On 4 June 2020, FTSE Russell, Singapore Press Holdings (SPH) and Singapore Exchange (SGX) had announced in their quarterly review that Mapletree Industrial Trust had replaced SPH as a constituent of the Straits Times Index (STI)1. The changes will be applied after business hours on 19 June 2020 and will be effective on 22 June 2020.
What caught my eye in the same article was the STI reserve list (the next-in-line substitutes should the current constituents are to be dropped in the next review), and out of five listed, four are real estate investment trusts (REITs). There were already five REITs in the STI, and with this impending change, there are going to be six.
For the Bedokian Portfolio, as well as the other investment portfolios, the STI served as the representative of the Singapore equities asset class. Depending on your school of thought on asset classes, some viewed REITs as a separate one due to physical properties being a standalone asset class, and REITs are a hybrid of physical properties with equities characteristics (a view that I am holding). There are others who viewed REITs as a subset or sector of equities and hence they are treated as such. Therefore, seeing the number of REITs on the STI reserve list, we may need to relook at how to position your Bedokian Portfolio if you view REITs as a separate component and use the STI only for equities.
The STI-REITs Overlap
Using data from the SPDR STI ETF, one of two ETFs listed in SGX that track the STI (for information, the other is the Nikko AM Singapore STI ETF), the weightage of REITs only (property sector companies are not included) is about 11.91%2. Factoring in the balanced Bedokian Portfolio (35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash) and extrapolating the 11.91%, a swing of 4.17% (35% x 0.1191) would favour REITs from equities, making it an equities-REITs ratio of 30.83% : 39.17%, and we have yet to add the incoming Mapletree Industrial Trust. This meant that inadvertently, your Bedokian Portfolio is overweight on REITs, even if you have equal portions of STI ETF and REITs (see Fig. 1).
With Singapore becoming a REITs hub and mergers happening (or happened) between REITs, this asset class (or sub asset class) will become a major ingredient in the STI recipe. The proposed merger of Capitaland Mall Trust and Capitaland Commercial Trust (both are in the STI) would create a vacancy in the index, and it is likely going to be another REIT coming in (assuming the reserve list remains the same). This may cause our portfolio balance to be lopsided much more to the REITs end.
It is OK if you choose to leave it as it is or if you agree on the viewpoint that REITs are equities. If not, there are two main ways on bringing the balance back:
#1: Buy More STI And Reduce The REITs
In order to mitigate the overlapping of REITs into equities as shown in Fig.1, a reverse overlap can be done as shown in Fig.2. To do this, we need to buy more STI ETF and less REITs until to the point where the actual weight is more or less equal with each other. This, to me, is the easiest for passive investors but there is the additional hassle of checking periodically the actual holdings of the STI ETF that you are invested in (whether the SPDR or the Nikko AM one) to see if the allocation is in sync or not.
#2: Core-Satellite Approach
The concept of the core-satellite in the Bedokian Portfolio is where ETFs that represent the various asset classes form the core while individual securities form up the satellite. The inclusion of individual securities will dampen the overlap issue (see Fig. 3) since you can dictate the types of securities you can hold. Assuming your ratio for the core and satellite is 50:50, on the weightage level, the swing to REITs will be less pronounced at 2.08% (35%/2 x 0.1191), which is not so significant in affecting the equities-REITs balance. In this way you can continue to have that allocation or make some fine adjustments between the core and satellite numbers to manage the swing.
If you are a passive investor and analysing companies is not your cup of tea, then you can replace the individual securities part with regional/country/sectoral ETFs instead, as long as they are under the equities category. There are tons of such ETFs available from the major stock exchanges in New York and London, and SGX has a variety, too.
Stay safe, stay invested and stay diversified.
1 – Straits Times Index (STI) quarterly review. FTSE Russell. 4 June 2020. https://www.ftserussell.com/press/straits-times-index-sti-quarterly-review-9 (accessed 16 June 2020)
2 – SPDR Straits Times Index ETF. State Street Global Advisors SPDR. Month-End Holdings as at 31 May 2020.https://www.ssga.com/sg/en/individual/etfs/library-content/products/fund-data/etfs/apac/holdings-monthly-sg-en-es3.xlsx (accessed 16 June 2020)
Ground Rules. Straits Times Index v2.5. January 2020. https://research.ftserussell.com/products/downloads/Straits_Times_Index_Ground_Rules.pdf (accessed 16 June 2020)
Zhen Hao, Toh. In Singapore, REITs Are Becoming More Important Than Ever. Bloomberg. 24 Feb 2020. https://www.bloomberg.com/news/articles/2020-02-22/singapore-s-reit-hub-ambition-pays-off-with-most-foreign-ipos (accessed 16 June 2020)