Is There Blood Running In The Streets Now?

The above line was derived from the famous quote by John D. Rockefeller (or some say Nathan M. Rothschild) which goes “The way to make money is to buy when blood is running in the streets”.

The colour of blood is red, which is also the same colour to denote a down market or securities price. The phrase “blood is running in the streets” could metaphorically mean the entire market is red, and/or a lot of investors/traders had “bled” their capital, incurring huge losses.

It is at this time when market panic sets in and equities are at a depressed price, oversold by investors to move their capital to other asset classes and safe havens. It is also at this time that bargains can be sought. Being in the same asset class, majority of equities will suffer the “drag-down” effect, including those that are fundamentally sound. This covers the “the way to make money” part of the quote.

The recent equity market decline has sparked several indications of a bear market looming. The United States (U.S.) Standard & Poor’s 500 (S&P500) index had fallen about 12.8% year-to-date (YTD, i.e. from 2 Jan to 24 Dec 2018)¹, and the U.S. Dow Jones Industrial Average (DJIA) declined 12.2% YTD². On the homefront, the Straits Times Index (STI) had dropped 11.1% YTD³. And at the time of writing this, the Japanese Nikkei 225 index had fell 5% intra-day. Quite dramatic falls, I would say, but does this warrant a blood on the streets scenario?

We shall take a look using two groups of indicators: the market Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios, and the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

P/E & P/B Ratios

Let us take a look at the current P/E and P/B ratios of the S&P500, DJIA and STI:

Index	P/E	P/B
S&P500	16.03	2.8169
DJIA	14.52	3.3836
STI	11.30	1.0620

Fig. 1 – P/E and P/B ratios for the S&P500, DJIA and STI (source: Bloomberg as at 25 Dec 2018)

P/E ratio wise, if based on the conventional number 15, we can infer that the markets are relatively cheap. For the S&P500 and DJIA, with technology and healthcare equities (typically high P/E sectors) taking up 35% and 28% of the indices respectively⁴, it can be said that they are at a bargain now. On the P/B front, however, the S&P500 and DJIA are still overvalued by conservative estimates, while for the STI on a whole is close to 1.

The VIX

The VIX, or sometimes called “The Fear Index”, is an indicator used by many investors/traders to gauge market volatility. A high VIX signifies high volatility (and of course, the accompanying fear). It is mathematically calculated with a combination of call and put options on the S&P500 component equities, and I shall not delve further into this (for more information, you could read the white paper from the Reference links below).

The VIX had spiked recently, from 21.63 to 36.07 between 10 Dec and 24 Dec 2018, a 66.8% rise⁵. There were spikes in VIX’s history, including the GFC period in 2008, the Eurozone crisis in 2011 and the recent one back in February of this year due to a flash crash. 

Most of the spikes do not last long; the longest spike was during the GFC and it lasted from Aug 2008 to about June 2009. Many people have different VIX thresholds to signal a buy call, like 25, 30, 35 or even 40.

The Bedokian’s Take

The P/E, P/B and VIX are just a few indicators that can be used to determine if there is really a massive bloodletting out there, though it can get very subjective. There are other parameters to look out for: geopolitical situations, interest rates, regional/sector performance, and of course other asset classes such as bonds, REITs, commodities and cash. 

One way to determine buy-in is to use the “10-30 Rule” which I had highlighted in my ebook⁶ to gauge an entry point/price for an index ETF or equities. Another way is to see if an index and/or share price had gone to its 52-week, 2-year or X-year low, though I would caution this method and I recommend an extensive fundamental analysis to be done along together. Lastly, do adhere to the principles and guidelines for a diversified Bedokian Portfolio (or any of your preferred portfolio allocation) while doing all these.

Brace yourselves and get ready for the storm.

1 – Yahoo Finance. S&P500. https://finance.yahoo.com/quote/%5EGSPC/ (accessed 25 Dec 2018)

2 – Yahoo Finance. Dow Jones Industrial Average. https://finance.yahoo.com/quote/%5EDJI/ (accessed 25 Dec 2018)

3 – Yahoo Finance. Straits Times Index. https://finance.yahoo.com/quote/%5ESTI/ (accessed 25 Dec 2018)

4 – S&P Dow Jones Indices. https://us.spindices.com (accessed 25 Dec 2018)

5 – Yahoo Finance. CBOE Volatility Index. https://finance.yahoo.com/quote/%5EVIX/ (accessed 25 Dec 2018)

6 – The Bedokian Portfolio, p119-120

References

CBOE. The VIX White Paper. http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/the-vix-index-calculation

All About Price: Buyer/Seller Remorse and Premorse

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. In this post, I will touch on a common psychological experience that most, if not all, of us had gone through; buyer/seller remorse and premorse.

Buyer/Seller Remorse

Buyer/seller remorse, in the context of investing/trading, is an emotion of regret that is felt after executing a transaction. The most common question stemming from this remorse is “Did I buy/sell at the right price?”. Such feelings will get amplified if a buyer buys at a price, only for it to go down lower later on, or for the seller, to sell at a price, only to see it going higher afterwards.

Buyer/Seller Premorse

Yes, there is this thing called buyer/seller premorse (OK, I made up that term, but I find it appropriate for the occasion). It is when one has set a buy/sell price, and seeing the buy price going lower (or the sell price getting higher), he/she will adjust the buy price lower to get the most bargain (or adjust the sell price higher to maximize profit), only to see it not transacted by the end of the trading day. Worse is, on the very next day, the price does not go back to where you want them to be. Ouch.

It’s A Jungle Out There

The financial markets contain a myriad of individuals and organisations transacting securities at a furious pace, and each one of them has a different target buy/sell price. Value investors will use their different valuation methods to transact; traders will use volume and trend to enter/exit the markets; and some will just use their gut feel and press the buy/sell button (while praying for hope). 

With all these goings-on, you would need to possess either tremendous skill or sheer luck to buy at the lowest or sell at the highest at any given period.

Preventing Remorse And Premorse

For buyer/seller remorse, the best way not to think about it is to be forward looking. A decision was done and there was no way to reverse it, so rather than wasting time brooding over it, it is better to start thinking about your future investment/trading plans and strategies. Treat it as an experience and just move on.

For buyer/seller premorse, you can come out with a range of prices based on your fundamental and/or technical analysis. Once this range is set, stick to it until the transaction is done or there are some situational changes that you need to recalibrate the range.

There is no right or wrong price to enter or exit. Either way, if you think that the price you bought at is a bargain or the price you sold at is a profit, then be content with it.

Merry Christmas!

Check out the other post in my All About Price series.

All About Price: Introduction & Valuation of Value

Here Comes Bob (Again)

Bob will be rebalancing his portfolio with an additional injection of S$5,000 on 2 Jan 2019. And no, Bob has still yet to consider individual company securities, despite his pledge to look into them early this year. Oh well…

Look out for Bob’s portfolio status here in January 2019!

Financial Ratios: Much More Than Meets The Eye

Looking at financial ratios is part and parcel of the fundamental analysis process, where it is carried out to determine if a company’s share, REIT or corporate bond is worth to invest. For today’s post we shall look at the mathematical aspect of ratios and how we could gain more insights into these numbers.

Ratio Basics

While most financial ratios are given as numbers, it is the actual end result of a fraction. A ratio is just that, a fraction, and it is made up of a numerator and a denominator. A Price-to-Book (P/B) ratio of 0.8 could mean anything; it could be 0.80/1.00, or 1.20/1.50.

When comparing ratios across different time periods, it is important to look at the numerator and denominator, not just the ratios. Take for instance the dividend yield ratio of a fictitious Company A over three years below:

2015: 3.5%

2016: 4%

2017: 5%

At first glance it looks good, with an increasing dividend yield ratio over the three years. But if we look deeper at the numbers that results in the ratios, you may want to reconsider investing in Company A:

2015: ($0.035/$1.00) x 100% = 3.5%

2016: ($0.032/$0.80) x 100% = 4%

2017: ($0.030/$0.60) x 100% = 5%

In actual fact, Company A’s dividend amount and share price is reducing over the three years. So it is important that you should look at the make-up of the ratios instead of taking them at face value.

Another point on ratios is purely math 101; if a ratio is rising, it could mean one of the five possible reasons:

• The numerator is getting larger while the denominator remains the same.
• The numerator is getting larger while the denominator is getting smaller.
• The numerator is getting larger while the denominator is getting larger but at a slower pace than the former.
• The numerator remains the same while the denominator is getting smaller.
• The numerator is getting smaller while the denominator is getting smaller but at a faster pace than the former.

Thus if a ratio is falling, the five possible reasons are:

• The numerator is getting smaller while the denominator remains the same.
• The numerator is getting smaller while the denominator is getting larger.
• The numerator is getting smaller while the denominator is getting smaller but at a slower pace than the former.
• The numerator remains the same while the denominator is getting larger.
• The numerator is getting larger while the denominator is getting larger but at a faster pace than the former.

Fun With Financial Ratio Math

If you know your financial ratios well, you can probably see more things from just a simple ratio. For example, the Return on Equity (ROE) ratio of a company is simply:

ROE = Net Income / Average Shareholders’ Equity

Since shareholders’ equity is akin to book value (assets – liabilities), and net income is also known as (net) earnings, we will have this:

ROE = Earnings / Book Value

Here comes the interesting part.

If P/B = Price / Book Value, and Price-to-Earnings (P/E) = Price / Earnings, then:

ROE = Earnings / Book Value = (Price / Book Value) / (Price / Earnings) = (Price / Book Value) x (Earnings / Price)

Hence, ROE = (P/B) / (P/E)

In other words, we could also use the relationship between a company’s P/B and P/E ratios to analyse the ROE.

The Dupont Analysis

The Dupont analysis, which was named after the Dupont conglomerate (the makers of Teflon and Kevlar), is an in-depth look of the ROE ratio by splitting it into three main components; profit margin, total asset turnover and financial leverage.

Under the Dupont analysis, the ROE is:

ROE = Profit Margin x Total Asset Turnover x Financial Leverage = (Net Income / Sales) x (Sales / Assets) x (Assets / Equity)

Breaking it down further on the profit margin part, we have:

ROE = (Net Income / Pretax Income) x (Pretax Income / Earnings Before Interest and Taxes) x (Earnings Before Interest and Taxes / Sales) x (Sales / Assets) x (Assets / Equity)

By analyzing the ratios of these components, one can see which part is affecting or contributing to the resulting ROE.

Conclusion

I hope this post provides you with some general knowledge on financial ratios. Still, ratios are just one aspect in fundamental analysis; a complete and holistic picture is needed when researching and analysing your next company share, REIT or corporate bond.

The Value Trap

We all love cheap things, and in the investment circles a lot of people also love “cheap” companies based on their valuations, for they are not really priced at their actual value, thus there is money to be made in the price-value difference. Whether you are a value investor, a growth investor, a dividend investor or a combination of either two or all three, the potential is there.

However, there is also this term that floats around the investing community, and that is “value trap”. This phrase is usually used, seen and/or heard when sourcing for “cheap” companies.

What Is A Value Trap?

According to Investopedia, a value trap is “…a stock that appears to be cheap because the stock has been trading at low valuation metrics such as multiples of earnings, cash flow or book value for an extended time period”¹.

In other words, a company can be trading at below its value for a very long time, with no indication of the price reaching its actual valuation. This is bad as if you happened to buy a cheap company hoping its price will go up but did not after a relatively long time, and then you may be stuck with a value trap.

How To Avoid A Value Trap

Simple, just do a full-scale fundamental analysis (FA) on the company. Typically, some investors fell for a value trap by focusing too much on valuation numbers/ratios and ignored the rest. Some investment literature had suggested looking at other things instead of just valuation, such as (and not exhaustive): 

• earnings per share over the past few years
• debt to equity ratio 
• free cash flow
• the company’s sectorial trends
• management vision, etc.

You could apply the three-tiered FA model in The Bedokian Portfolio (Company, Environmental Factors, Economic Conditions)² or any other FA methods and styles that you have learnt to distinguish between a really “cheap” company or a value trap.

Not All Value Traps Are Bad

Sometimes there are other factors besides bad fundamentals that made a company a value trap. A company may be profitable, have a steady cash flow, not much debt and in a stable sector/industry, yet it is still not priced at its true value. This could be due to its obscurity and being away from the public (and analysts’) eye, or the sector/related sector(s) that the company is in is not due for take off. Eventually, they may become the next value, growth and/or dividend companies, but exactly when is unknown.

And from a Bedokian Portfolio investor’s point of view, sometimes being invested in a value trap is a good thing, particularly if the company is in good financial health and paying good dividends consistently. Do your due diligence when you are exploring this option.

1 – Investopedia. Value Trap. https://www.investopedia.com/terms/v/valuetrap.asp(accessed 27 Oct 2018)

2 – The Bedokian Portfolio, p85

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

Bond Coupon Rate and Yields – https://bedokianportfolio.blogspot.com/2018/03/bond-coupon-rate-and-yields.html

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.

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.

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:

Name	Weight (%)
Singapore Telecommunications Ltd	10.18
DBS Group Holdings Ltd	8.5
Oversea-Chinese Banking Corp Ltd	7.95
United Overseas Bank Ltd	7.46
Singapore Exchange Ltd	5.77
CapitaLand Commercial Trust	5.4
CapitaLand Mall Trust	5.2
Singapore Technologies Engineering Ltd	5.19
SATS Ltd	5.09
Mapletree Commercial Trust	4.72
Hongkong Land Holdings Ltd	4.69
NetLink NBN Trust Regs Units Regs S	4.14
Dairy Farm International Holdings Ltd	3.5
Parkway Life Real Estate Investment Trust	2.3
SIA Engineering Co Ltd	2.19
Sheng Siong Group Ltd	2.06
M1 Ltd	1.62
Keppel Infrastructure Trust	1.57
Manulife US REIT	1.57
OUE Hospitality Trust	1.48
United Engineers Ltd	1.41
Haw Par Corp Ltd	1.36
StarHub Ltd	1.25
First Real Estate Investment Trust	0.98
AIMS AMP Capital Industrial REIT	0.95
Hong Leong Finance Ltd	0.9
SPH REIT	0.87
Raffles Medical Group Ltd	0.8
Frasers Hospitality Trust	0.51
Silverlake Axis Ltd	0.39

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).

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