Tuesday, June 28, 2022

Bob Is Rebalancing Yet Again…With Some Changes

Bob will be rebalancing his portfolio on 30 June 2022 with another SGD 5,000.

This time round, Bob will be using a different brokerage for his portfolio. As you know, previously Bob’s transaction fees were on the high side, thus this resulted in reduced returns.

 

With the advent of more brokerages offering lower commissions, Bob had decided to switch over to them for his trades, as well as transferring the entirety of his portfolio (assumed free of charge).

 

Remaining brand-neutral and given the size of his trades, the assumed transaction fee per trade would be SGD 5.00 (for Singapore securities) or USD 5.00 (for U.S. securities). I understand actual fees may be lower, but I would keep it at that quantum.

 

Bob’s portfolio can be accessed here.


Sunday, June 26, 2022

Diversification Is Dead! Long Live Diversification!

A few days ago, I was having lunch with an acquaintance when he made a remark that went something like this: when the markets were experiencing a sell-off in the weeks before, I saw that almost everything went down: shares, bonds, REITs, gold, etc. I thought diversification is supposed to protect us in all market conditions but somehow this is not true. Is diversification dead? 

This is a very good question, and I believe most of you would ask the same thing during that moment. As a proponent of diversification, it is in my interest (and all of ours) to address it.

 

There are two explanations: for the first one, I shall use a paper which one of the authors is the father of modern portfolio theory (MPT), Harry Markowitz. The second one is based on my observations and hypothesis with regards to the market.

 

#1: Does Portfolio Theory Work During Financial Crises?

 

This was the title of the paper written by Markowitz and two other authors (link under References below). It acknowledged that during financial crises, all asset classes go down and all correlations go up, but it also stated that this was predicted by portfolio theory and why we should use MPT.

 

Using William Sharpe’s (the inventor of the famous Sharpe Ratio) model, securities are correlated with one another because on the whole, all are correlated with the market. This brings us to the idea of market risk, or systematic risk, which cannot be diversified away. In times of crises, when the market goes down, all would go down with it.

 

To visualize this better, below is the formula of Sharpe’s model:

 

Return of a security = alpha of the security + (beta of the security x return of the market) + idiosyncratic random term

 

With a market downturn, the return of the market goes down, thus pulling down the return of the security as well. The saving grace comes in two forms: the numbers of the security’s beta (the volatility of returns with respect to the market) and the idiosyncratic random term (dubbed as unsystematic risk, which could be diversified away) and these could help to limit the fall.

 

The above is the main gist of the paper, which went on to state that it is good to diversify across and within asset classes, and of course the adage of “Don’t put all your eggs in one basket”.

 

#2: The Bedokian’s Hypothesis

 

If #1 is too theoretical for you, then probably my hypothesis (sorry, no paper) would give another dimension of explanation. 

 

Coming from a behavioural aspect, an investor or trader would move his/her capital to a security that would bring better returns (“more bang for the buck”) and/or to a perceived safe haven of the moment. This explains why typically when equities/REITs go down, the next go-to would be bonds and/or commodities, and when the bull market returns, the monies would flow back to equities/REITs.

 

In the event of a down market, usually investors and traders would want to preserve their capital first and contemplate their next move, therefore liquidity takes priority and the next best thing would be to sell whatever they have on hand. This results in why almost every asset class is negatively affected. It would take some time for them to select what their next moves are and redeploy their capital.

 

And that is not all. Depending on the prevailing economic condition, the frequency of shifting of capital between asset classes varies with each market participant; some would just rebalance their portfolios accordingly, while others would continue to move the capital across that best suit the moment. The latter could probably explain why some investors moved to long term bonds during the market sell-off1, even though the prospect of higher interest rates looming across the horizon.

 

Conclusion

 

It is easy to conclude that diversification has no use in times of a market downturn, but over time it has still proven itself to be the one valuable tool in protecting your portfolio over the long period. Bear markets, while painful to go through, were historically shorter than bull’s, and such periods would be viewed as kinks (and opportunities) as you look back in time.

 

So, is diversification dead?

 

Long live diversification!

 

References:

 

Markowitz, Harry M.; Hebner, Mark T. and Brunson, Mary E. Does Portfolio Theory Work During Financial Crises? https://www.ifa.com/pdfs/does-portfolio-theory-work-during-financial-crises.pdf (accessed 25 Jun 2022)

 

1 – Min, Sarah and McKeever, Vicky. Treasury yields fall, prices climb as investors seek shelter from stock sell-off. CNBC. 19 May 2022. https://www.cnbc.com/2022/05/19/us-bonds-treasury-prices-climb-following-stock-market-sell-off.html (accessed 25 Jun 2022)


Sunday, June 19, 2022

All About Price: Bottom Fishing

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 what almost everyone has in their minds now: bottom fishing. 

Let us go back to the period of February to March 2020; both the Straits Times Index (STI) and S&P 500 had dropped around 20-ish percent, and you were wondering if the said indices would go down further. Assuming that you had held their respective exchange traded funds (ETFs) and wanted to add more, it would be natural to get them at the lowest price before they head upwards to recovery.

 

If you had bought into them on the day it went to the lowest (29 Mar 2020 for STI and 15 Mar 2020 for S&P 500, based off the graphs on Yahoo Finance), congratulations, but then my next question would be, how did you know?

 

Chances were, you did not. You had probably happened to initiate a buy during those days, and at the back of your mind you would have had the thought of whether it would go down further. In other words, you were lucky.

 

Fast forward to the present day, we see the S&P 500 is on a downward trajectory from their year-to-date (and not so much for the STI, which is holding up well) and again begs the question of how low it could go.

 

So, is there a way to bottom fish without the element of luck?

 

My answer is no.

 

And the reason is simple: we cannot tell the future. We can roughly guesstimate the future trends based on available indicators and information at hand, and our own observations, but we can never get a precise reading. Good news is, there are a few methods and tools that you could utilise in trying to get that price as low as possible, though not foolproof.

 

#1: The 10-30 Rule

 

I had espoused the 10-30 rule in my ebook1, which is to use 30% of the cash portion in your Bedokian Portfolio (or any cash earmarked for investment) for every 10% downturn of the financial markets. To determine the basis number to work the 10% from, I would use the STI (representing the local market) or S&P 500 (representing the U.S. market), add up the 52-week high and low numbers together, and then divide the sum by two.

 

Applying this in real life, using the 52-week high-low numbers from Yahoo Finance at the close of 17 June 2022, the basis numbers for the STI and S&P 500 would be around 3252.01 and 4227.75, respectively. Taking 10% off the basis will see about 2926.81 for the STI and 3804.98 for the S&P 500, thus it is a signal that the U.S. markets are ripe for entry (3674.84 as of 17 June 2022) and our local markets would have to wait a while (3098.09 as of 17 June 2022).

At first glance you may be thinking that this rule is only applicable for S&P 500 and STI ETFs (or any index ETFs). However, you can use it as an indicator for entry into individual securities, in particular counters that are in the respective indices. On the other hand, you can use the rule on individual securities itself by taking their 52-week high/low to get a basis price. Either way, additional fundamental analysis is required, e.g., to see if the drop of the share price is due to the general downtrend situation or if there are really problems with the company itself.

 

#2: The 52-Week High/Low

 

Though similar to #1, this is meant more for individual securities than indices. I had written about it here as part of the All About Price series, where I had talked about it being used as an indicator, its benefits and caveats.

 

#3: Reversion To The Mean

 

Also part of the All About Price series (here), where I had shared about using moving averages to determine the entry and exit points of securities.

 

Conclusion

 

As I had emphasized earlier, none of the above is a foolproof way of getting a security at its lowest point. There is no way we can predict how the markets go, and I will recommend prudence by going in piecemeal rather than committing your reserves in one-shot.



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


All About Price: Reversion To The Mean

 

1 – The Bedokian Portfolio (2nd Edition), p131-133


Sunday, June 12, 2022

The Market Sell-Off: Are You Buying?

With the release of the United States (U.S.) May year-on-year consumer price index (CPI) data on Friday, showing an increase of 8.6%, the highest since 1981, the market reaction was instant: the S&P 500, Dow Jones and Nasdaq indices were down 2.91%, 2.73% and 3.52% intraday respectively, and we may be seeing the decline extended to the Asian and European markets come Monday.

 

After watching the news unfold last night, I quickly logged into my brokerage account and started to scan through our U.S. counters.

 

No, we did not sell anything. In fact, we were looking to buy more.

 

It is at such down times that bargains are available. The oft-quoted phrase by Warren Buffett, “be fearful when others are greedy, and greedy when others are fearful”, holds true. It is an opportune time to look into your holdings and watchlists, and see if any of them are worth averaging down and/or going in.


Stay calm, stay invested and stay safe. 


Friday, June 3, 2022

The Orchard Road Shopping Belt

With the opening of borders, a feature which was woefully absent two years ago is making a comeback. Yes, the tourists are coming. Never mind the inflation, interest rates and expensive plane tickets, there will always be a portion of people, dying to enact the “revenge of travel”, coming here (and the converse is true for our fellow citizens going out of here, by air, sea, and the causeways).

 

Now that the crowds (local and foreign) are coming back, let us look at our famous tourist barometer: the Orchard Road shopping belt (which I shall call it ORSB).

 

There are some variations as to where the ORSB lies, depending on one’s sources. For me, the ORSB starts from the junction of Tanglin Road/Napier Road junction to the border of Orchard Road and Bras Basah Road, which in building-wise, from Tanglin Mall to The Cathay. Also included in the area is from the junction of Orchard Road/Scotts Road to the Scotts Road/Stevens Road junction, ending at Goodwood Hotel.

 

We could sub-divide the ORSB into different sectors, namely:

 

Sectors

 

Road (From)

Road (To)

Building (From)

Building (To)

A

Tanglin Road / Napier Road Junction

 

Orchard Road / Scotts Road Junction

Tanglin Mall

Wheelock Place / Shaw Centre

B

Orchard Road / Scotts Road Junction

 

Orchard Road / Bideford Road Junction

Ion Orchard / Tang Plaza

Mandarin Gallery / Apple Store Orchard

C

Orchard Road / Bideford Road Junction

 

Orchard Road / Buyong Road Junction

Mandarin Gallery / Apple Store Orchard

Concorde Hotel Singapore

D

Orchard Road / Buyong Road Junction

 

Orchard Road / Bras Basah Road

Plaza Singapura

The Cathay

E

Orchard Road / Scotts Road Junction

 

Scotts Road / Stevens Road Junction

Shaw Centre / Tang Plaza

Goodwood Park Hotel

 

Putting it all together, this is how my ORSB looked like:

 

 


Fig.1: The Orchard Road shopping belt. Click to enlarge. Source: Google Maps.

 These sectors were derived based on my personal observations of and visits to the ORSB. Typically, a pedestrian/shopper would confine oneself to within the sector during a normal shopping/outing/dining session (up to 3 to 4 hours) before either heading to the next sector or returning to their homes/hotels. Also, sectors B, C and D were defined by the MRT stations that served them, which are Orchard, Somerset and Dhoby Ghaut, respectively.

 

The Retail REITs Along ORSB

 

For this post, I would emphasize on the retail REITs along the ORSB rather than the hospitality ones, as I assume the latter would benefit regardless of their location, i.e., “a rising (tourist) tide lifts all (hotel) boats”. I will highlight some of the numbers, plus some additional qualitative opinions and viewpoints of my own.

 

REIT

Sector Location

Property(ies)

Valuation of Property(ies) to the REIT

Net Property Income to the REIT

 

Net Asset Value (SGD)1

Dividend Yield1

Gearing1

Starhill Global REIT

 

B

Wisma Atria,

Ngee Ann City

67.7%2

59%2

0.78

6.581%

36.1%

SPH REIT

B

Paragon Shopping Centre

 

64%3

60.4%3

0.91

5.714%

30.3%

OUE Commercial REIT

 

B/C

Mandarin Gallery

8%4

9.8%4

2.37

6.821%

35.4%

Lendlease Global REIT

 

C

313@Somerset

69.3%5

58.3%5

0.81

5.780%

33.5%

CapitaLand Integrated Commercial Trust

 

D

Plaza Singapura, The Atrium@Orchard

9.3%6

NA6

2.06

4.685%

37.2%

 

From the numbers above, certain REITs are concentrated along the ORSB, like Starhill, Lendlease (figures shown here are before the acquisition of Jem) and SPH REIT. Thus, the locations of the ORSB malls for these REITs are very important, particularly when capturing footfall. Strategically located on or near MRT stations is a big plus. Having a good mix of tenants that suit the profile of people visiting them would have a multiplier effect in converting footfall into actual spend. For example, malls such as Paragon and Ngee Ann City housed a range of luxury brands that attracts consumers wanting to purchase such goods.

 

We should not underestimate the power of “spillovers”, where crowds would go to the next/nearest location for “added visits”. This spillover effect worked for Paragon, where visitors from the nearby Mount Elizabeth Hospital and Medical Centre would come over. Additionally, Paragon has a medical centre located above the mall, creating more value to itself in the Mount Elizabeth medical locale.

 

The ORSB is prominently featured in our tourist brochures and promotional media on visiting Singapore. As long as the tourist numbers continue along an upward trajectory in the coming years, and increased affluence of the local population, the heydays of ORSB would continue.

 

Note: SPH REIT is currently undergoing a chain offer by Cuscaden Peak7.

 

Disclosure

 

The Bedokian’s portfolio holds all the REITs mentioned indirectly via the Nikko AM-Straits Trading Asia ex Japan REIT ETF, and directly holds SPH REIT and Lendlease Global Commercial REIT.

 

Disclaimer

 

1 – Data obtained from reitdata.com as of 3 June 2022.

 

2 – 3Q FY 2021/22 Business Updates. Starhill Global REIT. 28 Apr 2022. https://starhillglobalreit.listedcompany.com/newsroom/20220428_201657_P40U_9XG4X6QWB2N4BS1Z.1.pdf(accessed 3 Jun 2022). NPI is calculated based on 3Q FY21/22 figures.

 

3 – 1H FY2022 Financial Results. SPH REIT. 1 Apr 2022.https://sphreit.listedcompany.com/newsroom/20220401_180600_SK6U_YH2EUDHV8N5IXZSQ.3.pdf(accessed 3 Jun 2022). NPI is calculated based on 1H FY2022 figures.

 

4 – Business Update for 1st Quarter 2022. OUE Commercial REIT. 12 May 2022. https://investor.ouect.com/newsroom/20220512_181226_TS0U_2CHQ9N06QX6UU1C8.2.pdf (accessed 3 Jun 2022). Revenue By Property metric for 1Q 2022 is used instead for NPI figures.

 

5 – Lendlease Global Commercial REIT Annual Report FY2021. 1 Oct 2021. https://www.lendleaseglobalcommercialreit.com/-/media/asia/lendlease-global-commercial-reit/investor-relations/sgx-announcements/2021/lreit-ar2021-spreads.pdf (accessed 3 Jun 2022). Figures shown here are before the JEM acquisition. For valuation, Euro/SGD conversion used was 1.5894 being average for 2021 (exchangerates.org.uk).

 

6 – FY 2021 Financial Results. CapitaLand Integrated Commercial Trust. 28 Jan 2022. https://investor.cict.com.sg/newsroom/20220128_062055_C38U_AR9JN8WAR80SVR7X.3.pdf (accessed 3 Jun 2022). NPI figures reported were consolidated, hence unable to obtain individual numbers for Plaza Singapura and The Atrium@Orchard.

 

7 – Cuscaden Peak’s offer for SPH Reit turns unconditional. The Business Times. 2 Jun 2022. https://www.businesstimes.com.sg/companies-markets/cuscaden-peaks-offer-for-sph-reit-turns-unconditional (accessed 3 Jun 2022).

 

Sunday, May 22, 2022

Astrea 7 Or Singapore Savings Bond: Which One Shall I Choose?

With both inflation and interest rates rising, isn’t it an oxymoron to go for bonds, since they are not very suitable in such times which I had stated so myself here? The answer is simple: we still need bonds in a diversified investment portfolio. Also, we had seen some instances of investors moving towards bonds during the ongoing market sellout despite threats from the two “in-“ words, like the United States Treasury yields falling due to demand for bonds1, thus proving their use as a safe haven.

With our Frasers Property Treasury 3.65% bonds maturing in a couple of days, we are looking for replacements to reinvest the redeemed funds. Besides the current bond ETFs that we are holding, I chanced upon the two Astrea 7 bonds and the Singapore Savings Bond (June 2022 issue).


Let us take a brief look at the three.

 

Astrea 7 Bonds

 

There are write-ups on the details of the Astrea 7 bonds (like here and here), so I shall not delve much into it. Basically, it is a corporate bond issued by Astrea 7 Pte Ltd, which ultimately is indirectly wholly owned by Temasek Holdings. The performance of the bonds is supported by cash flows from a portfolio of private equity (PE) funds, which are generated mainly through the monetization of or exit from investments by the PE funds. For retail investors there are the Class A-1 bonds denominated in Singapore dollars (SGD) with a minimum 5-year duration at 4.125% annual coupon rate, and the Class B bonds denominated in United States dollars (USD) with a minimum 6-year duration at 6% annual coupon rate.

 

Singapore Savings Bond

 

SSB for short, it is a bond backed by the Singapore government, and for the June 2022 issue, the average return rate is 2.53% annually if held over the full tenure of 10 years. The rates of the SSB are determined by a formula that takes reference from the yields of one, two, five and ten-year Singapore Government Securities (SGS).

 

Comparison

 

Besides the facts that both coupon rates and the nature of the bonds differ, we would still need to compare from an investor’s point of view in terms of other conditions. I had made a table for easy viewing and decision making:

 

Bond

Astrea 7 Class A-1

Astrea Class B

SSB (June 2022)

Denomination

SGD

USD

SGD

Minimum application amount (Principal)

SGD 2,000

USD 2,000

SGD 500

Tenure

10 years with mandatory call after 5 years

10 years with mandatory call after 6 years

10 years

Annual coupon rate

4.125% + 1% one-time step up after 5 years (if not redeemed)

6% + 1% one-time step up after 6 years (if not redeemed)

Averaged 2.53% if held for full 10 years

Payout frequency

Semi annual

Credit rating (Fitch)

Expected A + sf

Expected BBB + sf

AAA (rating for Singapore government)

Underlying assets

Private equity funds

NA

Bond seniority

Senior

Lower than Class A-1

NA

 

Fig. 1: Comparison of the bonds.


Risks

 

While all investments carry risks in many forms (which includes a total default), we need to manage in terms of the probability of them happening. I will highlight a couple of risks here that, in my opinion, have a higher probability of happening.

 

Interest rate risk – This risk is real with all the talk about interest rates rising. If the prevailing interest rate is higher than the bond’s coupon rate, then the bond’s value would go below par due to its sell-off by investors going after newer bonds with a higher coupon rate and/or bank deposits with higher interest rates. This is not applicable for SSB as the bond value can be redeemed at par value.

 

Forex risk – Astrea 7 Class B bonds are denominated in USD, which is subjected to foreign exchange risk. Though USD-SGD fluctuates between 1.2x and 1.4x for the past decade, we may not know its direction in the future. With a coupon rate of 6%, you may earn less or more if SGD strengthened or weakened against USD, respectively. On a related note, this also concerns the SGD value of your bond principal should you initially invest at a higher/lower USD-SGD and redeemed at a lower/higher USD-SGD, which could be viewed as an additional loss/gain.

 

Further Points

 

To have a glimpse on how the Astrea 7 bonds might fair, we could see from the past iterations that were listed the last few years: Astrea IV, Astrea V and Astrea VI (incidentally these three used Roman numerals). As of 20 May 2022, both Astrea IV and Astrea V were trading above par (SGD 1.04 and SGD 1.022 respectively) while Astrea VI was below par at SGD 0.99. Coupon rate wise among the four bonds, Astrea IV is the highest at 4.35% and Astrea VI is at 3%, which probably explain why the latter was trading below par. Based on Astrea 7’s higher rates at 4.125% for SGD or at 6% for USD, it might be trading at a premium (i.e., above par) upon listing, ceteris paribus.

 

Being a bond based on PE, the Astrea bonds are holding well so far. However, with an expected recession looming and the recent battering of growth stocks, this may pose a concern as usually PE are associated with growth, though I foresee this as a short-term kink.

 

Assuming all the compared bonds run the full tenure of 10 years, comparing June 2022 SSB’s averaged 2.53% per year, the risk premium is 1.595% (year 1 to year 5) / 2.595% (year 6 to maturity) for the SGD Class A-1 and 3.47% (year 1 to year 6) / 4.47% (year 7 to year 10) for the USD Class B. Class B’s rate is naturally higher to compensate for the risk taken since it is lower in debt seniority and exposed to forex risk. 

 

The Bedokian’s Take

 

The Bedokian Portfolio’s bond selection entails the bond to be at least of investment grade and five years to maturity2, to which all the bonds mentioned here had passed. Having reviewed and weighed the factors mentioned here and in other blog posts, we would be allocating between the June 2022 SSB and the Astrea 7 Class A-1.

 

The closing date for the application for the SSB and the Astrea 7 bonds are 26 May 2022 and 25 May 2022, respectively.

 

Disclaimer 

 

Reference

 

Astrea 7 Bond Prospectus – https://www.azalea.com.sg/storage/app/media/reports/Prospectus/astrea-7-pte-ltd-prospectus-19-may-2022.pdf

 

1 – Min, Sarah & McKeever, Vicky. Treasury yields fall, prices climb as investors seek shelter from stock sell-off. CNBC. 19 May 2022. https://www.cnbc.com/2022/05/19/us-bonds-treasury-prices-climb-following-stock-market-sell-off.html (accessed 20 May 2022).

 

2 – The Bedokian Portfolio (2nd Edition). p108.