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The Honolulu Advertiser
Posted on: Sunday, March 28, 2010

Hawaii market for investments not huge, but opportunities exist


By Alan Yonan Jr.
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

LAURIE ARAKAKI | The Honolulu Advertiser

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First it was "eat local," a consumer-driven effort to get fresher food to the table, support area farmers and reduce the carbon emissions associated with transporting produce over long distances.

Then the recession hit and the buy-local movement gained momentum with struggling independent business promoting the campaign as a way to boost the local economy by keeping money circulating closer to where it is spent.

But what about investors who want to keep a share of their portfolio closer to home? After all, putting your money in homegrown investments can help build local wealth, enrich the tax base and create jobs.

While Hawai'i may not have the array of local investment options you'd find in California, there are opportunities here for investors who want to do more than just park their cash in a local bank.

Want to help the state build a bridge or upgrade one of the terminals at Honolulu International Airport? You can buy tax-free municipal bonds issued by the state and city. The bonds, considered relatively safe since they're backed by a state's taxing power, can be purchased individually or packaged in a mutual fund. And they're particularly attractive to investors in higher tax brackets because they're exempt from state and federal taxes for Hawai'i residents.

For those who want to take an equity stake in a company, Hawai'i has about a dozen publicly traded firms that sell stock. Investors can diversify their portfolios with shares from companies in the banking, technology, agriculture, utility, land development and airline businesses. Some of the companies have dividend reinvestment programs that allow investors to buy shares directly without going through a broker.

Another option for higher net worth individuals is venture investing, which includes "friends and family," venture capital and angel investments. While relatively small, this sector offers a chance for more sophisticated investors with greater risk appetite to gain exposure to companies with higher growth potential.

Then there's real estate, which can be the home you live in, a rental property that provides a regular stream of income, or a speculative investment whose value is tied to the ups and downs of the market. For the speculators who hope to profit from market movements, timing as they say is everything.

As is the case with socially responsible investing, devoting a part of your portfolio to homegrown investments can bring emotional satisfaction beyond just the monetary return. However, as investment advisers like to say, diversification is key. That was a hard lesson learned by many employees of Worldcom who had 100 percent of their pensions invested in company stock that became worthless when the company collapsed in 2002.

Honolulu-based financial planner Heather Moir-Dangler says she advises clients with emotional ties to their investments to keep the big picture in mind.

"We stress a holistic, balanced approach to investing that focuses on value," said Moir-Dangler, owner of Moir Financial & Insurance Services.

"Yes, we do get clients with an allegiance to Hawai'i. Local investors can look at local stocks but we encourage them to look at other stocks and follow the value concept."

It's OK to invest in companies with which you have an emotional tie, but such a "speculative stake" should generally be limited to no more than 10 percent of a portfolio, she says.

"There are ways to get your emotional fulfilment without jeopardizing your life savings."

Here are some more details on local investment options:

MUNICIPAL BONDS

The state last week issued $645 million in revenue bonds to fund various Airports Division projects with an interest rate of just under 5 percent. Like most municipal bond issues, the bulk of the offering was sold to institutional investors, such as insurance companies and pension funds. But retail investors did take about $100 million of the issue, according to the state office of Budget and Finance.

Individual investors who want to buy municipal bonds issued by the state and counties which are usually sold in minimum denominations of $5,000 must purchase them through a broker. However, for a $1,000 minimum, investors can buy into a mutual fund that specializes in local municipal bonds.

Mutual funds that specialize in Hawai'i munis include Hawaii Municipal Fund (SURFX), managed by Lee Financial Group; Pacific Capital Tax-Free (PTXFX) and Aquila Hawaiian Tax-Free Trust managed by Bank of Hawaii's Asset Management Group; Lord Abbett Hawaii Tax-free Fund (LAHIX), managed by Lord Abbett & Co.; and Bishop Street Hawaii Municipal Bond Fund, managed by Bishop Street Capital Management.

STOCKS

Hawai'i's listed companies are Alexander & Baldwin Inc., Bank of Hawaii Corp. Barnwell Industries Inc., Central Pacific Corp., Cyanotech Corp., Hawaiian Electric Industries Inc., Hawaiian Holdings Inc., Hoku Corp., Maui Land & Pineapple Inc., Mera Pharmaceuticals Inc., and ML Macadamia Orchards LP.

As a group, their shares have done well over the past year, but lagged behind the broader market. The Bloomberg Hawaii Index, a weighted index of the 11 companies, is up 34 percent from a year ago. Over the same period, the S&P 500 Index has risen 43 percent.

Individually, the top performer is Hawaiian Holdings, parent of Hawaiian Airlines which has risen 131 percent over the past year. Central Pacific is the laggard with a 73 percent decline.

Of the 11 companies, Alexander & Baldwin, Bank of Hawaii and Hawaiian Electric Industries sell shares directly to investors through their dividend reinvestment programs.

VENTURE INVESTING

Investors can take a stake in a start-up company through what's known as a "friends and family" investment. It is generally the first round of funding that start-ups receive before they begin to pitch to angel investors or venture capital firms. Friends and family investments, as the name implies, are informal arrangements between investor and entrepreneur. They are considered the riskiest of the three types of venture investing . Some very successful local technology companies, including Sopogy, got their start with F&F funding.

Angel investors usually commit their own funds, typically in the $25,000 to $1.5 million range. A collection of local angel investors formed the Hawaii Angeles Organization in 2002, widely recognized as the first stop for Hawai'i entrepreneurs seeking to raise seed and early-stage capital. In the eight years since it was launched, members of Hawaii Angels have invested $30 million in 40 companies, said Bill Spencer, a founding member of the group.

Venture capital firms, which usually require an initial investment of $1.5 million to $10 million, are limited to high net worth or institutional investors. Honolulu-based Kolohala Ventures is Hawai'i's premier venture fund and has invested in local companies including Cardax Pharmaceuticals, Hawaii Biotech, Honolulu Seawater Airconditioning, Kai Sensors and Nanopoint.

REAL ESTATE

Ask any local real estate agent and they'll tell you "there's never been a better time to buy." That definitely would have been true for someone who bought an Oahu median-priced home for $299,000 in 2001. Six years later the median price topped out at a record $643,500. For an investor with perfect timing that would have been a gain of 115 percent.

But for many homeowners who got caught up in the frenzy of the rapidly escalating market and bought their homes with nontraditional mortgages the bottom fell out when home prices began falling and unemployment began rising in 2008. A combination of higher monthly payments on adjustable mortgages, job losses and declining equity forced an increasing number of homeowners into foreclosure. RealtyTrak reported a record 1,534 foreclosure filings statewide in December 2009.

O'ahu's housing market has begun showing signs of recovery, with the median sale price for single-family homes rising in February for the second straight month compared with the same months last year. And there is a consensus among local economists that the market could eke out a modest gain this year.