Inside The Bedokian’s Portfolio: Mapletree North Asia Commercial Trust

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

First up, Mapletree North Asia Commercial Trust (MNACT).

Overview

MNACT was previously known as Mapletree Greater China Commercial Trust (MGCCT), which was listed on the Singapore Exchange in March 2013. Initially consisted of two properties, Festival Walk in Hong Kong and Gateway Plaza in Beijing, it acquired another commercial property, Sandhill Plaza, at Shanghai in 2015. Then in 2018, six Japanese properties were added, and along with it a name change to the present one. 

As of now MNACT has a total of nine properties. 

Why MNACT?

I added (then) MGCCT in August 2014 for retail and office exposure in China and Hong Kong. During then the book value was about 0.9 times, gearing at around 38% and a dividend yield close to 7%, which are within range for my major selection guidelines.

Festival Walk, the crown jewel and one of the largest malls in Hong Kong, sits next to the Kowloon Tong MTR station and located in a dense residential district. Adding in the fact that there are two universities within its vicinity, Festival Walk is almost guaranteed to have a heavy footfall. Putting into our local context, it is like a large suburban mall such as Northpoint City. 

Gateway Plaza is located at the prime Chaoyang business district in Beijing, near hotels, some residential areas and several diplomatic embassies, a conducive area for multinational companies. BMW Brilliance and BASF currently have offices situated there.

Present And Future

Based on the latest financial information (1 Apr 2018 – 31 Mar 2019) and closing price as at 28 Jun 2019, MNACT’s book value is at 1.01 times, with a gearing of 36.6% and dividend yield of about 5.3%, which is still moderately healthy. 86% of its debt is on fixed rate, so there is an assurance of stable interest costs. Though currency risk is a given since it holds overseas properties and collects rental in RMB and Yen, 75% of the distributable income for 1H FY19/20 is hedged to SGD, so the risk is mostly mitigated.

The investment mandate had expanded from the Greater China area to encompass the whole northeast Asia region, a good strategic move in my opinion since there will be more accretive property choices for MNACT to go for. This also brings about diversification of office spaces in different countries and it may prove useful in this trade war climate.

The prime concern for me on MNACT will be the crown jewel itself; Festival Walk make up 66% of its NAV and contributes 62% of net property income. Recently Hong Kong is rocked by demonstrations and this may bring a long-term socio-economic impact.

Despite the rise in REIT prices lately, MNACT can be considered for a new addition to the portfolio or for averaging up.

Disclosure

Bought (then) MGCCT at: 

SGD 0.91, August 2014

Disclaimer

Reference

MNACT site: https://www.mapletreenorthasiacommercialtrust.com

Bob Is Rebalancing Yet Again, But…

We are coming into Bob’s bi-annual rebalancing again. As 30 June 2019 is a Sunday, Bob has two options: either doing it on 28 June (Friday), or on 1 July (Monday).

Thing is, Bob is aware that the G20 Summit is coming up on 28 – 29 June, and along with it a possible meeting between the leaders of the two largest economic powerhouses, China and the United States, on settling the trade dispute.

Bob knows that the core ethos of rebalancing is to inject fresh funds into his Bedokian Portfolio, and then adjust it accordingly to his strategic allocation. However, whatever happens on the period of 28 – 30 June 2019 may bring a difference between the trading days on 28 June and 1 July, as in whether the markets will go up, down or (remotely) sideways over the weekend.

You see, Bob is worried that if he does his rebalancing on 28 June, only for prices to slide further on 1 July if not-so-good news happens during the Summit, then he will feel shortchanged by buying them at a higher price. Conversely, if he chooses 1 July instead, and prices are higher than on 28 June due to good news, then he will still feel shortchanged for not buying at a low.

So how now, Bob?

Choice #1: Stick To The Plan

Since Bob had started his Bedokian Portfolio back in the beginning of 2017, he had never done a rebalancing no later than 30 June. So sticking to his policy, he will do it on 28 June 2019 as planned.

Choice #2: See The Outcome

Bob will sit it out through the weekend and see how things unfold. Good or bad result, he will have to accept the outcome and carry it out on 1 July.

The Bedokian’s Take

Rebalancing or not, and if you are Bob or not, we do face such situations and tests in our investing life. Putting it simply, we can learn two things from here. Firstly, investing is long term. Ups and downs, they are just kinks in your investment journey, so do not fret much. Secondly, if a decision has been made, do not look back. Make do with what you have and press on, taking this as an investment lesson.

With this, Bob has decided he will do his rebalancing on 28 June.

You may see Bob’s portfolio after rebalancing from 29 June 2019 onwards here.

Growth Stocks In The Bedokian Portfolio?

Being a dividend investor, and knowing growth investing is of a different slant, I was asked a few times on my take of having growth stocks in The Bedokian Portfolio. I had mentioned that The Bedokian Portfolio caters to growth, dividend and a little bit of both.

Before I give my opinion, let us take a look at the basis behind growth and dividend (or income) investing.

It’s About The Returns

Investing 101: Returns = Capital Gains + Income

Capital gains, as we know it, derives from the price appreciation of the asset. Income is either the dividend/coupon/interest that is paid out from holding the asset.

Growth investing focuses more on the capital gains component and investors in this school of thought pay attention to companies that are growing fast and/or in high-growth sectors such as technology and pharmaceuticals. New and upcoming companies, sectors/industries and countries/regions also belong to the growth category.

Dividend investing, on the other hand, emphasizes more on the income part. Dividend investors prefer this investment style as there is a deemed constant income stream from their assets. Companies from established sectors such as banks and utilities, and REITs pay out periodic dividends. Bonds, too, belong to this group as they pay out regular coupons.

Balancing Growth And Dividend Investing

For me, I would see the growth-dividend divide as a form of higher profitability versus longer sustainability. Growth investing gives higher returns but may not be sustainable (i.e. what is the next growth sector to go into after I had cashed out my gains? And can I repeatedly get the same returns?), while dividend investing provides realised returns from income almost constantly but are typically lower than growth’s in a given period.

The best, of course, is to strike a balance between these two, and there are three main ways on going about this: balance by age, balance by weightage or a mix of both.

Balance By Age

In most investment literature, it is encouraged that young investors in their 20s and 30s to have an aggressive portfolio, which means a majority of it is made up of equities. The Bedokian Portfolio has a suggested mix catered to this group in the form of 40% equities, 40% REITs, 10% bonds, 5% commodities and 5% cash¹. Since growth comes from equities, the entire 40% could be dedicated to it, with the REITs and bonds providing the income stream. As one gets older, the growth equities will be reduced to 35% and eventually 20%, if going by The Bedokian Portfolio’s age category².

Balance By Weightage

If a complete growth component in your equities portion is unsettling for you, then you may want to consider having a 50-50 split (or any other ratio) between growth and dividend, and make this ratio fixed throughout your investing life. With the variety of securities and financial instruments available, you can work out a number of combinations (e.g. 50% dividend ETF and 50% growth ETF). 

Balance With A Mix Of Both

This balance features elements from the above two sections, and in gist by having a higher proportion of growth equities to dividend equities during the younger years, and increase the latter component as you get older, while reducing the overall equities proportion in your Bedokian Portfolio simultaneously.

1, 2 – The Bedokian Portfolio, p72

Recap: Why Diversification Is Important?

These past few weeks had been tumultuous: the trade war was still ongoing between the United States (U.S.) and China; telecoms giant Huawei was bearing the brunt of the clampdown by the U.S.; and just recently the U.S. president had tweeted, against expectations, that Mexico would be the subject of tariffs.

The equity markets, which are deemed to be sensitive to such macroeconomic and geopolitical events, took a dip. If you are at a loss at this juncture, you could read up an earlier piece on what to do when a trade war happens. On top of that, I will show you another way to go through the storm, and that is diversification.

Diversification Is A Natural Hedge

Experienced investors and traders often use hedging strategies to minimize their losses and risks. Derivative financial instruments such as futures, options and contracts for difference (CFDs) are the common tools used for hedging. Short-selling (or shorting) a counter is another way. While they have their good uses, I would not recommend the above hedging strategies if you either do not understand them and/or not sure how the markets are going to move next (which is next to impossible).

Though some may see diversification as a very slow hedging tool, it does work to a certain extent and it is simple to understand. What makes this possible is this thing called correlation, which is how various asset classes, regions and countries, sectors and/or companies would move in relative with one another. However, for this to work optimally, you must have a portfolio with different asset classes (not just equities only) to begin with.

Using the Bedokian Portfolio’s five asset classes and taking a cue from my go-to portfolio analysis tool Portfolio Visualizer, let us look at the correlation of the various ETFs representing the different asset classes and cash in the U.S. market from 1 Jan 2019 to 31 May 2019:

Name	Ticker	VTI	VNQ	BND	GLD	CASHX
Vanguard Total Stock Market ETF	VTI	-	0.64	-0.49	0.06	-0.08
Vanguard Real Estate ETF	VNQ	0.64	-	0.28	0.56	0.22
Vanguard Total Bond Market ETF	BND	-0.49	0.28	-	0.23	0.21
SPDR Gold Shares	GLD	0.06	0.56	0.23	-	0.64
Cash	CASHX	-0.08	0.22	0.21	0.64	-

Fig. 1: Correlation table of the five Bedokian Portfolio asset classes, 1 Jan 2019 to 31 May 2019. For full set of data see here. 

As with the fluidity of the financial markets, such correlation numbers are not hard fixed to one another and will change. Sometimes the asset classes may seem positively correlated, but there are other times where they are negatively correlated. The main gist is all of them correlate with one another differently, and that is why diversification is a natural hedge, since the aim is also to minimize risks and losses.

A caveat though; there is no such thing as a 100% foolproof hedge. If there is such, I would really want to know what and how to do it.

A Hedge For Passive Investing

Passive investors make use of the natural hedging in diversification by rebalancing their investment portfolios. 

Equities coming down due to the trade wars and tariffs? No issue. Let us see how things are like in my next rebalancing date. If my equities portion is below my benchmark, I can just either sell those asset classes that are above their benchmarks and buy more equities, or with my cash injection I would simply adjust the portfolio back to their respective proportions.