Lion-Nomura Japan Active ETF (Powered By AI): The Bedokian’s Take

A new exchange traded fund (ETF), which is the abovementioned, will be listed on 31 Jan 2024 on the Singapore Exchange (SGX). 

This ETF came in at the appropriate time when the Land of the Rising Sun is looking to rise again as an economic powerhouse after a period of more than three “lost” decades. Using Japan’s main representative stock index, the Nikkei 225, which was around 35,963 points as of 19 Jan 2024, it is fast approaching the last high of 38,915 which was set back in Oct 1989¹.

 

However, what caught my attention were the two phrases “active” and “powered by AI”; these are firsts in the SGX ETF universe. Though active, the ETF will be benchmarked against the Tokyo Stock Price Index (TOPIX). On the artificial intelligence front, using datasets ranging from fundamentals, technical, qualitative, quantitative, etc., the AI and machine learning models will select between 50 and 100 securities for the ETF’s portfolio from the top 1,000 stocks listed and traded in the Tokyo and Nagoya exchanges. The ETF’s holdings will be diversified across sectors and market capitalization.

 

The initial public offering period is until 25 Jan 2024, at an issue price of SGD 1.00. More information of the ETF is available at its site (link under References below).

                                    Picture credit: LittleMouse from pixabay.com

 

The Bedokian’s Take

 

It is important to understand that the underlying value of the ETF is the Japanese Yen (JPY), so this means that regardless of whether you are getting the SGD or USD denominated security, the primary concern will be JPY itself, therefore there is foreign exchange risk involved. The JPY has been on a downward trend against the SGD since the former’s last highs in 2012, with around a 43% drop between then and now². With a possible Japanese economic boom coming over the horizon, a strengthening JPY would be favourable for early investors of this ETF (but maybe not so good for tourists heading there).

 

Being an actively managed ETF, the current expense ratio of 0.7% sits in between passive/tracking ETFs’ (e.g. U.S. listed EWJ with 0.5%³) and the active unit trusts’ (minimally 1% and above). Also, for peer comparison, a U.S. listed Japan-focused active ETF (JPAN) has an expense ratio of 0.79%⁴. Thus, with AI to boot, the expense costs seem reasonable.

 

As this ETF is very country-oriented, in terms of suitability, my viewpoint is that it is probably good for those who has a substantial portfolio size proportioned by asset class level and wish to diversify one tier below, i.e., by equities > region/country.

 

References

 

https://www.lionglobalinvestors.com/en/fund-lion-nomura-japan-active-etf-powered-by-ai.html

 

1 – Yahoo Finance. 20 Jan 2024.

 

2 – Japanese Yen/Singapore Dollar. Marketwatch. https://www.marketwatch.com/investing/currency/jpysgd (accessed 20 Jan 2024)

 

3 – iShares MSCI Japan ETF. ETFDB.com. 19 Jan 2024. https://etfdb.com/etf/EWJ/#etf-ticker-profile (accessed 20 Jan 2024)

 

4 – Matthews Japan Active ETF. ETFDB.com. 19 Jan 2024. https://etfdb.com/etf/JPAN/#etf-ticker-profile (accessed 20 Jan 2024)

Headwinds For Apple?

 

Picture credit: 652234 from pixabay.com

Recent news for Apple (AAPL) did not bode well, such as the antitrust suit from the United States Department of Justice, the alleged ban on the use of iPhones in Chinese government departments and state-linked companies, the Barclays analyst downgrade report, etc. These headwinds had, directly and indirectly, caused Apple to lose its highest market capitalization ranking to Microsoft.

 

While past figures had indicated a slump in total revenues between 2022 and 2023, some indicators are pointing to another possible downtrend come 2024. These can be viewed as worrying for Apple shareholders, but for myself, I do not see it, yet. I will provide four reasons, with the last being unique to our portfolio situation.

 

Reason #1: The Ecosystem And Brand Power

In 2007 when the iPhone was first launched, there was a myriad of mobile phone operating systems such as Symbian, Blackberry, Palm, etc. Android and Windows Phone were not even out yet. Today, the major mobile phone operating systems remaining are Apple’s iOS and Google’s Android, occupying 29.19% and 70.11% respectively¹. In a two-horse race, being second is still a very good deal.

 

The strength of iOS over Android is the former is part of the overall Apple ecosystem that included other hardware and services. Though being viewed ironically by some as “stifling” or “antitrust”, users who wanted convenience and amalgamation would love the concept of the ecosystem. As of February 2023, Apple had around two billion active devices², and if going by an assumed average person of having four devices (a Mac computer, an iPad, an iPhone and an Apple Watch), we could see at least 500 million Apple users around.

 

Also, Apple often occupied the top few spots in surveys for the world’s most valuable brands, and this clearly demonstrated the power of a 2-D bitten fruit image. Therefore, with the captive ecosystem and brand power, current users would likely stick to Apple devices and new users would be easily pulled into.

Reason #2: Nothing Is Static

 

Senior management and C-suite executives are in a company for a reason: to steer it as a ship in the risky seas of business. Apple’s head honcho, Tim Cook, and his team should be aware of the not-so-good news and the actual situation within the company. If everything is OK, well fine, life goes on. If the news has some truth to it, instead of sitting there and waiting for it to become a self-fulfilled prophecy, they will do something about it. 

 

Nothing is static; an analyst’s report on a particular company may be the result of some data gathered from the past and with analysis, inferred on its prospects. Things may change, whether from within the company or other external factors, that could add on the headwinds or provide a counter tailwind, thus the actual result may be different than what was being forecasted.

 

Reason #3: Further Inputs Needed

 

Earnings season is here for the period between October and December 2023, and traditionally this quarter (Q1 2024) is the best for Apple based on historical data. This is due to the Thanksgiving and Christmas shopping periods, when Apple products were usually bought as gifts for others and oneself.

 

But to determine whether the headwinds news holds some bearing, the next period which I would seriously start to look at is from Q2 2024 onwards, and it would not be just a quarter thing; I tend to look at over two to three years. Yes, that may be a bit too long, but financials do not deteriorate overnight (unless it is an Enron scenario) and I needed to make a more informed decision.

 

Reason #4: Price Margin Of Safety

 

As stated earlier, this is a personal reason and may not be applicable to all. Our average Apple share price is around USD 128.15, and from the closing price of USD 185.92 (12 Jan 2024), this represented a price margin of safety of 45.08%, so in the worst case I could set an exit price should things really go south even before two to three years are up.

 

However, if the fall is perceived to be technical rather than fundamental (e.g., S&P500 going down, dragging everything with it), I would average down and add more instead, which means the growth story of Apple might continue.

 

Disclosure

 

The Bedokian is vested in AAPL.

 

Disclaimer

Errata (16 Jan 2024): With regards to Reason #4, our average price of Apple is USD 96.35 instead, and this represented a price margin of safety of around 92.96%. The error was due to not converting the figures from SGD to USD. Apologies for the error.

1 – Global market share held by mobile operating systems from 2009 to 2023, by quarter. Statista. 8 Jan 2024. https://www.statista.com/statistics/272698/global-market-share-held-by-mobile-operating-systems-since-2009/ (accessed 13 Jan 2024)

 

2 – Shakir, Umar. Apple surpasses 2 billion active devices. The Verge. 3 Feb 2023. https://www.statista.com/statistics/272698/global-market-share-held-by-mobile-operating-systems-since-2009/ (accessed 13 Jan 2024)

The Case Of BRK Vs. ARKK

Again, one of my “chanced upon this article and I have to write about it” blog post, this time from this article:

“Warren Buffett closes in on Cathie Wood as tech stocks tumble.¹”

 

Inside, it described about the relative performance between Buffett’s Berkshire Hathaway (BRK) and Wood's Ark Innovation ETF (ARKK), and subsequently the two contrasting styles of investing, which were value and growth, respectively. 

 

Bear in mind that this piece was written in January 2022, so it was the time when the world was emerging from COVID-19, and before inflation and interest rates were rearing their ugly heads. Back in 2020, as most of us remembered, companies seen as disruptors (read: technology) were leading the charge, partially due to their expected heralding of change in a post-COVID world, and electric vehicles. When a sense of normalcy returned in 2021, things which were dubbed as game changers found themselves no more, and for some of them began to return to earth from their sky-high valuations.

 

What can we learn from here?

 

I will go through three issues related to this article.

 

Issue #1: Value Vs. Growth

 

Most investment literature tend to separate and compare the various investment styles, of which value and growth are two of the major ones. In short, value investment looks for undervalued companies that (someday) realise their true worth in terms of price, whilst growth investment seeks companies that are (potentially) heading for the moon. Stripping down to the most basic of investing instinct, value investing takes time to make money, while growth sees the dough “brrrr-ing” towards you.

 

As expressed in the eBook², both value and growth (and others) can blend to form a coherent approach. While value is easy to understand, growth is slightly challenging as we may not know what the next big thing is, and if we do know, would it be a short-lived fad or a long-term trend.

 

Issue #2: The Questions Of When

 

A graph from the article caught my eye, which I will reproduce here using Portfolio Visualizer (Figure 1):

 

Fig.1: Portfolio growth of USD 10,000 for Berkshire Hathaway Class B (blue) and ARK Innovation ETF (red), Jan 2020 to Dec 2021. Source: Portfolio Visualizer (click to enlarge).

 

The simple question would be: why not I just let go of ARKK sometime between Jan and Mar 2021, and I will gain the maximum profit from it all?

 

For this, I will pose three counters:

 

• If you had known it is going up, when would your entry point of ARKK be?

• If you had known it is going down, when would your exit point be?

• If you had ARKK, when would you know it is not going up infinitely?

 

If you had no answer for the above three posers, then only luck would have had assisted you in reaping the profits.

 

Hindsight is 20/20, so to speak, hence I rest my case here.

 

Issue #3: A Tale Of Two Actively Managed Funds

 

Both BRK and ARKK are considered actively managed funds, i.e., they do not follow an index but rather the wisdom of the fund managers behind them. Yet, they adopt different investing styles (value and growth), different focus (diversified across sectors and concentrated on technology) and different timeframes (long term and relatively short term). 

 

While I am not dissing one or the other, the message here is to select whatever financial instruments that float one’s portfolio boat, as I acknowledge the individual differences in investment principles and methodologies.

 

Disclosure

 

The Bedokian is vested in BRK.B.

 

Disclaimer

 

1 – Wigglesworth, Robin. Financial Times. 23 Jan 2022. https://www.ft.com/content/42bb6639-79a0-48da-9f21-01f33e7370f9 (accessed 6 Jan 2024).

 

2 – The Bedokian Portfolio (2^nd Edition), p148-149.

 

Do They Know Something That We Don’t?

I came across an interesting article that goes like this:

“Everything Wall Street got wrong in 2023¹”

 

It described that, among other things, at the end of 2022, high profile analysts from big investment banks and fund houses gave a gloomy outlook for 2023, especially on the equities front.

 

However, some things turned out quite the opposite. We knew what happened throughout 2023.

 

The game of prediction is very, very hard. Unless one has a time machine, no one knows what events will happen exactly when, where and how.

 

Yet, as investors, we are still fascinated by “predictions” (read: opinions) given by economists, analysts, strategists, fund managers, etc. After all, it is their job to provide these views and advice. We have little to no reason to doubt them, since they were armed with qualifications, skills, experience and sometimes track records to show. And the opinions provided gave us the impression that they know something that we normal retail investors do not.

 

Still, I am not dissing them nor their opinions, for they can provide learning points which we could take away from, which is why I still enjoy watching pundits expressing their views on business news channels (and looking important as a big-shot investor with prices scrolling across my TV screen). Their perspectives are justified because they support them with statistics, data and information that were not readily available to and/or easily interpreted by retail investors. You can say they have the know-how to digest and using them as informed forecasts, but this is where the difference between them and us ends.

 

No matter how much or little of our expertise, we are all equals in the playing field of prediction. The best we could do is the art of “guesstimating” where, based on what we know of the past and present, we try to project a rough outcome of the future. This is the best we could do, and at least we have justifications in doing so rather than throwing darts randomly and blindly around.

 

We are human after all.

 

1 – Business Times. 29 Dec 2023. https://www.businesstimes.com.sg/companies-markets/everything-wall-street-got-wrong-2023 (accessed 3 Jan 2024)

 

A Good Financial Plan Takes A Lifetime

A Happy 2024 to everyone!

In this post about our portfolio pivoting, I had briefly stated that we had identified an age where we would “step-down” from our day careers and move on with roles of lesser responsibilities and/or more personal time (a.k.a. freelance).

 

The first inkling of determining our step-down age was sometime around a year ago, where we started to get serious on our retirement (i.e., putting in more precise numbers). Just like the long journey after getting an epiphany on investing (see here for the story), it took us about a few months to come up with a crude framework, and we are still not done yet (it will never be). The reasons for being crude were that there were many assumptions and subsequent projections made in crafting the financial situation at the point of step-down, such as the tangibles (e.g., the prevailing full retirement sum for our cohorts, which is not published yet on the CPF website; the surrender values of our endowment plans, which we had requested for the latest copies of the benefits illustrations, etc.) and the intangibles (e.g., the actual age of our children which they could go fully independent). To top it off, we had to discount several other sources of cashflow/cash pools which were slightly difficult in getting a firm number (e.g., calculating the CPF-OA balances which were constantly varied by transactions of our investments).

 

In the end, we had settled on sources that could be easily projected. Those which were not included were things like the aforementioned CPF-OA balances and a couple of investment-linked products, etc., but we would treat them as positive outliers akin to that of a “known windfall”. The ones which we decided to include in the “overall sum” were:

 

• The Bedokian Portfolio (main portfolio built with disposable income)

• CPF-OA funds invested in a roboadvisor (which provided an online projection chart)

• Endowment/savings funds maturing before our step-down ages (which would be injected into the Bedokian Portfolio)

• CPF-SA amount (to remain inside CPF)

 

Planning for a below average scenario, the Bedokian Portfolio was projected with 4% annual returns including capital gains and dividends, the roboadvisor projection was based on median returns and the endowment/savings plan returns based on the latest benefits illustrations. Still, to provide a wider margin of safety, we shaved an additional 20% from the projected overall sum.

 

With the projections done, we used a 4% yield/withdrawal rate on both the projected overall sum and the one with the margin of safety applied. On top of this, we added in an assumed gross renumeration from our step-down job/gig.

 

The results were quite satisfactory.

 

However, as the following adages go:

 

“No plan of operations extends with any certainty beyond the first contact with the main hostile force.” – Helmuth von Moltke, Prussian general (1800-1891)

 

“Everyone has a plan till they get punched in the mouth.” – Mike Tyson, boxer (1966 - )

 

In layman speak, these meant that any plan would be thrown out the moment it came into being operationalized. Even with known-knowns and known-unknowns planned before a battle, there could be moments when the unknown-unknowns would come in and disrupt everything and make our plans go into complete disarray.

 

But that was just half the story. If we keep planning, executing, gathering feedback and then use them for our further planning, we could create a more positive loop as compared to sticking to a plan and be done with it. This may sound tedious, but the backbone was already set up, and all we need to do was to adjust the numbers accordingly. The original projected numbers can be used as a guide or soft target for achievement.

 

Financial planning for investing, retirement, expenses, etc., is a never-ending job, because they are many assumptions to be made, variables and needs to be considered, and figures to be projected, and one, some or all of these may change, sometimes drastically, and we must take in the new ones to factor in and generate another plan again for the time being. 

 

Hence the conclusion of it all is the title of this blog post.