger: The Bedokian’s Take

Well, as usual, I am a bit slow in providing inputs on certain events happening in the investment scene. For this blogpost, I shall talk a bit about the proposed merger between Mapletree Commerical Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT), forming the Mapletree Pan Asia Commercial Trust (MPACT).

If you had remembered, we used to have MNACT in our portfolio (see here), but we had divested fully our position (see reasoning here). I had also talked about MCT being the “King of the South” (see here), and the trend of REIT mergers (see here), hence I feel I should write a piece about these two coming together.

 

If one looks at the intentions, it makes sense for this merger to go through: MPACT will be in the top 10 largest REITs in Asia in terms of market capitalization, and with it comes economies of scale in managing debt and acquisition of new assets. Depending on which side you are at, the merger could either be welcoming or unwelcoming for either side’s unitholders, or both if one has invested in the two.

 

Based on some of the responses I gathered online and offline, from MCT unitholders’ perspective, granted that MPACT would be accretive in terms of yield and net asset value (NAV), the price consideration for absorbing MNACT, which is at SGD 1.1949 (close to MNACT’s NAV), may be a bit difficult to swallow for some MCT unitholders as they feel it is too high a premium to pay. Furthermore, there is the impression of the dilution of geographical concentration, whereby MCT investors may not want to have exposure to other property assets overseas.

 

On the other hand, MNACT unitholders, from what I read, may benefit from this deal in terms of seeing their investment going up a few notches to book value; after all, since the second half of 2019 (the unrest in Hong Kong and the subsequent COVID-19 pandemic), MNACT’s price is on a downtrend, and this offer could be seen as a deliverance. However, I do not see this price enthusiasm going on judging from the closing price of SGD 1.08 as at 10 Jan 2022 (or probably due to the likely coming interest rate hikes, which is a REIT’s common bogeyman).

 

The Bedokian’s Take

 

It might not be fair for me to comment as I do not hold these two counters directly (apart from using exchange traded funds), but there are several answers and reactions to this merger, depending on where one is coming from. The points provided in the presentation from the trusts (see under Reference below) are reasonable, and the views in the previous two paragraphs are legitimate, too. 

 

Barring any other macroeconomic factors (yes, that includes interest rates), in my opinion, one should ask the following two questions on whether to participate in the merger: the first would be what the long-term view of MPACT is; if one thinks that there is potential in the retail and commercial property sectors in Singapore AND (emphasis mine) Asia-Pacific region, and their economies in general, then MPACT is a good proxy to go for. 

 

The second question is somewhat related to the first; what the growth potentiality of MPACT is; a cursory check of Mapletree Investments’ mixed-use, office and retail properties located in Asia which are not in any publicly-listed trust showed a number of assets in Singapore (e.g., Harbourfront Centre, etc.), Vietnam (e.g., Saigon South Place), China (e.g., Nanhai Business City), India (e.g., Global Technology Park) and Japan (TF Nishidai Building). These are possible injections to MPACT by the sponsors, not counting those that could be acquired by the trust itself.

 

If the answers to the above two questions are positive, then one might consider going for the offer. Still, further fundamental analysis is required to have a more solidified view of the whole picture.

 

Disclaimer

 

Reference

Proposed Merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust (the “Merger”), 31 Dec 2021. https://www.mapletreecommercialtrust.com/~/media/MCT/Newsroom/Announcements/2021/5%2020211231%20%20Joint%20Presentation%20%20Proposed%20Merger%20of%20MCT%20and%20MNACT.pdf (accessed 10 Jan 2022).