Friday, August 16, 2019

Inside The Bedokian’s Portfolio: iShares JP Morgan USD Asia Credit Bond Index ETF

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, we shall talk about the iShares JP Morgan USD Asia Credit Bond Index ETF, or I just refer to it as the iShares Asia Credit Bond ETF.

Overview

The iShares Asia Credit Bond ETF is listed on the Singapore Exchange with two ticker symbols; N6M (in US dollars) and QL2 (in Singapore dollars). According to the iShares site, the ETF is made up of debt instruments issued by sovereigns, quasi-sovereigns and corporates in Asia, excluding Japan. 

Some brief information of the ETF as at 15 Aug 2019:

  • Credit Quality: Almost 77% of the debt instruments are investment grade (rating BBB and above).
  • Geography: About 67% are from Hong Kong, Indonesia, Philippines, India, China and South Korea.
  • Sector: Approximately 56% are from sovereign and government-owned entities.
  • Maturity: Around 77% have a maturity of between two and ten years.
  • Management fee: 0.3%.
  • Distribution frequency and currency: Quarterly, in USD.


Why iShares Asia Credit Bond ETF?

In May 2017, when Genting announced that they would be redeeming their 5.125% perpetuals (perps) later in that year, I had to look for a replacement that had the same if not similar yield to replace it in our Bedokian Portfolio. Incidentally, there is another iShares bond ETF (iShares Barclays USD Asia High Yield Bond Index ETF), having historical yields of about 6% when I reviewed it back in 2017. 

However, I had opted for the iShares Asia Credit Bond ETF instead, as it has a higher proportion of investment grade bonds, which suited my selection criteria, even though the yield was lower at about three to four plus percent. It was lower than the 5.125% I was getting from the Genting perps but the compromise was reduced risk.

Also, I had chosen the SGD denominated instead of the USD one for ease of personal administration, though the latter is more liquid than the former.

The Outlook For Asian Bonds

The ongoing trade war between the United States and China had brought some challenges to the global economy and financial markets. Furthermore, interest rates across most of the developed regions and countries are either low, at zero or at the negative area. Further mentions include the Hong Kong social situation, and the ongoing South Korea-Japan diplomatic and trade spats. 

All these would give Asian bonds a mixed outlook in the months to come, meaning some countries’/regions’ bonds would have a normal yield curve, while others may see a flattening or inverted yield curves, due to their macroeconomic policies and/or investor sentiment.

As this ETF is close to 7% of our Bedokian Portfolio, and with the availability (and consideration) of the Nikko AM SGD Investment Grade Corporate Bond ETF (launched in Aug 2018), I may keep the current holdings and stop adding positions for now.

Disclosure

Bought iShares Asia Credit Bond ETF at: 

SGD 14.80, July 2017
SGD 14.27, January 2018
SGD 13.78, May 2018


Reference



Friday, August 9, 2019

Tariffs And Currency Devaluation, In A Nutshell

If you are new to investing and just entered the financial markets, you may have heard of the terms ‘tariffs’ for a while now and most recently, ‘currency devaluation’. As if investing is a difficult animal to deal with, adding in all these macroeconomic mumbo-jumbo may have sent your head further spinning.

Well, like it or not, you will need to have some idea of what these terms mean in your fundamental analysis (at the Economic Conditions level according to The Bedokian Portfolio1), but to make things digestible for you, I will explain them in easy-to-understand analogies. Let us use a setting where there are only three countries in the world; Country A, Country B and Country C.

Tariffs

Country A and Country C both produce a widely used consumer product called gizmo. The cost of producing a gizmo in Country A was about (let’s be currency neutral here) $6, while in Country C the production cost was $3 each. Gizmo sellers in Country A, seeing the cheaper production cost in Country C, began to import gizmos from the latter. Even with (assumed) transportation costs of $1, the total cost of getting a gizmo from Country C was just $4, cheaper than the $6 produced at Country A itself. Gizmo manufacturers in Country C were happy since someone was buying from them, and gizmo sellers in Country A were happy, too, as their costs were down by $2 per gizmo.

Soon, gizmo manufacturers in Country A began to see their orders decline, and they cannot compete with Country C’s gizmo cost due to their own inherent production costs. As a result, many gizmo factories closed down and unemployment rose. The government of Country A then saw this unemployment as an issue and began to take steps in protecting their own gizmo production sector. They then imposed a 50% tariff on imported gizmos from Country C. With this tariff, the cost of a gizmo from Country C was the same as the ones from Country A (150% of $4 = $6), thus providing a so-called level playing field.

Such an act was seen as protectionist because the government of Country A wanted to protect its own gizmo manufacturers (and jobs). Also, consumers in Country A would have the opportunity cost of getting a lower priced gizmo due to the cheaper production cost in Country C.

It is not the end of the story yet. We shall now add in another character in the whole picture; Enter Country B, which had no tariffs imposed on by Country A. Enterprising middlemen in Country B would just buy the gizmo from Country C at $4 each (including $1 transportation), then sell them the Country A at $6 apiece (with transport), thus earning $1 per gizmo in the trade ($6 sell price - $4 cost - $1 transportation to Country A = $1). For gizmo sellers in Country A, now their cost is the same, regardless of where they got their gizmos.

Currency Devaluation

Let us use Country A and Country C again, this time we will assign a currency to each of them, namely A$ and C$ respectively, and an exchange rate of A$1 is to C$4. Assuming all things equal, Country C’s central bank decided to devalue their currency to A$1 is to C$5.

There could be a few reasons why a country would want to devalue its currency. One of the main reasons was to make its exports relatively cheaper. If a gizmo costs C$4 to manufacture in Country C, with the A$1:C$4 rate, an importer in Country A could get it at A$1 (sans transportation costs). But with the A$1:C$5 rate, the importer could get 1.25 gizmos for that same A$1. Multiply that on a large scale, it meant the importer could get 25% more gizmos for the same amount of A$ paid. So if Country B produced gizmos but at 1.1 gizmos per A$1, the importer at Country A would prefer to get it from Country C, thus Country B lost out its gizmo exporting business to Country C.

However, from the other side, it meant that imports from Country A into Country C were seen as more expensive. A A$1 gizmo imported from Country A would cost C$5 for Country C buyers instead of the pre-devaluation amount of C$4.

In The Real World

Hope the above analogies gave you a better understanding of tariffs and currency devaluation. Translating that knowledge into the real world, you could see how the countries that are involved in the trade war are using the above macroeconomic policies and tools.

Frankly, we do not know how this trade war will pan out, as both the United States and China are not showing signs of backing down for now. If this is going to be a protracted affair, then look out for the “middleman” regions/countries as highlighted in the last paragraph of the Tariffs section. Also, I had mentioned some other opportunities in my previous post here.

Reference

If you are interested to know more about economics, you can start off with Economics for Dummies (Flynn, Sean. 3rdedition. 2018. John Wiley & Sons. ISBN 978-1-119-47638-2) and Economics 101 (Mill, Alfred. 2016. Adams Media. ISBN 978-1-440-59340-6).

Happy National Day!


1 – The Bedokian Portfolio, p89-90

Saturday, July 27, 2019

Turning Three (!) Tips For You!

The Bedokian Portfolio blog is turning three soon! And since all good things come in threes, I shall give you three tips and opinions for you to ponder about!

One: Are S-REITs Overvalued?

Singapore real estate investment trusts (S-REITs) are currently enjoying a boom. Based on the iEdge S-REIT 20 Index, since 1 Jan 2019 it has risen from 1208 to 1436 as at 26 Jul 20191, an 18.9% rise. Recently in some of my investment chats with others, very often REITs were creeping into the conversations. So with all the talk about REITs, is it a sign that this asset class is getting overheated?

Based on my own aggregation from data sourced from REIT Oracle2, the average price-to-book (P/B) ratio is about 1.13, meaning in general S-REITs are 13% above its net asset value, so can say it is not cheap. However, quantitatively there are still S-REITs that are below the P/B ratio, though you may have to exercise extra analysis to see if they are worth getting.

If you are holding onto existing S-REITs, you may consider doing an averaging up. And/or, if you are rebalancing your portfolio due to the surge in S-REIT prices, you could practice the “sell extreme winners and buy false losers” with other REITs or other asset classes. You can look them up in my previous post here for more information.

Two: Happy Or Sad? Don’t Transact

Humans are emotional creatures, period. No matter how hard you try, you cannot escape times when feelings overwhelm you, be it happy or sad. If that happens, objectivity is somewhat thrown out of the window.

With no objectivity in place, your presence in the financial markets is at best unstable. You cannot make sound judgements and execute clear decisions, and these may be costly. Therefore if you are aware that there is an emotional tsunami inside you, deal with it first and forget about the markets.

Three: Doing Nothing Is Doing Something

OK, this statement may sound a bit philosophical, but if you look deep enough, there is some sense and meaning to it. For example, in a battlefield, if the enemy is seen doing nothing, it could be that they are waiting for your next move, resupplying their logistics, or probably even falling asleep! Anything goes.

In the field of active investing (and trading), doing nothing is not just chucking your portfolio aside and leave it as it is (and on the other extreme end, you do not need to watch it every minute and hour either). Rather, it is like watching and observing from the sidelines. You could be waiting for the moment to execute a buy/sell, or see how things pan out after rumours and news, good and bad, make their rounds in the markets.

Remember, not everything warrants an action to be made. Sometimes waiting out and doing nothing could be a better option.


1 – Singapore Exchange, iEdge S-REIT 20 Index. https://www2.sgx.com/indices/products/sreit2 (accessed 26 Jul 2019)

2 – Reit Oracle. All Singapore REITs. https://www.reitoracle.com (accessed 26 Jul 2019)

Thursday, July 11, 2019

Asset Class Correlation For 1H2019

Someone I knew made a remark that for 2019, the price of everything is going up; equities, REITs, bonds and even gold. So that begs the question: is there still correlation between the asset classes?

Using U.S. ETFs representing the various asset classes, plus an equities ETF for the Singapore market (EWS), we shall now turn to Portfolio Visualizer to find out.


NameTickerVTIEWSVNQBNDGLDCASHXReturn
Vanguard Total Stock Market ETFVTI-0.930.53-0.400.360.0418.67%
iShares MSCI Singapore Capped ETFEWS0.93-0.33-0.300.460.2413.93%
Vanguard Real Estate ETFVNQ0.530.33-0.250.120.1619.16%
Vanguard Total Bond Market ETFBND-0.40-0.300.25-0.230.246.14%
SPDR Gold SharesGLD0.360.460.120.23-0.569.86%
CashCASHX0.040.240.160.240.56-1.22%

Fig. 1 – Correlation results based on monthly returns for the period 1 Jan 2019 – 30 Jun 2019. For full data click here.


All asset classes had positive returns in 1H2019, yet we see negative correlation between bonds, and the U.S. and Singapore equities. Surprisingly, gold had a positive correlation with the other asset classes.

The above is based on monthly returns. Let us see what would the correlation be like on daily returns.


NameTickerVTIEWSVNQBNDGLDCASHXReturn
Vanguard Total Stock Market ETFVTI-0.730.40-0.38-0.170.1618.67%
iShares MSCI Singapore Capped ETFEWS0.73-0.22-0.29-0.040.2213.93%
Vanguard Real Estate ETFVNQ0.400.22-0.160.110.0219.16%
Vanguard Total Bond Market ETFBND-0.38-0.290.16-0.54-0.056.14%
SPDR Gold SharesGLD-0.17-0.040.110.54-0.209.86%
CashCASHX0.160.220.02-0.050.20-1.22%

Fig. 2 – Correlation results based on daily returns for the period 1 Jan 2019 – 30 Jun 2019. For full data click here.


For Figure 2, we can clearly see that bonds and gold had a negative correlation with the equities ETFs, though gold’s was only slight. 

So what is the conclusion of all these? Correlation is still very much alive even though none of the asset classes had negative returns in the said period. Also, correlation is not hard fixed and can go plus and minus with one another.

So therefore, stay diversified.

Saturday, June 29, 2019

Inside The Bedokian’s Portfolio: Mapletree North Asia Commercial Trust

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

First up, Mapletree North Asia Commercial Trust (MNACT).

Overview

MNACT was previously known as Mapletree Greater China Commercial Trust (MGCCT), which was listed on the Singapore Exchange in March 2013. Initially consisted of two properties, Festival Walk in Hong Kong and Gateway Plaza in Beijing, it acquired another commercial property, Sandhill Plaza, at Shanghai in 2015. Then in 2018, six Japanese properties were added, and along with it a name change to the present one. 

As of now MNACT has a total of nine properties. 

Why MNACT?

I added (then) MGCCT in August 2014 for retail and office exposure in China and Hong Kong. During then the book value was about 0.9 times, gearing at around 38% and a dividend yield close to 7%, which are within range for my major selection guidelines.

Festival Walk, the crown jewel and one of the largest malls in Hong Kong, sits next to the Kowloon Tong MTR station and located in a dense residential district. Adding in the fact that there are two universities within its vicinity, Festival Walk is almost guaranteed to have a heavy footfall. Putting into our local context, it is like a large suburban mall such as Northpoint City. 

Gateway Plaza is located at the prime Chaoyang business district in Beijing, near hotels, some residential areas and several diplomatic embassies, a conducive area for multinational companies. BMW Brilliance and BASF currently have offices situated there.

Present And Future

Based on the latest financial information (1 Apr 2018 – 31 Mar 2019) and closing price as at 28 Jun 2019, MNACT’s book value is at 1.01 times, with a gearing of 36.6% and dividend yield of about 5.3%, which is still moderately healthy. 86% of its debt is on fixed rate, so there is an assurance of stable interest costs. Though currency risk is a given since it holds overseas properties and collects rental in RMB and Yen, 75% of the distributable income for 1H FY19/20 is hedged to SGD, so the risk is mostly mitigated.

The investment mandate had expanded from the Greater China area to encompass the whole northeast Asia region, a good strategic move in my opinion since there will be more accretive property choices for MNACT to go for. This also brings about diversification of office spaces in different countries and it may prove useful in this trade war climate.

The prime concern for me on MNACT will be the crown jewel itself; Festival Walk make up 66% of its NAV and contributes 62% of net property income. Recently Hong Kong is rocked by demonstrations and this may bring a long-term socio-economic impact.

Despite the rise in REIT prices lately, MNACT can be considered for a new addition to the portfolio or for averaging up.

Disclosure

Bought (then) MGCCT at: 

SGD 0.91, August 2014


Reference

MNACT site: https://www.mapletreenorthasiacommercialtrust.com

Monday, June 24, 2019

Bob Is Rebalancing Yet Again, But…

We are coming into Bob’s bi-annual rebalancing again. As 30 June 2019 is a Sunday, Bob has two options: either doing it on 28 June (Friday), or on 1 July (Monday).

Thing is, Bob is aware that the G20 Summit is coming up on 28 – 29 June, and along with it a possible meeting between the leaders of the two largest economic powerhouses, China and the United States, on settling the trade dispute.

Bob knows that the core ethos of rebalancing is to inject fresh funds into his Bedokian Portfolio, and then adjust it accordingly to his strategic allocation. However, whatever happens on the period of 28 – 30 June 2019 may bring a difference between the trading days on 28 June and 1 July, as in whether the markets will go up, down or (remotely) sideways over the weekend.

You see, Bob is worried that if he does his rebalancing on 28 June, only for prices to slide further on 1 July if not-so-good news happens during the Summit, then he will feel shortchanged by buying them at a higher price. Conversely, if he chooses 1 July instead, and prices are higher than on 28 June due to good news, then he will still feel shortchanged for not buying at a low.

So how now, Bob?

Choice #1: Stick To The Plan

Since Bob had started his Bedokian Portfolio back in the beginning of 2017, he had never done a rebalancing no later than 30 June. So sticking to his policy, he will do it on 28 June 2019 as planned.

Choice #2: See The Outcome

Bob will sit it out through the weekend and see how things unfold. Good or bad result, he will have to accept the outcome and carry it out on 1 July.

The Bedokian’s Take

Rebalancing or not, and if you are Bob or not, we do face such situations and tests in our investing life. Putting it simply, we can learn two things from here. Firstly, investing is long term. Ups and downs, they are just kinks in your investment journey, so do not fret much. Secondly, if a decision has been made, do not look back. Make do with what you have and press on, taking this as an investment lesson.

With this, Bob has decided he will do his rebalancing on 28 June.

You may see Bob’s portfolio after rebalancing from 29 June 2019 onwards here.