Wednesday, October 11, 2017

The Three REIT ETFs and The Bedokian Portfolio

When my ebook was launched in July 2016, there was no local REIT ETF available to speak of. Fast forward to the present day, there are now two REIT ETFs listed on the Singapore Exchange (SGX), and one coming up soon. From an index investor’s perspective, this meant more choices in selecting one or a few suitable for his/her investment objectives and methodologies.

By now there are quite a number of articles written about these three REIT ETFs on other investment sites and blogs. For my post today, I will analyse them from a Bedokian Portfolio investor’s point of view.

The three REIT ETFs, in chronological order of their listing (with my given short form in brackets), are the Phillip SGX APAC Dividend Leaders REIT ETF (Phillip APAC), the Nikko AM-Straits Trading Asia Ex-Japan REIT ETF (Nikko-Straits Trading) and the Lion-Phillip S-REIT ETF (Lion-Phillip). I had covered the former two briefly in my previous blog posts (here and here), but I will delve a little bit deeper.

It’s All About The Indices

Each REIT ETF tracks a different index; The Phillip APAC follows the SGX APAC Ex-Japan Dividend Leaders REIT Index; The Nikko-Straits Trading tracks the FTSE EPRA/NAREIT ex-Japan Net Total Return REIT Index; The Lion-Phillip’s benchmark is the Morningstar Singapore REIT Yield Focus Index.

Diving in further, we now look at the indices themselves. The SGX APAC Ex-Japan Dividend Leaders REIT Index is a dividend-weighted index that measures the performance of REITs that pay the largest dividends in the Asia Pacific region excluding Japan.1 The FTSE EPRA/NAREIT ex-Japan Net Total Return REIT Index, on the other hand, tracks the performance of listed real estate companies and REITs in developed and emerging markets, and they are screened for their free-float adjusted, liquidity, size and revenue.2 As for the Morningstar Singapore REIT Yield Focus Index, the REITs are from Singapore and they are screened based on the dividend yield, economic moat and distance to default.3

If the above paragraph confuses you, it is OK. You may go on to the next section to find out more on how to choose your REIT ETF. However, if you are concerned on the basis of the derivation of the indices (and subsequently the REIT ETF’s following of them), then you could include them in your consideration on the choice of REIT ETF.

The Underlying Allocation and Holdings

The next question would be: what is the make-up of the REIT ETFs? There is a strong implication pertaining to this query, and that is of diversification, which is one of the paramount factors in The Bedokian Portfolio. We are actually looking out for the types of REITs, their geographical locations and their respective allocations.

The Phillip APAC is made up of REITs from mainly Australia (50.4%), Singapore (27.9%) and Hong Kong (14.4%), with their percentages based on dividend weight. With the same weight basis, 42% came from retail REITs, 25.7% from diversified REITs and 14.7% from industrial ones, with the remaining from office, hotel, residential, etc.4

The two largest country allocation for the Nikko-Straits Trading are Singapore (60.5%) and Hong Kong (23%), with industrial and office REITs taking up 44.7%, and retail REITs at 39.7%.5

Lastly, the Lion-Phillip’s REITs are all listed on the Singapore Exchange6 and they are well diversified in terms of property types.

Back to diversification, the Phillip APAC is viewed as a foreign component of the Bedokian Portfolio7, since more than 50% of the dividends is from overseas. For both the Nikko-Straits Trading and Lion-Phillip, with S-REITs being the majority, you could safely treat them as local. If you want to really go into the specifics, however, you could drill down to each individual S-REIT and find out their local-foreign property and payout proportions, and decide from there.

Sector wise each REIT ETF has its own majority, with retail the highest in Phillip APAC, industrials and office for Nikko-Straits Trading, and office for Lion-Phillip.

Is it OK that we buy two or all three ETFs to achieve a better balance? Sure, why not? But I have to stress that there are some REITs which are common among the three, e.g. Ascendas REIT, Capitaland Mall Trust, etc. You could adopt a core-satellite approach8, where you could go for individual REITs whose regions/sectors that the REIT ETF did not cover or emphasize much, but that meant deviating a bit from pure index investing.

Another issue is whether they are physical or synthetic. Based on their prospectuses, all three REIT ETFs use replication (meaning physical) as the main strategy, though both Phillip APAC and Lion-Phillip may use representative sampling strategy.9,10,11 In representative sampling strategy, the ETF may include securities that are not part of the original index, but share similar characteristics as that of the actual index securities. To me, as long as the objective of the ETF is met and it closely tracks the index, I am alright with it.

The Nitty-Gritty

Next we look at the management fee. The Phillip APAC is 0.3% per annum, while both the Nikko-Straits Trading and Lion-Phillip is 0.5% per year, so the latter two’s “maintenance” costs are higher. My advice is not to focus on costs alone and look at them from a bigger picture to see which is/are suitable for you.

Another little known issue would be taxes. According to the prospectuses, there is a mention of the 17% income tax rate, in which the dividend income issued by local REITs to the ETFs are subjected to it, but not to the typical individual investor. Hence, in preferring the ETF to the individual REIT, the compromise would be a lower yield due to taxation.

Further Considerations and The Bedokian’s Take

There are a few more considerations in choosing which REIT ETF, like perhaps their liquidity and bid/ask spread in the financial markets, or your macro viewpoints on properties in general, or country-specific. The factors in choosing which REIT ETF is non-exhaustive, but at least I had pointed out, in my opinion, the more important ones in the above sections.

1 – SGX News & Updates. SGX launches SGX APAC ex Japan Dividend Leaders REIT Index. 29 Aug 2016. (accessed 9 Oct 2017)

2 – FTSE Russell. FTSE EPRA/NAREIT Asia Pacific ex Japan Index. 29 Sep 2017. (accessed 9 Oct 2017)

3 – Morningstar. Morningstar Singapore REIT Yield Focus Index. 2017. (accessed 9 Oct 2017)

4 – Phillip Capital Management. Phillip SGX APAC Dividend Leaders REIT ETF. Product Info Sheet (Aug 2017). (accessed 9 Oct 2017)

5 – Nikko Asset Management. NikkoAM-Straits Trading Asia Ex-Japan REIT ETF. March 2017. (accessed 9 Oct 2017)

6 – Lion-Phillip S-REIT ETF Fund Information. October 2017. (accessed 9 Oct 2017)

7 – The Bedokian Portfolio, p111

8 – The Bedokian Portfolio, p122-123

9 – Phillip SGX APAC Dividend Leaders REIT ETF Prospectus. 29 Sep 2016. (accessed 9 Oct 2017)

10 – NikkoAM-Straits Trading Asia Ex Japan REIT ETF Prospectus. 27 Feb 2017. (accessed 9 Oct 2017)

11 – Lion-Phillip S-REIT ETF Prospectus. 28 Sep 2017. (accessed 9 Oct 2017)

Thursday, October 5, 2017

The Next Big Thing

Being an active investor, we would want to know what is the next big thing, as this is where we can get potentially good returns. Problem is, we mostly know it on hindsight, and it is a bit too late to enter the fray by then. So, before it happens, the answer to the question would be at most a guess, but if we guessed it wrongly, the next big thing may become our next big mistake.

To look out for the next big thing, we need to consider two questions: how to spot it and whether is it long or short term.

Indicators and Signs

On spotting the next big thing, I use two things to suss it out, namely indicators and signs. In my lingo, indicators are statistics, figures and hard data pertaining to the issues at hand, i.e. quantitative, while signs are a bit more qualitative in nature, such as personal observations, user experiences and that subjective “gut feel”.

You may have already used some forms of indicators and signs in your fundamental analysis (FA), e.g. analysing past profit figures or visiting a particular REIT’s retail mall that you are interested in, etc. On researching for the next big thing, however, you may need to go beyond your typical FA scope, as a more holistic view is required to better gauge the possible outcomes. Like my favourite example of e-commerce, not only would you need to consider the impact on brick-and-mortar retailers, but also available infrastructure and user acceptance in supporting it.

Then again, the research is not a guarantee of success of confirming the next big thing, but at least it is a guesstimate with informed inferences rather than pure guessing.

Trend and Fad

I shall use two words that are commonly heard in the fashion industry: trend and fad. According to, one of the meanings of trend is “to tend to take a particular direction; extend in some direction indicated”1, while fad’s meaning is “a temporary fashion, notion, manner of conduct, etc., especially one followed enthusiastically by a group”2.

Translating these meanings to the business world, a trend is where a product, service or paradigm could exist for a longer time and may evolve into something better at the next level, whereas a fad is like a “flash in the pan” and it could just come and go at an instant. On the investment front, trends would bring good returns in both growth and income (i.e. dividends), while fads would give you good short term but non-sustainable returns.

To know whether the current big thing can last long (trend) or just a burst of fireworks (fad), we use indicators and signs to determine which is it. Again, we have to place a caveat on the conclusions even when extensive research is done.

Practical Applications

If you have identified the sector/industry where the next big thing will be, you can either screen for the individual companies, or you can go macro by the index way through ETFs. You may also want to consider associative investing3 (i.e. investing in fields related to the targeted one) if investing in the next-big-thing sector/industry proved difficult (e.g. there is no available financial instruments to invest with) or you want to have an additional safety margin should it fail (e.g. a related sector/industry would still be around even if the deemed big thing fizzled). REITs could also provide a form of associative investing; think data centres and logistics hubs in relation to the current big thing of e-commerce.

Last but not least, if you are still not sure of what the next big thing is, and/or whether the current big thing can last long, then it is better to exercise your decisions on a prudent stance.

1 - (accessed 2 Oct 2017)

2 - (accessed 2 Oct 2017)

Sunday, September 24, 2017

Are We Heading For Another Dot Com Bust?

With the rise of tech companies and the prominence of tech-related issues such as driverless cars and AI (artificial intelligence), some veteran investors and traders may be wondering, “Are we heading for another dot com bust?”

Well, the answer is somewhere out there and only time can tell, but let us try to find one by going through some of the trends and indicators that we can see now.

First, we shall go through a history lesson.

The Original Dot Com Boom and Bust

The original dot com boom and bust period was generally accepted to be between late 1998 and early 2001. Using the NASDAQ Composite Index as a gauge, from a modest 1500-ish points in August 1998, it reached to slightly above 5,000 points in March 2000, before falling down again to about 1,800 points in March 20011. Back then, anything and everything related to the internet were seen as a huge potential, and huge amounts of money were invested in these companies, both private and publicly listed. Exuberance ruled the days back then, when investors and traders were convinced that certain companies would give them a big break.

The overall strategy adopted by these dot com companies were to create brand awareness and capturing the market share. This meant spending large amounts on marketing and providing freebies or huge discounts to customers. It was planned that after a substantial market share was captured, the companies would stabilise down to create a more profitable structure. While money was spent, a very huge proportion of the companies did not make any of it.

With all these factors in place, a bubble was thus formed and we knew the rest of the story.

Any Difference Between Now and Then

Fast forward 16 years, we are still seeing some of the signs that had happened back then. Some companies are still adopting the brand awareness and market share capturing approaches with freebies and discounts; The valuation of the listed tech companies, based on Price to Earnings ratio (or P/E ratio), are relatively higher than their non-tech counterparts, though not as outrageously high back in 2000. For the unlisted companies still in the domain of private equity investments, valuations were placed in the billions for the well-known ones.

So, with this similarity, are we seeing a second dot com bubble forming?

Before we jump to that conclusion, there are two main factors, in my opinion, that could spell a difference between then and now.

The Smartphone Revolution

The first factor would be the entry of the smartphone. Back in 1999 to 2001, there was no such thing as the iOS or the Android OS, and smartphones were rare to begin with. Anything that was related to the internet had to be accessed through a computer, and even though there were laptops, which were more mobile, they were expensive devices to have.

Now things are different; in 2016, the world smartphone penetration was about 28.3% and it is projected to rise to 37% by 20202. Many business-to-consumer tech companies (and some business-to-business ones) are utilising the smartphone as a way to reach out to their customers, since it is cheaper and more convenient.

Internet Usage

The second factor hinged on the prevalence of the internet in our lives. In year 2000, at the height of the dot com bubble, only about 5% to 6% of the world population used the internet; By June 2017, that number jumped to 51.7%3. In fact, numerous surveys and studies have shown that a lot of people could not live without the internet.

By Their Powers Combined…

The smartphone and the internet have combined into one powerful platform for both businesses and consumers alike, and they permeate deeply into our everyday lives and goings-on, ranging from social media (e.g. Facebook, Instagram, Twitter, etc.) to shopping (e.g. Amazon, eBay, Alibaba, etc.). Also, comparing to the early 2000s, the mature industries and sectors now are feeling more threatened of being partially or totally replaced.

So What Is The Answer To The Question

Back to the question of “Are we heading for another dot com bust?”, after digesting some facts and figures, my answer would be “I do not know”. Yes, it may sound as a bummer, but one thing is for sure that a thorough fundamental analysis would probably save you from being hit hard in a similar bubble.

If you wish to invest in tech companies or their related sectors, do remember not to put all in one basket, and also the 12% limit rule along with it.

1 – Yahoo Finance. NASDAQ Composite.^IXIC/ (accessed 23 Sep 2017)

2 – Statista. Smartphone user penetration as percentage of total global population from 2014 to 2020. (accessed 23 Sep 2017)

3 – Internet World Stats. Internet Growth Statistics. (accessed 23 Sep 2017)