Saturday, October 20, 2018

T2023 S$ Temasek Bond

By now, quite a number of financial bloggers had covered the upcoming T2023 S$ Temasek Bond (the Bond), so I will just give my opinion from a Bedokian Portfolio investor’s point of view.

Bond Overview

Let us have a look at the details of the Bond:


Figure 1 – Overview of the T2023 S$ Temasek Bond1

As highlighted in my ebook The Bedokian Portfolio2, a bond is consisted of three basic components; the bond principal, the coupon rate and the bond maturity date. From the information in Fig. 1, the bond principal is at least Singapore Dollar (S$) 1,000.00 (for public offer, i.e. you and me), the coupon rate is 2.7% and the maturity date is on 25 October 2023 (five years).

So if a bond holder holds S$1,000.00 worth of the Bond, he/she will be getting S$27.00 a year, in two six-monthly payouts of S$13.50 each (S$27.00/2 = S$13.50). If the bond holder holds the Bond till maturity, he/she will get a total of S$135.00 in coupons, and the S$1,000.00 back.

The bond issuer is Temasek Financial (IV) Private Limited, and the guarantor is Temasek Holdings (Private) Limited. From the product highlights sheet3, the bond issuer is a wholly owned subsidiary of the guarantor. Both the issuer and guarantor are being rated AAA and Aaa by credit ratings agencies Standard & Poor’s and Moody’s respectively, thus making this an investment-grade bond.

The Bond will be listed on the Singapore Exchange (SGX), meaning it can be traded just like any other company shares and bonds (government and corporate).

The Bedokian’s Take

If you were following the bond selection criteria in the ebook4, this bond would suit you to a T, especially if you can get it during the public offering; at par value, investment grade credit rating, and at least five years to maturity.

However, as with any financial instrument, caveats in the form of risks apply. The product highlights sheet had mentioned a number of risk factors, some of which reflected what I had mentioned in my ebook5. Although the default risk (risk of non-payment of coupons and/or principal) is minimal (we all have heard of Temasek Holdings (Private) Limited), I would think two other risks, namely volatility risk and rate risks, apply to this Bond, and these two risks affect each other as well.

As you can recall, this Bond will be listed in the financial markets, thus it is subjected to demand and supply which results in market price changes, hence volatility risk. Rate risks refer to the impact of interest rate and inflation rate on the Bond; if both rates are higher than the coupon rate, then it is not worthwhile to hold onto the Bond, therefore the demand of the Bond may drop and along goes with the market price (back to volatility risk), ceteris paribus.

The Bond’s coupon rate is relatively lower than that of other corporate bonds’, granted that it has a shorter duration than the rest, but it is higher than government bonds of the same duration. Hence categorizing this Bond based on its coupon rate, I would place it between government and corporate.

If you want to invest in this Bond, do try to get it at the public offering stage and remember to adhere to the 12% limit rule, and if possible, hold it till maturity.


1 – Temasek. T2023-S$ Temasek Bond Offer. Bond Offer Summary. https://www.temasek.com.sg/en/our-financials/bond-offer.html (accessed 20 Oct 2018)

2 – The Bedokian Portfolio, p29

3 – Temasek. T2023-S$ Temasek Bond Offer. Bond Offering Documents. Product Highlights Sheet.  https://www.temasek.com.sg/content/dam/temasek-corporate/our-financials/bond-offer-2018/Temasek%20Product%20Highlights%20Sheet%20(16%20October%202018).pdf (accessed 20 Oct 2018)

4 – The Bedokian Portfolio, p100-101

5 – ibid, p33-34

Further Reading

Saturday, October 13, 2018

The Red Scare

The whole world went red during the period of 10-11 October, sending investors and traders alike panicking. Fear and anxiety gripped the financial markets as almost all major indices took a nosedive during those two days.

While I shall not dwell on what really happened and will this happen again next week (short answer: I don’t know), but we can learn a few quick lessons from this tumultuous session.

Lesson #1 – Do Not Panic

When news buzzed around about the fall of share prices and indices sometime on the morning of 10 October, some investors around me began to panic. The panic I saw was on a scale, ranging from ‘I am now at a loss from my entry position’ to ‘Oh no! The crash is coming!’. If one is experiencing such panic, it is normal, but if one starts to act on this panic, then it is worrisome. Panic selling not only results in losses incurred, but also clouds your judgment.

Take a step back and observe. A sound investor see things in a calm manner, even if the sky is rising or falling around.

Lesson #2 – Look For Opportunities

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." – Warren Buffett

"The way to make money is to buy when blood is running in the streets." - John D. Rockefeller / Nathan M. Rothschild

The above two quotes are quite self-explanatory. When crisis hits, first is to follow lesson #1. Then look out for fundamentally sound companies whose prices had fallen just for the sake of it without any valid reason. Thinking about this and putting it bluntly, we are capitalising on the panic of others; a panic sell will drive the price down, since supply will be more than demand, and we would be happy to be on the demand side for this round. Well, this is business.

Lesson #3 – Correlation Is Observed

In that two-day period, the price of gold spiked from United States Dollar (US$) 1190 to about US$1220, a 2.5% increase, as investors tried to preserve their capital by moving away from equities to gold, typically seen as a safe haven. With the demand for gold goes up, so does its price. This is an example of correlation between asset classes at work.

I had run a correlation test between the iShares MSCI World ETF (URTH), representing the world’s equity asset class, and the SPDR Gold ETF (GLD) for the period of 7 – 12 Oct 2018 using tools from the Portfolio Visualizer site. The correlation score between URTH and GLD is -0.581, meaning there is negative correlation between these two during that time.

Conclusion

I hope the above (very) short lessons will better prepare you for the coming weeks ahead should the markets turn south. Meanwhile enjoy the weekend!

1 – www.portfoliovisualizer.com. Asset Correlations for the period 7 – 12 October 2018, with daily returns for correlation basis. The period is selected as it is the shortest possible one for the site to generate the correlation data as at 13 October 2018.

Saturday, October 6, 2018

Tips Are Good For You

During my hobby trading days (or my “young and foolish” days), besides using very rudimentary technical analysis, I would scour the Internet and try to hear from my other trading friends and acquaintances for tips, so that I could make a quick buck from the stock market. Sometimes I make, sometimes I lost and sometimes I would just break even.

When we received a tip while trading or investing, chances are that it will be met with positivity; who would not want a money-making opportunity, right? And with this euphoric thinking, most caution would be thrown into the wind and the rush to capitalise on the tip is very likely.

I believe some of us had been through what I had described above. Of course, after a while, I had realised how dumb it was to chase after non-guaranteed tips and leads.

Having said about how bad tips were, you may be wondering by now about the choice of title of this blog post. Yes, tips are good for you. Allow me to share why this is so.

Tips Could Provide A Spark

At times we are so engrossed with our own thoughts and points of view that we failed to see things outside of our own “box”. Tips, whether intentional or not, could give that “spark” that brings you out of the said box. All you need is a tinge of open mindedness and some inquisitive nature. 

When presented with a tip, do not just think about how it can make you money, but rather think about why the tip is mentioned as such. If you go along this line of thought, you will probably see a whole new dimension that is related to the tip. From there you can then capitalise on it and start to make some money.

When the United States (U.S.) Federal Reserve was starting to raise interest rates a couple of years ago, there was talk of buying up local banks as a rising interest rate environment was profitable for them (Note: if you want to know the relationship between the U.S. interest rates and Singapore’s please read here). With this tip, not only I had looked at the three local banks, but also the three local finance companies as well, since they were in the same sector/industry.

Tips Come From Unusual Sources

Sometimes tips could just come from the most unusual sources, and a keen eye and ear are all that is needed. Being observant is key in this aspect, though you do not really need the super sleuth skills of Sherlock Holmes to achieve that.

First to start off would be the everyday things that we take granted for. What is the brand of your mobile phone? Which brand of handbags that you see most common while commuting to work? What are the companies’ names emblazoned on the sides of the rubbish trucks that ply the streets everyday? Which brand of toiletries that your family uses? Why do we mostly see a lot of MacBook users inside Starbucks?

All these questions can be developed further and in detail. Who knows, you might be able to get something out of these prospects.

Tips From Professionals

I believe you may have received emails of analyst reports and daily updates of the financial markets from your brokerages (if not, give them a ringer. They will be glad to provide you). If you have multiple brokerages, it is even better, for you will get different opinions of the same company or current market/economic situation.

While the reports are written by analysts and economists who know more of the economy and financial markets than you and me combined, the truth is very clear; no one really knows what the future holds. So now the question is, if their estimated guesses (or guesstimates) are as good as anyone’s, why do we need to read them?

The answer is simple. Typically analysts and economists are privy to information that we ordinary folk have little access to. For analysts, they are being invited by (or invite themselves to) the companies, where they could see things first hand and hear things from the horse’s mouth. For economists, they have the necessary modelling tools and techniques to come out with a guesstimate of what is to come.

With the published reports, updates and viewpoints, you can combine them with your own opinions and findings, and decide from there.

Conclusion

The ultimate result is to have tips from the above three sources, plus your own, to give you a (the best you could) full picture of the whole scheme of things. The only major concern is information overload, which may lead to confusion (especially with differing opinions) and/or selective bias (picking opinions which you agree with and diss the rest).

Still, as I had said time and again, we cannot tell the future, but a decision based on guesstimates stands a better chance than pure guesswork, or guesses based on groundless tips.

Thursday, September 27, 2018

The Phillip SING Income ETF

There is a new ETF coming to town; the Phillip SING Income ETF (the ETF) and it is scheduled to be listed on the Singapore Exchange on 29 October 2018. From the product highlights sheet (see link at References below), this is what we know of the ETF:

  • It replicates, as closely as possible, to the Morningstar Singapore Yield Focus Index (the Index).
  • The ETF is suitable for investors who want capital growth and regular income in the form of dividends, with an indexed approach.
  • The investment strategy used by the ETF manager would be the replication strategy (i.e. investing in the Index’s underlying securities in their actual proportions). However, a representative sampling strategy (i.e. non-Index component securities with a high correlation/similar valuation/market capitalisation to the actual Index securities may be included) would be employed to track the index more efficiently.
  • Semi-annual distributions in June and December or such other times as the ETF manager may determine.
  • The total expense ratio is about 0.64% of the ETF’s net asset value, consisting of 0.4% manager’s fee, 0.04% trustee’s fee, 0.1% custodian fee and 0.1% other fees and charges. The latter two percentages are variables and may be exceeded.


The Index and the STI

Listed in Figure 1 are the components of the Index:

NameWeight (%)
Singapore Telecommunications Ltd10.18
DBS Group Holdings Ltd8.5
Oversea-Chinese Banking Corp Ltd7.95
United Overseas Bank Ltd7.46
Singapore Exchange Ltd5.77
CapitaLand Commercial Trust5.4
CapitaLand Mall Trust5.2
Singapore Technologies Engineering Ltd5.19
SATS Ltd5.09
Mapletree Commercial Trust4.72
Hongkong Land Holdings Ltd4.69
NetLink NBN Trust Regs Units Regs S4.14
Dairy Farm International Holdings Ltd3.5
Parkway Life Real Estate Investment Trust2.3
SIA Engineering Co Ltd2.19
Sheng Siong Group Ltd2.06
M1 Ltd1.62
Keppel Infrastructure Trust1.57
Manulife US REIT1.57
OUE Hospitality Trust1.48
United Engineers Ltd1.41
Haw Par Corp Ltd1.36
StarHub Ltd1.25
First Real Estate Investment Trust0.98
AIMS AMP Capital Industrial REIT0.95
Hong Leong Finance Ltd0.9
SPH REIT0.87
Raffles Medical Group Ltd0.8
Frasers Hospitality Trust0.51
Silverlake Axis Ltd0.39

Fig.1 - Components of the Morningstar Singapore Yield Focus Index

The companies that are in bolded italics are also in the Straits Times Index (STI). While it is easy to assume that this Index and the STI share similarities, there are differences between the two.

The first would be the sector make-up and proportion. For the STI, the three local banks (DBS, UOB and OCBC) stood at about 33% of the weightage, while for the Index it is only at 24%. Also, there are seven property centric companies (including REITs) in the STI, but the Index contains 12. 

Secondly, the aims of the indexes are different. The Index is income focused, whereas the STI captures the most liquid companies in the Singapore market, and it is like a microcosm of the local economy. 


The Bedokian’s Take

Besides the SPDR STI ETF and the Nikko AM STI ETF, this is the next closest Singapore-listed equity ETF you can get. In fact, the ETF can be considered a good complement or even a substitute for the equity component of the Bedokian Portfolio, given the ETF’s focus of providing yield and the Bedokian Portfolio’s emphasis on dividend and index investing.

The caveat here is that REITs hold about 24% of the ETF’s weightage, as seen from Figure 1. Extrapolate this onto the balanced Bedokian Portfolio (35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash), we could have a Bedokian Portfolio of about 43% in REITs. Even for the STI, the overall property weight (including REITs and property centric companies) is only about 15%. This is not unusual as the ETF emphasizes on yield and REITs typically provided a good one.

Still, if you are interested in getting this ETF and want to maintain a strategic asset allocation, you may have to take an additional calculation step of dissecting the REIT part of the ETF and categorise it under REITs, so there will be some sort of ETFs overlapping between the equity and REITs portions of your portfolio. 


References

Monetary Authority of Singapore. OPERA. Phillip SING Income ETF Prospectus. 24 Sep 2018. https://eservices.mas.gov.sg/opera/4b35e09c-17a6-4b9b-9903-2a1cea001d25.publishresource(accessed 25 Sep 2018)

Monetary Authority of Singapore. OPERA. Phillip SING Income ETF Product Highlights Sheet. 24 Sep 2018. https://eservices.mas.gov.sg/opera/222d30b8-0632-43aa-8625-ef50c106fde2.publishresource(accessed 25 Sep 2018)

Morningstar. Morningstar Index Data.  21 Sep 2018. http://corporate1.morningstar.com/us/products/indexes/(under Equity > Dividend > Morningstar Singapore Yield Focus Index) (accessed 25 Sep 2018)

Morningstar. Morningstar Indexes. Construction Rules for the Morningstar Singapore Yield Focus Index. May 2018. http://corporate.morningstar.com/US/documents/Indexes/Construction%20Rules%20for%20Morningstar%20Singapore%20Yield%20Focus.pdf(accessed 25 Sep 2018).

FTSE Russell. FTSE ST Index Series. 31 Aug 2018. http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?issueName=SGXSERIES. (accessed 26 Sep 2018)

Monday, September 17, 2018

Considerations of ETF Selection

ETFs are great tools to start off passive index investing, whether you want to follow the Bedokian Portfolio or other investment strategies and approaches. Before you jump right in, here are some considerations that you should take note of.

Consideration #1 – The Index

The index determines the make-up of the underlying securities of the ETF. Take the Straits Times Index (STI) for instance, both the STI ETF and the Nikko AM STI ETF track it, but there could be some slight differences between them, such as their proportions of the STI components and how closely the ETF tracks the index.

Additionally, you may also want to see the sector/industry exposure of the index, as well as regional/country exposure if applicable. This is important due to diversification.

Consideration #2 – The Structure of the ETF

I had mentioned earlier about physical and synthetic ETFs. Although in my ebook I had stated that physical ETFs are preferred, due to the counterparty risk that synthetic ETFs have, the latter do track the index closer than the former. The verdict of going with physical or synthetic is up to you.

The other thing to take note of would be whether you want to have dividends from the ETF. An ETF could be capitalising (reinvest the dividends from the underlying securities back to the ETF) or distributing (distribute the dividends) on a periodic basis, so again it is your call which one is more suitable.

Consideration #3 – Total Expenses Ratio

Expenses are part and parcel of running an ETF, and ETF providers impose these expenses as a percentage (dubbed as total expenses ratio or TER) of the entire investment fund, so it is important to select an ETF with as low TER as possible.

As TER is imposed yearly, there is compounding effect at work. For example, take two similar ETFs called A and B, with an annual TER of 0.5% and 1% respectively. Assuming an initial $10,000 investment with a 10% annual return, after 20 years ETF A will return $61,416 while ETF B returns only $56,044. The 0.5% TER variation spelt a difference of $5K+ in returns.

To find out about an ETF’s TER, you can look it up at the ETF’s fact sheet or prospectus, or online on ETF screeners and Google/Yahoo Finance pages.

Consideration #4 – The Liquidity of the ETF

The liquidity of the ETF (or any other financial instrument) is the measurement of how quickly it can be transacted in the financial markets without affecting its price. For instance, if ETF A has a 10,000-unit buy queue at $1 and a 5,000-unit sell queue at $1.05, it is highly liquid, since the narrow price spread would make the buy/sell transactions easier. However, if ETF B has a 1,000-unit buy queue and a 500-unit sell queue at $1.00 and $1.50 respectively, then it is not so liquid or is illiquid.

Fortunately in a way, there are market makers (like the authorised participants that are responsible for the ETF creation and redemption processes with the ETF providers) who can facilitate some liquidity for the ETF. These market makers act as middlemen and will buy up the sell side and sell to the buy side, earning some profit along the way if feasible.

Consideration #5 – Tax 

Specifically tax from dividends. There are some ETFs whose dividends are subject to tax, like those based on foreign markets. Typically if you (as an individual) invest in a United States (U.S.) market ETF, and if you are not a U.S. person, a 30% withholding tax is imposed on the dividend. Meaning if an ETF is giving a 5% annual dividend yield, with the withholding tax, the effective yield is only 3.5%. 

Still, if you are still unsure about taxes and such, it is best to consult an accountant or tax expert (and I’m not one of them, apologies).

Putting Them All Together

The above five considerations are not exhaustive but I believe they are sufficient in your ETF selection for your investment portfolio. A holistic approach is needed; it is better to balance out the considerations and not to over-emphasize on one, like looking strictly at TER without regarding the index.

Saturday, September 8, 2018

The SGX ETF Universe

There are almost 60 Exchange Traded Funds (ETFs) listed on the local Singapore Exchange (SGX). You can find them on the SGX webpage, under “ETFs”.

To make things easier, I have a screenshot of the webpage in Figure 1.


Fig. 1 – SGX Listed ETFs (as at 7 Sep 2018, 5:06PM)

From here, you can learn a few things on ETFs.

#1 – ETF Providers

The listed ETFs are typically prefixed with the name/abbreviation of the ETF providers, such as the IS Asia HYG, with IS being iShares; and SPDR being ETFs from State Street Global Advisors, etc. If there is no prefix (such as GLD ETF), a quick Google search will yield who the ETF provider is.

Some ETF providers will have a number of ETFs, while a few only have one so far (e.g. UOB’s UETF SSE50 China).

#2 – Asset Classes and Regions/Countries

The good thing about ETFs is that they allow you to invest in various asset classes, as well as different regions/countries. 

Interested in the United States (U.S.) equities market? There is the SPDR S&P 500 US$ and the XT MSUSA US$, to name a few. 

Want some bonds? We can choose the localised ABF SG Bond ETF or the more international IS Asia BND US$, among others.

REITs? PHIL AP DIV REIT, NikkoAM-STC Asia REIT or LION-PHILIP S-REIT may be your answer. 

If you wish to enter the ASEAN regional market, there is the CIMBASEAN 40 or the ONESTOXXASEAN. 

Commodities wise, we have the GLD ETF.

#3 – Physical and Synthetic ETFs

A physical ETF will hold all, if not most, securities that made up the index that it follows, while a synthetic ETF uses swaps (a form of derivative financial instrument) with a counterparty (usually an investment bank) to track the index.

SGX had labelled synthetic ETFs with a “X@” symbol  (e.g. Lyxor Asia US$, XT MSWorld US$, etc.) for ease of reference. Alternatively, you can visit the ETF provider page to read up the prospectuses for further information.

#4 – Inverse ETFs

There are also inverse ETFs, where if the indices go down, their prices go up, and vice versa. Inverse ETFs are used mainly for speculation and it is not meant for holding it long term. There is an inverse ETF on SGX called the XT S&P 500 – 1x US$ (see Figure 2), and can be found under Leveraged and Inverse Products (Specified Investments Products) in the SGX website.


Fig. 2 – SGX Listed Inverse ETF (as at 7 Sep 2018, 5:06 PM)

#5 – Trading Currency

You may have noticed by now that there are listed ETFs with the same name but different currencies, like the CIMB APAC Div S$D and CIMB APAC Div US$. The S$D and US$, representing Singapore dollars (or SGD) and U.S. dollars respectively, are called trading currencies.

Regardless of whether an ETF can be traded using SGD, USD, Euros or even Yen, all these are of no concern, for the most important part is not the trading currency, but the currency of the securities that make up the ETF. For example, if you have changed some SGD to buy a U.S. Dow Jones Index ETF in Sterling Pounds, the foreign exchange risk is between SGD and USD (which all constituents of the Dow Jones Index are based on), not the SGD – Sterling Pound and the Sterling Pound – USD pairs.


ETFs are great investment vehicles to start off a passive index investment portfolio. In my next blogpost, I will highlight some of the considerations when embarking on one.

Monday, August 27, 2018

Introducing The Portfolio Multiverse

The Portfolio Multiverse is a concept in which an individual would plan, manage and organise his/her investment and trading portfolios based on each portfolio’s objective(s) and characteristics, and the individual’s risk appetite, risk tolerance, knowledge and allowable time for the portfolios, asset classes and/or financial instruments used in it (that is a mouthful, I must admit). This concept stemmed from my mental accounting bias and personally I felt it is easy to view one’s overall investment/trading picture.

Is it difficult to start off this Portfolio Multiverse? Not really. In fact, if you are a salaried person and have started out investing using your disposable income, you already have a Portfolio Multiverse in place. For common folks like you and me, we can start off our Portfolio Multiverse with three basic portfolios. 

The Three Basic Portfolios

For most Singaporeans, the first basic portfolio to start with is their almost risk-free Central Provident Fund (CPF) accounts. Regardless of whether you tinker with it by investing, or just leave it as it is, the age to start withdrawing is known (from age 65, using the CPF Life model1), so there is a sort of rough gauge on how much you will be getting per month at a certain point of time. We can treat this as the basic retirement portfolio.

Then you can create an investment portfolio (e.g. The Bedokian Portfolio) using your disposable income to augment your CPF for retirement. Since the use of CPF is subjected to regulations, this portfolio is more flexible and liquid, and it can also be used to fulfill your financial objectives such as determining when to start collecting the yield as passive income or to fund foreseeable big ticket items like your child’s education.

If you still have spare cash, you may consider opening up a Supplementary Retirement Scheme (SRS) account2. You can save some taxes along the way while building up the SRS fund through investing. The uniqueness about SRS is that you are given up to 10 years to withdraw the amount3, and can start at or after the prevailing statutory retirement age when you first made the contribution (currently is age 62).

The Timeline Map

With these three basic portfolios, you can chart your financial plans and milestones using a timeline map. Each portfolio is assigned a timeline, and on each timeline you can indicate the objectives, milestones and payouts along the way; for example on the Bedokian Portfolio timeline, you can indicate that you want to have $100,000 by age 30 with a projected yield of 5%, by age 45 to withdraw $20,000 to fund your home re-renovation, and by age 55 you would want to commence drawdown at 3%, etc.

The timelines are not isolated from one another. They are supposed to work together to achieve your overall financial goals, especially at the retirement stage, at which you would have income streams from CPF, SRS and the Bedokian Portfolio. Furthermore, depending on what other timelines you might have and the prevailing regulations for CPF and SRS, the funds can be transferred among one another (e.g. allocate a portion of the dividends from your Bedokian Portfolio to top up your CPF or SRS).

Expanding The Portfolio Multiverse

As life goes on, and if more capital is available to you, you could either just add it into these three, or go for other portfolios, asset classes and financial instruments such as property or annuities (provided you have gained some knowledge on how to invest in them). There you can create additional timelines and further plan your financial path.

The Portfolio Multiverse concept is still a work-in-progress, but the main gist is described above.

In case you are interested, I have written some blog posts on how to implement The Bedokian Portfolio on your CPF and SRS portfolios (look them up at the references section below).


1 – Central Provident Fund Board. CPF Life. Last updated 23 July 2018. https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/cpf-life (accessed 19 Aug 2018)

2 – Ministry of Finance. Supplementary Retirement Scheme. 7 Dec 2017. https://www.mof.gov.sg/Portals/0/mof%20for/individuals/SRS_Booklet%20-%207%20Dec%202017.pdf?ver=2017-12-07-105458-317 (accessed 19 Aug 2018)

3 – You need not withdraw everything after 10 years, but 50% of the remaining amount after that period would be subject to income tax.

References