By now a few people had pointed out something about the Straits Times Index (STI), viewed as the representative of the local equities market; there is not enough diversification and it is overweight on certain sectors.
Let us take a look, shall we?
Fig. 1 - Weightage of the STI1
The three main sectors of the STI are banks, industrial goods and services, and real estate, which constituted a total of 71.61%, quite a heavy concentration there. Banks, which consisted of the big three (DBS, UOB and OCBC), stood at 41.62% of the index, almost half!
Extrapolating this onto the balanced Bedokian Portfolio2, with the 35% equity portion invested only with the STI, 14.57% (35% x 41.62%) of your entire Bedokian Portfolio would be on banks. And if you remembered, this would contravene my 12% limit rule.
Relooking at the link in footnote 1, there are other indices around, such as the FTSE ST Maritime and the FTSE ST Small Cap. If you have read investment portfolio books from the United States (U.S.), they encouraged diversifying into sub categories of equity based on market capitalization, such as large cap, mid cap and small cap, and/or by sector play, and they have related financial instruments for investors to go into. Just look at Vanguard3 (a U.S. ETF provider) alone and they have a slew of ETFs for the U.S. market indices.
While we do have these equity cap and sector indices locally, there is no ETF based on them, hence there is a limitation on what to invest for our local markets.
So how to go about it?
Alternative #1 – Core-Satellite Approach4
My oft-harped-about approach, this involves using ETFs and individual securities (in this case, individual company equities) to form the core and satellite, respectively. Using back the balanced Bedokian Portfolio, if the STI forms half of your 35% portion (meaning 17.5%), your bank weightage would be reduced to about 7.28% (17.5% x 41.62%), assuming that you have no local banks in your individual holdings.
But this alternative may not sit well for passive and index Bedokian Portfolio investors, so let us go to the next alternative.
Alternative #2 – Going Glocal
The second alternative is to go glocal (I had written about this here), where you could diversify into overseas equities ETFs. According to the Bedokian Portfolio, the order of diversification of region/country comes first before sector, so taking back the bank example, if your overseas ETF has a banking component, this would not count together with the ones in the STI.
It is up to you how you want to assign your equities between local and overseas, using the 10%-30% guideline5 for your Bedokian Portfolio.
1 – FTSE Russell. FTSE ST Index Series. 29 June 2018 http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?issueName=SGXSERIES (accessed 14 July 2018)
2 – 35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash
3 – Vanguard. Vanguard ETFs. https://investor.vanguard.com/etf/list#/etf/asset-class/month-end-returns (accessed 14 July 2018)
4 – The Bedokian Portfolio, p122-123
5 – The Bedokian Portfolio, p109-110