The Thing About Asset Class Correlations

In portfolio management, the term “correlation” has been mentioned many times as its very characteristic formed the basis of diversification among the asset classes. For those who are new to investing, correlation is “a statistical measure that determines how assets move in relation to each other”¹. As the various asset classes behave differently during differing market and economic conditions, their relative price movements with one another would be different given a set period or snapshot of time.

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However, there has been a notion that correlation in terms of price and returns is a zero-sum game. For example, in a portfolio consisting of two asset classes (let us call them A and B) and they are negatively correlated with each other, the assumption is that if the price of A rises, the price of B would drop, vice versa. Yes, that is correct, but only half; the correlation numbers are not fixed, and there are times where A and B gain together, and at times where both suffered losses together.

As stated above that correlation is a statistical measure, it is being defined by the time frame used. If in a day, the price of A and B moves in tandem, whether up or down, they are positively correlated with each other for that moment. However, if A and B moves differently from each other over a longer period, then their correlation may be less positive, or possibly even negative, for that said period.

Hence, it is not surprising to see A and B were having a negative correlation over set time, and yet both had positive returns. Providing a real-world example, I would use two asset classes that were conventionally opposites in the correlation thing, equities and gold (see Figure 1):

 

Asset Class	VTI	GLD	Annualised Return
Equities (VTI)	1.00	-0.14	23.81%
Gold (GLD)	-0.14	1.00	26.66%

 

Fig. 1: Asset class correlations of equities (represented by Vanguard Total Stock Market ETF (VTI) and gold (represented by SPDR Gold Shares ETF (GLD), 1 Jan 2024 to 31 Dec 2024, using monthly returns correlation basis. Source: Portfolio Visualizer.

 

The Bedokian’s Take

While correlation forms part of the overall concept of diversification, for the retail investor, my take is to be aware of it and how it works. Leave the correlation numbers crunching to the academics, analysts and financial bloggers like me to provide useful insights for all. 

Another trivia, which may come as a surprise to you, is that the main cause of correlation comes from you and me (sort of), and the rest of the participants in the financial markets. I will provide a couple of links under Related Posts below to understand why this is so.

Stay calm and stay invested.

Related posts:

Know This, And You Are Halfway Knowing How The Market Works 

Diversification Is Dead! Long Live Diversification! 

 

1 – Edwards, John. Why Market Correlation Matters. Investopedia. 31 Oct 2022. https://www.investopedia.com/articles/financial-advisors/022516/4-reasons-why-market-correlation-matters.asp#:~:text=Correlation%20is%20a%20statistical%20measure,in%20relation%20to%20each%20other (accessed 23 Feb 2025)

All Hyped Up: Banks And Gold

Recently, most investment online and offline talk that I have been reading are about two things: local banks and gold. The run-up of share prices and bumper dividends of DBS and UOB (and probably OCBC who will be announcing on 26 Feb 2025), and the spike of gold inching towards the landmark USD 3,000 price level, had caught the attention of mainstream investors wanting a piece of the action pie.

A common anecdotal indicator on whether something is being hyped up is when non-investors, like the oft-mentioned friendly neighbourhood barber/hairdresser, start to talk to you on the hyped asset. This is a strong, but not the ultimate, sign of an overhyped or overheated market, in general and/or for the asset concerned.

However, looking at the fundamentals of the local banks and gold, in my opinion there is still some potential upside; let us start with banks. 

 

The Big Three

 

(Picture credit: Jason Goh from pixabay.com)

 

All three banks are experiencing revenue growth over the past three years, which results in higher valuations. Figure 1 shows a snapshot of selected valuation ratios of DBS, OCBC and UOB.

Banks	DBS	OCBC	UOB
Price/Book Ratio (P/B)	1.93	1.38	1.29
Price/Earnings-to-Growth Ratio (5 year expected) (PEG)	8.85	2.61	1.58
Forward Price/Earnings Ratio (P/E)	11.95	10.31	9.78

 

Fig.1: Selected current valuation ratios for DBS, OCBC and UOB. Source: Yahoo Finance as of 22 Feb 2025.

Based on the numbers alone, UOB is currently the “cheapest” among the three, but before concluding, a deeper dive is needed because each bank’s business model and geographical exposure is different. On the latter point, for instance, UOB’s foreign concentration is more in the Southeast Asia region, while DBS’ is skewed into Greater China, and OCBC’s is mixed between Greater China and Southeast Asia. Hence, in conducting fundamental analysis (FA), do not just focus on the valuations and price alone; a holistic approach is required, i.e., the Bedokian Portfolio’s three-level FA method¹.

Being the only major financial institutions in Singapore, the banks represented its economic stability and health. As Singapore is one of the top five financial hubs in the world, DBS, OCBC and UOB, in my opinion, are positioned for further growth.

 

The Shiny Yellow Metal

 

(Picture credit: Soofia Tailor from pixabay.com)

 

Since the beginning of 2024, gold had broken the resistive USD 2,000 mark and went on a steep curve upwards towards the USD 3,000 line, resulting in a near 50% growth rate for the past year. There are a few reasons why gold prices spiked, like the current geopolitical tensions (trade wars and actual wars), economic uncertainty, hedging against inflation, central bank purchases, etc., and all these factors are intertwined with one another.

Unlike other asset classes which use securitization (i.e., legal “pieces of paper”) to denote ownership value, which may have a (very low) risk of being made worthless, gold (and other non-perishable hard commodities like metals) holds value on its own, depending on its demand and supply. Between 1971, when gold was delinked from the US dollar, and Mar 2024, gold had an average annual return of 7.98%². Despite losing out to equities in terms of returns over the same period, it is a finite resource, and its worth would go higher as time goes by.

 

Is It Too Late?

Another way to put this question is: what is the right price to enter. True that prices of banks and gold had gone up significantly over the past year, and there is a possibility of investors suffering from buyer remorse due to a possible fall in price after vesting in them. Although this can be seen as a form of averaging up for those who are vested and having the price margin of safety, for new entrants these deemed “high prices” proved a challenge.

The important thing here is to gain a toehold on them first by investing a token amount, and then average up or down from there. We do not know which direction the price movements will be, but if they are fundamentally sound going forward, then this is one possible way of starting on them.

Disclosure

The Bedokian is vested in OCBC and physical gold.

Disclaimer

1 – The Bedokian Portfolio (2^nd Ed), Ch 11

2 – Average annual return of gold and other assets worldwide from 1971 to 2024. Statista. 25 Jun 2024. https://www.statista.com/statistics/1061434/gold-other-assets-average-annual-returns-global/ (accessed 22 Feb 2025)

Decumulate To Accumulate

Readers of the blog would have remembered that we have identified the step-down age in the not-so-far-and-yet-not-so-near future. One of the things that we had done is adjusting our portfolio asset allocation, which I had mentioned here. I also shared in the post of which are the funds that we are basing on for our projection on top of our periodic contributions, like education savings and endowment plans since their end dates were known.

Picture generated by Meta AI

For our end of year 2024 Bedokian Portfolio value, it has surpassed its set target by around 34%, and in fact the number has also exceeded the 2026 year-end target. As mentioned in this post, the growth was attributed to last year’s bull run and the injection of two liquidated investment-linked insurance plans (ILPs), the latter of which were not part of our planned funding (aka “known windfall”). To add, after the July 2024 post was written, I had liquidated another ILP, further boosting the portfolio size.

Insurance products such as ILPs, endowment and life plans that have a surrender value form part of our Portfolio Multiverse, and in our opinion the portfolio was one of the “overlooked” ones; we knew it existed, making periodic contributions to it, and not monitoring it. Yet, if you noticed from the actions above, we are (sort of) decumulating our insurance portfolio to accumulate our Bedokian Portfolio.

However, insurance plans, especially ILPs and life ones, likely come with additional components and riders to cover events such as disability and critical illness. While liquidating these plans, it is important that the corresponding coverages are met before doing so, hence it is advisable to consult with your financial advisor(s) (which we did) before making any decisions. An individual’s/family’s insurance and protection amount and needs are different from one another.

Related post:

Your Financial Portfolio Is Bigger Than You Think 

Disclaimer

Paragon REIT: It Has Been A Great Journey

Yesterday it was announced that Paragon REIT would be taken private, subjected to approval by minority unitholders in an extraordinary general meeting (EGM) to be held sometime in April 2025. The offer price is SGD 0.98 per unit, which is around 1.07 times of the REIT’s net asset value (NAV), and along with it, (possibly) the final distribution of SGD 0.0233 per unit.

Paragon REIT malls (screenshot from Paragon REIT's media/analyst briefing slides)

While there were four reasons stated in the announcement (page 5 of the media/analyst briefing slides, link under Reference) for the privatisation, I see two main rationales, namely:

• The low trading liquidity and analyst coverage had somewhat stunted the growth of the REIT, and

• Privatisation would take the risks off from unitholders of an upcoming asset enhancement initiative of Paragon shopping mall, considered the crown jewel of the entire REIT portfolio (at 72% of its value), for it remain competitive.

The Bedokian’s Take

Our Bedokian Portfolio has held Paragon REIT since it listed (back then as SPH REIT) in July 2013, and we had further incorporated the REIT in our CPF portfolio sometime before the onset of COVID19. Over the years we had gone in at different tranches, at one point as high as SGD 1.07. Currently the average prices of the REIT in the Bedokian Portfolio and CPF portfolio stood at SGD 1.02 and SGD 0.88, respectively.

I had espoused Paragon REIT several times in my blogposts, due to its low gearing and the strength of location of its two local malls (Paragon and Clementi Mall), which is a good mix as one is located within the Orchard shopping belt and the other in the heartlands, thus having a sort of retail diversification.

Though I have a penchant of investing in smaller retail REITs due to them being niche and with growth potential (like our other investment in Lendlease Global Commercial Trust), the main minus point is them being dwarfed by the larger REITs, especially in recent years where there were a couple of major mergers, namely the Capitaland and Mapletree family of REITs. Hence this privatisation should come as not much of a surprise.

For the offer, I opined that it would likely go through, given the REIT traded near or at its NAV for the past five years, and the additional 7% would provide an incentive for those who entered during this period. For us, we would accept whatever the outcome of the EGM is.

Until then, and depending on the result of the EGM, it has been a great journey with Paragon REIT.

Disclosure

The Bedokian is vested in Paragon REIT and Lendlease Global Commercial Trust.

 

Reference

Media/Analyst Briefing. Proposed Privatisation of Paragon REIT. 11 Feb 2025. https://paragonreit.listedcompany.com/newsroom/20250211_073825_SK6U_035NUIV7JXSG06FM.3.pdf

 

Disclaimer

Market (Over)Reactions

Just a few days ago, Alphabet reported earnings per share (EPS) of USD 2.15 against the estimated USD 2.13, but its revenue failed at USD 96.47 billion against the expected USD 96.67 billion, a shortfall of just -0.21%. Yet, the market punished Alphabet harshly, making it drop almost 9% from around USD 206 to USD 188 overnight (and currently it went lower than that). 

Picture generated by Meta AI

Following this, the media jumped on the bandwagon to add oil to the fire, using negative words and phrases such as “weaker-than-expected”, “revenue miss”, “disappoints”, etc. Reading such headlines naturally fuel the “flight in fear” instinct in us humans, and I would expect some investors to do the figurative “run for the hills”.

However, looking deep into its books, there are some positives coming out from the numbers, like increasing free cash flow AND capital expenditure for the last 3 fiscal years. Placing these figures next to their increasing revenue over the same period, which grew from USD 282.836 billion to USD 350.018 billion, the short conclusion would be that it is still a money-making machine.

Yes, there are some comments on the prospects of Alphabet and the accompanying challenges, like the stiff competition of its businesses and artificial intelligence (AI) models, which may cause them to lose market share and leadership. If this happens, it would not be overnight, but rather gradually over at least a few years, and during then one can see the “writing on the wall”. Recently Alphabet, along with other technology firms, are investing heavily into AI, and this may prove to be a game changer for their business prospects.

The Alphabet earnings situation shared some similarities to Salesforce; back in May 2024, despite a higher-than-expected EPS, a revenue miss of -0.44% brought a price drop from USD 27x to USD 21x. Fast forward today, the share price had increased more than 50% to around USD 33x.

So, what is the takeaway from here? If a fundamentally sound company’s share price had gone down due to short term fears or bad-but-not-so-bad past results, it is time to consider entering it.

Disclosure

The Bedokian is vested in Alphabet (Google).

Disclaimer

Apple’s Q1 2025 Earnings And Everything AI

Apple reported record-breaking financial results for its fiscal Q1 2025, which ended on December 28, 2024. The company achieved all-time highs in both revenue and earnings per share[1][2].

 

Picture generated by Meta AI

Key highlights:

1. Revenue: $124.30 billion, up 4% year-over-year[1][3]

2. Earnings per share: $2.40, up 10% year-over-year[1][2]

3. Net income: $36.33 billion, an increase of 7.1% from the previous year[4][7]

 

## Segment Performance

- iPhone revenue: $69.14 billion, down 0.8% (missed estimates)[4]

- Mac revenue: $8.99 billion, up 15.5%[4]

- iPad revenue: $8.09 billion, up 15.2%[4]

- Wearables, Home, and Accessories revenue: $11.75 billion, down 1.7%[4]

- Services revenue: $26.34 billion, up 13.9% (all-time record)[4][7]

 

## Regional Performance

Apple achieved all-time revenue records across multiple regions, including the Americas, Europe, Japan, and Asia Pacific[2]. However, Greater China revenue declined by 11% year-over-year[2].

 

## Company Statements

CEO Tim Cook highlighted the quarter as Apple's best December performance in history, emphasizing the success of their product lineup and the potential of Apple Intelligence[1][3]. CFO Kevan Parekh noted that strong operating margins drove EPS to a new all-time record[3].

 

## Outlook

Apple anticipates "low to mid single-digit" year-over-year revenue growth for the March quarter[4]. The company continues to face challenges in China and competition in the AI space[7].

Despite the overall positive results, Apple's shares fell about 1.5% in extended trading following the release[7], reflecting some investor concerns about iPhone sales and competition in the AI market.

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Besides the content written between the “===” line, everything above (except for the picture, which was done by Meta AI) and below (the citations) were generated using an artificial intelligence (AI) tool, namely the AI search engine Perplexity AI (perplexity.ai), by typing in the input  “please provide a summary report for apple’s recent earnings”.

The summary was done within seconds; Perplexity AI scoured the internet and came up with a coherent report as requested. Imagine the time saved using this tool instead of manually looking for information sources and coming out with a report (or blog post). No wonder so many students were relying on it and other AI applications like Open AI and Deepseek for their assignments and research.

Still, no matter how powerful these AI tools, for now some human work and judgement are required when carrying out analysis on the markets, economy and securities. AI is good for assisting in decision making, but it still cannot tell the future on how things will flow, unless it is powerful enough to create a common singularity in the future through a form of self-fulfilling prophecy. 

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Citations:

[1] https://9to5mac.com/2025/01/30/apple-reports-record-q1-2025-earnings-with-124-30-billion-in-revenue/

[2] https://www.gurufocus.com/news/2675839/apple-inc-aapl-q1-2025-earnings-call-highlights-record-revenue-and-eps-amidst-global-challenges

[3] https://www.apple.com/sg/newsroom/2025/01/apple-reports-first-quarter-results/

[4] https://www.moomoo.com/community/feed/apple-earnings-review-record-breaking-results-despite-weak-iphone-and-113921889206682

[5] https://www.reddit.com/r/apple/comments/1idy9vf/apple_reports_record_q1_2025_earnings_with_12430/

[6] https://www.apple.com/newsroom/2025/01/apple-reports-first-quarter-results/

[7] https://www.investopedia.com/apple-earnings-q1-fy-2025-8782696

[8] https://www.forbes.com/sites/dereksaul/2025/01/30/apple-earnings-preview-record-results-expected-with-china-ai-concerns-in-focus/

[9] https://www.cnbc.com/2025/01/30/apple-aapl-q1-earnings-2025.html

[10] https://www.cnbc.com/2025/01/30/apples-gross-margin-hits-record-as-services-business-keeps-growing.html

[11] https://investor.apple.com/stock-price/default.aspx

[12] https://www.perplexity.ai/finance/AAPL