Monday, May 31, 2021

REIT Mergers And Blurred Sectoral Lines: Shall I Go For A REIT ETF Instead?

The period of 2019-2020 had seen some of the big REIT mergers. To name a couple, we had the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust, resulting in CapitaLand Integrated Commercial Trust, and OUE Commercial REIT absorbing OUE Hospitality Trust.

The concept of merger has its advantages. When REITs merge, there will be economies of scale in managing the whole thing, whether on debt management or acquisition of new assets. There is also the notion of size: the bigger a REIT is, the bigger its market capitalization would be, and of course the better its liquidity in the market.


From a retail investor’s point of view, such mergers may blur the lines between the different types of REITs, and with some observers expecting more mergers, the next obvious question will be: wouldn’t it be better to just buy a REIT ETF?


This is an interesting question to ponder, and I can already see two distinct plus points in going this way. The first will be no administrative hassle for the investor when it comes to mergers. Rather than the individual investor counting how many units of the newly merged REIT entity he/she will be getting (and calculating how many units to purchase to make the holdings a round number), the ETF manager would do all these behind the scenes. The second plus point is greater diversification: if REIT mergers bring about diversification of the assets, why not getting a bigger diversified “universe” covering these merged REITs via ETF?


However, going through the ETF way has its minuses, too, and surprisingly they are related to the advantages in the previous paragraph. The main crux is the lower expected returns in investing through an ETF rather than owning REITs direct (though this may not be the case across all instances). Firstly, managing an ETF requires expenses, which translates to the total expense ratio (TER) (and yes, this includes the ETF manager doing the “administrative hassle” as stated above). The TER is calculated as an annualized percentage of an ETF’s assets, and over the long run it may impact returns. Also, the diversified nature of an ETF meant that the returns and yield are averaged from across its holdings.


So, what is the conclusion? As always, my answer would be “it depends”. In investing, there are many styles and methods to it, just like there are different individuals with different preferences and risk appetites. In deciding on whether to go for REITs or ETFs (or both), you would still need to consider other points beyond my abovementioned pluses and minuses.


If you want to be an active investor and have more control, then you can go for REITs direct. If you are a passive investor who just rebalances your portfolio once or twice a year, then the ETF path is good (and save the headache of missing corporate actions related to mergers). The third way is to go for a core-satellite approach, and that is owning both REIT ETFs and REITs themselves, and for this you would need to be an active/passive hybrid investor.


Remember, there is no correct way in investing, for “correct” is a subjective word in this field.

Tuesday, May 4, 2021

A Structured And Holistic Way To Learn Investing: Supplementary

After my post on the above topic came out, I have had encountered numerous queries in this area. The questions were varied, but after aggregating I could group them generally into three categories. There were some which were unique to the individuals’ situations, so I would leave them out.


Category #1: Is it OK to attend courses?


This was the most common line of questioning I got, which I believe it stems from my post’s biasness and impression on self-learning via available offline and online resources.


I do recognize the differences in every individual’s learning styles and methods; some prefer to go through on their own, while some prefer someone to guide them along, and others may want to have a hybrid of the former two.


As emphasized in the earlier post, not all courses are suitable for everyone, as the course structure may have a few assumptions in place, like the participant having some underpinning knowledge of certain topics to be taught. Imagine a newbie who had never invested before learning about fundamental analysis; if he/she has a business/finance/accounting background, that is fine. If not, however, he/she would be confused even by the words “debit” and “credit”.


For my case, I did attend a course to further my knowledge on investing and the things related to it (see here on my experience in attending Nanyang Poly’s Specialist Diploma). In my opinion, the course option would be suitable after you had completed Stage Two, where you had at least mastered the required info needed for investing and be ready on what the trainers/lecturers will be talking about. You can take courses in advancing and obtaining Stage Three knowledge, and/or Stage One/Two to reinforce on what you had learnt and/or fill in the gaps that you may have missed.


Category #2: Different materials telling me different things on investing. Which should I follow?


In our primary and secondary academic education journey, most of us were used to having absolute answers to questions, e.g., 1 + 1 = 2 and hydrogen + oxygen = water. The trouble about investing is that there is more than one way in going about it, and the range of results obtained is infinite.


To start off, my Bedokian Portfolio make-up already differs from other known portfolios like the 60/40, Bogleheads’, etc. Or for fundamental analysis, there are many ways in valuing a company. Especially if you are learning from the ground up, you will find that many authors, writers and bloggers have different methods, styles and means, and their results are vastly different.


Frankly, there is no one ultimate answer in the world of investing, and the reason why is that the factors in play that govern the answer is in a constant flux. Add in different perspectives from various players, it is as random as you can get.


My answer to this category is, after going through Stages One and Two, find one methodology and style that you are comfortable with, and stick to it. It could be from a single source (e.g., 60/40 equity/bond) or a mix like the Bedokian Portfolio (which itself is cobbled from a few portfolio make-ups and investing styles). Tweaks and adjustments are OK as you go along, but try not to deviate drastically from the original, e.g., from 60/40 equity/bond into 50/50 crypto/cash.


Category #3: Do I need to know “everything” related to investing?


The word “everything” here is a cumulation of styles, methodologies, financial instruments, strategies, etc. A couple of examples would be like “do I need to know fundamental analysis if I opt for passive investing” and “do I need to know about options and futures”. Basically, it is a question of whether we need to have every ounce of investing knowledge stuffed in our brains.


While the theories behind learning, knowledge and application warrants a separate reading, I can put it simply in the following “knowledge tiers”, namely:


  • Tier 0: No knowledge of the topic
  • Tier 1: Heard of the topic
  • Tier 2: Understand the topic
  • Tier 3: Able to apply on the topic


Ideally, we should go for Tier 3 in all aspects related to investing, though it is not necessary. Depending on individual preferences, one can get started in investing with just some Tier 3 and others Tier 0. I have met a seasoned investor who knows nothing about option strategies, and I have also seen a passive fund investor with zilch accounting knowledge. Both are currently doing well in their respective investments.


Using the Stages in the previous post, for active investing, my preference would be at least Tier 2 for Stages One and Two to start, and at least Tier 1 for Stage Three going forward. For passive investing, you can afford to go Tier 1 for topics like accounting, economics and fundamental analysis, and Tier 2 for portfolio management and asset classes. 


While I had recommended the basic level of investment knowledge, do not just stop there. Learning, like investing, is a journey, and I hope you could pair these two together going forward.