How We Organise Our Portfolios Via Brokerages

We had talked about investment strategies, methodologies and styles, but we seldom delve into the intricacies of the administrative part, which are brokerages. Before we jump into the deep end of the market pool, we need to plan and equip ourselves properly first, like having a float of some sorts and a good swimming attire.

For our portfolio multiverse, we use a multitude of brokerages to keep our holdings. Definition-wise, the term “brokerage” used here denotes any agent or platform that we use to execute trades with for our portfolios.

Being brand-neutral here, I will anonymise the brokerages with alphabet letters.

Picture generated by Meta AI

The Bedokian Portfolio (Main Portfolio)

Brokerage A, Brokerage B, both CDP (Central Depository)-linked, under my name

I use CDP-linked brokerages to hold individual counters listed in the local Singapore Exchange, primarily because I want to have better control on corporate actions and events, as well as the attendance of annual general meetings without the hassle of notifying custodian brokerages. I mainly use two brokerages so that I can have contingencies for each other.

Brokerage C, CDP-linked, under my spouse’s name

Besides the reasons above, the other reasons for this account are: it provides my spouse an avenue to familiarise with trading platforms, and an additional application for initial public offerings and fixed income instruments (e.g., treasury bills).

Brokerage D, Brokerage E, both custodians, under my name

These two custodian brokerages are used for holding local and foreign exchange traded funds (ETFs), and foreign individual companies, since CDP is not eligible for foreign-listed counters. I am OK to keep local ETFs in custodian as there are very few corporate actions to begin with. Why two? Brokerage diversification, of course.

The main guideline that I follow here is that a counter would not be split between the different brokerages (e.g., out of 10,000 shares of 123 Company, 3,000 is at Brokerage A, 3,000 in Brokerage C and 4,000 in Brokerage D). This is to prevent the incident of short selling, facilitate a quick transaction (especially sell orders) and not to confuse myself what is at where.

CPF And SRS Portfolios (Own And Spouse’s)

Brokerage A, Brokerage B, under my name; Brokerage C, under my spouse’s name

We use the same CDP-linked brokerages for our CPF under the 35% stocks limit, and SRS portfolios. Also, cross-brokerage ownership of the same counter is allowed (i.e., 123 Company shares are present in my CDP Bedokian Portfolio, and in my spouse’s CPF portfolio), where in this way, we can attend the AGM together.

Brokerage F, roboinvesting platform, under my name and my spouse’s name, separately

Based on my previous writings, I think you could guess which roboinvesting platform we are using. 

 

Trading Portfolio

Brokerage G, custodian, under my name

This platform is purely used for trading purposes with no long-term holdings inside, save for covered-call ETFs. Sometimes I would use Brokerages D and E for trading, too, depending on circumstance (e.g., I need to execute a trade but there are insufficient funds in Brokerage G, hence using others).

Brokerage H, crypto platform, under my name

I would like to categorically state that Brokerage H is regulated by the Monetary Authority of Singapore. I also use a cold wallet to safekeep cryptos that are not designated to be traded often.

 

Hope the above tips assist you in your own brokerage organization.

 

Related post:

Of Custodians And Ringfencing

 

Of Custodians And Ringfencing

Occasionally there will always be a question popping up on the safety of having one’s securities in a custodian account. Time and again, some people will have the impression that if the brokerage who is holding their shares in custody goes under, there goes the shares. And I am quite surprised that due to this, a few investors would rather invest locally and have their shares custodised with the Central Depository, or CDP, which to me is a missed opportunity on diversifying into other markets outside of Singapore.

This thinking is not without basis. In 2011, a now-defunct U.S. based commodities brokerage firm MF Global had misused customers’ funds by using them to cover their liquidity shortfalls, and there were Singapore customers included. It was till 2016 that MF Global’s liquidators returned all the funds to the affected customers. Due to this experience, I have heard of at least one ex-MF Global client swearing off custodian accounts.

 

By legal right, the assets of investors are separated from the assets of the brokerage with whom the investors invest with. This is the “ringfencing” described in the title. In the rare event where the creditors are acting against the brokerage, they are going after its assets, not the investors’.

 

As the adage goes, however, anything can happen, and skeptics will argue the scenario of another “MF Global happening” and if so whatever safeguards and legal protections would be thrown into the wind. I do not dispute of such possibilities manifesting, since I acknowledge that there are many risks involved in investing, though in terms of probability, it is very rare.

 

Rather than restrict oneself from investing in overseas markets (or local markets if wanting cheaper transaction costs), why not diversify across different custodian brokerages? Recent years had seen several discount brokerages popping up, and adding a layer of safety and security is that they are (mostly, if not all) licenced by the Monetary Authority of Singapore. Perhaps these may convince those to try out (or retry) custodian brokerages, and from there, invest in the rest of the world?

 

 

References

 

Ross, Marc L. What Happened At MF Global? Investopedia. 17 Jan 2023. https://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx (accessed 17 Sep 2023)

It’s AGM Season!

If you had invested in equities of individual companies and units in real estate investment trusts (REITs) and held them in the Central Depository (CDP), or through your CPF investment account (CPF-IA) and/or supplementary retirement scheme (SRS) account, you would have received notices of annual general meeting (AGM), examples of which are shown in the picture below (Fig. 1).

Fig. 1: Examples of AGM notices (source: own photo)

If you search enough on the internet, you would have realised, at least for local listed companies and REITs, a lot of AGMs were held in the month of April. With the lifting of COVID restrictions, an announcement in December last year by the authorities stated that the option of having online official meetings, which included AGMs, would cease from 1 July 2023¹. From the slew of AGM notice letters that had been sent out, many companies and REITs were bringing back physical AGMs.

 

Being a shareholder and/or unitholder, you have the right to attend the AGM to vote on matters, businesses and resolutions as detailed in the AGM notice, ask questions and clarify issues with the board of directors and senior management, and depending on the company/REIT, to enjoy refreshments provided or get some cash/shopping mall vouchers (or probably nothing at all).

 

I had attended a few AGMs before COVID, and it was really an eye-opener. After verifying your identity at the entrance of the venue (usually a ballroom in a hotel or a function room in a convention centre), you would be issued a voting device that looked like an old Nokia feature phone, with number buttons and a monochrome screen. This was used to vote on the resolutions. After the resolutions were passed, the session would open to the shareholders/unitholders for question time.

 

The AGM was one of the few moments where you share a (ball/function) room with the elites of the business world. You could say that you had sat opposite with so-and-so to discuss on important matters (though so-and-so was likely seated on a stage in front and you were just one of possibly tens or hundreds of shareholders/unitholders present).

 

After everything was over, and if there were refreshments, this was where the fun begins. Depending on how the food was laid out, the shareholders’/unitholders’ (hereafter referred to as “crowd”) behaviour ranged from orderly to chaos. The most memorable incident that I had witnessed was a food item being cleared out by the crowd in less than 10 seconds after it was being replenished (the refreshments were teatime food items by the way).

 

AGMs are usually held during office hours, so working folks (like myself) would have to take leave to attend, which I do once in a while as a break from my work. Still, the crowd size is relatively big especially in AGMs of larger companies and REITs.

 

If your shares/units are not held in CDP/CPF-IA/SRS, i.e., through custodian, do enquire with the brokerage that held your shares/units and ask if they could arrange for your AGM attendance.

 

 

1 – Ang, Rosalind. Temporary option for companies to hold official meetings online will stop from July 2023. The Straits Times. 16 Dec 2022. https://www.straitstimes.com/singapore/companies-can-no-longer-hold-official-meetings-online-from-july-2023-minlaw (accessed 2 Apr 2023)

 

Bob Is Rebalancing Yet Again…With Some Changes

Bob will be rebalancing his portfolio on 30 June 2022 with another SGD 5,000.

This time round, Bob will be using a different brokerage for his portfolio. As you know, previously Bob’s transaction fees were on the high side, thus this resulted in reduced returns.

 

With the advent of more brokerages offering lower commissions, Bob had decided to switch over to them for his trades, as well as transferring the entirety of his portfolio (assumed free of charge).

 

Remaining brand-neutral and given the size of his trades, the assumed transaction fee per trade would be SGD 5.00 (for Singapore securities) or USD 5.00 (for U.S. securities). I understand actual fees may be lower, but I would keep it at that quantum.

 

Bob’s portfolio can be accessed here.

Lendlease Global Commercial REIT Preferential Offer

If you are a Lendlease Global Commercial REIT (Lendlease REIT) unitholder (at least from 30 March 2022, 5:00 pm), you would have received a purplish-pinkish form for the application of new and excess units under the preferential offering. As stated in my previous post on Lendlease REIT, we would be applying for this preferential offering.

 

In summary, a total of 345,577,449 new units would be offered at SGD 0.72 each, on a pro-rata basis of 29 new units for every 100 units held as at the record date of 30 March 2022. The application deadline is on 12 April 2022.

 

I would also like to take this opportunity to comment on the various ways to pay for the application. With the advent of PayNow, it is much easier to pay for this preferential offering (as well as others) at the comfort of your home than to rush to the nearest ATM or taking out a banker’s draft/cashier’s order. My guess is a long time ago, when the option of using ATM is available, it was probably considered a godsend back then in terms of convenience over going to the bank and apply for the draft/order. Such is the advancement of payment technologies.

Introduction To Alternatives (Part 1)

After swimming around comfortably in the pool of investing, you might have come across this term “alternatives” while doing your laps. Alternatives, or alternative investments in full, are assets that do not belong to the common mainstream asset classes/financial instruments, namely equities (shares/stocks), bonds and cash.

There are several alternatives; some are asset classes, investment vehicles, methodologies, or a combination of the former two/three. Examples include real properties, hedge funds, private equities, cryptocurrencies, derivatives, etc. The Bedokian Portfolio already contains two alternatives, namely real estate investment trusts (REITs), an equities-property hybrid, and commodities (gold, silver and oil).

 

Alternatives are usually included due to their different correlations with equities and bonds, thus providing more diversification and hence, better returns with lesser risks in an investment portfolio.

 

Writing about alternatives would warrant an entire book, or a series of books, depending on how much details are written. I would give a very short summary of the various alternatives available out there. I had covered commodities and REITs in the eBook¹, so I would not state them here.

 

Property

Property is referred to as immovable property, for example land, houses, apartments, buildings, factories, warehouses, etc. They are generally used to earn rental income, and there is a huge potential in capital gain when its value increases, especially when the property is in a prime location, and/or in an increasing economic growth environment. Properties are leveraged items; unless one is rich enough to pay it off in one shot, a loan is needed to be taken out to fund the purchase. Therefore, for a property investor, a typical strategy would be using the rental income to cover the mortgage payments, with either divesting in the future to realise capital gains, or for keeps for legacy reasons.

 

Private Equity

Private equity, or PE for short, is an investment in a company that is not publicly traded in the financial markets. There are two main approaches of PE: venture capital (VC) and leveraged buyouts (LBOs). Some of you may have heard of VC, where a VC firm would put a stake in start-ups or small companies with huge potentials, and either sell them to larger companies or list them publicly a few years down the road. A lot of well-known companies that are listed in the markets currently were funded initially through VC, such as Alibaba, Google, etc. 

 

For LBO, a PE firm would buyout a private company using debt or leverage (thus the term), and just like VC, the acquired company would eventually be sold or listed a few years later. Whether VC or LBO, the common thing between the two is that the PE firm would have some say in the management of the funded/acquired companies, ranging from advisory to direct control. 

 

PE is in the domain of sophisticated (accredited and institutional in investment talk) investors, who are usually high net worth individuals, funds, investment firms, etc.

 

Hedge Funds

Hedge funds are funds that use different strategies to earn returns for the investors who have a stake in it. Though hedge funds buy and sell shares most of the time, which may seem on the surface that they are no different from equities, it is the strategy(ies) employed that make them stand out. 

 

Some of the selected hedge fund strategies include:

 

Equity Long/Short: Purchasing of a company’s (or some companies’) shares while at the same time short-selling others’, usually across sectors or industries.

 

Market-Neutral: Similar to equity long/short, but the approach involves both longing and shorting within the same sector/industry. It is “neutral” in a sense as this strategy is not concerned on where the markets are heading, but rather exploiting the relative performances of the companies within the sector/industry.

 

Dedicated Short Bias: As it goes, shorting is the name of the game, although a few hedge funds adopt a net short method (i.e., short positions more than long positions).

 

Global Macro: A strategy which makes use of the geo-political and socio-economical situations around the world. Investments are not just limited to equities, but also other asset classes.

 

Arbitrage: Arbitraging is an art or skill of identifying mispricing of the same security across two or more markets, and make a profit from it. Here is a layman example: at a given time, if an item is selling at S$1 and S$1.50 at locations A and B respectively, I would buy it at location A and sell it at location B.

 

Event Driven: This approach utilises happenings in the corporate world and takes advantage of the expected mispricings, such as mergers, acquisitions, spin-offs, etc. 

 

Multi-Strategy: As described, it means a hedge fund could employ two or more of the strategies mentioned above.

 

Just like PE, hedge funds are in the domain of sophisticated investors.

 

Cryptocurrencies

A relatively new asset that emerged from the shadows of the Global Financial Crisis of 2008/2009, cryptocurrencies (or cryptos for short) are gaining widespread popularity and traction in recent years. The great ancestor of cryptos is none other than Bitcoin, which is also famous for the accompanying blockchain technology. Though they are touted as a form of digital currency for the future, as of now they are mostly used for speculative trading.

 

Collectibles

Collectibles are items that are likely to worth more the longer they are kept, and some examples include artwork, antiques, rare coins, stamps, wine, etc. On the crypto front, there are also non-fungible tokens (NFTs). The difficulty of having collectibles as an investment is the appraisal and valuation of their current and potential worth, unless you hire an expert to look into them or you are an expert yourself.

 

Derivatives

Derivatives are a category of investment vehicles that derive (the root word) their value from an underlying asset. In other words, you do not really own the asset using derivatives, but rather they sort of mimic the asset class itself by following the value. 

 

Derivatives are used more for trading than investing, and most derivatives lose their value over a certain time, such as within the next few days, weeks or months. Examples of derivatives include futures, options, warrants, swaps, contracts-for-differences (CFDs), etc. There are also stacked derivatives, like options on futures and options on swaps.

 

In Part 2, I shall share further on how to incorporate alternatives into your portfolios.

1 – The Bedokian Portfolio (2^nd Ed). Chapter 5 Commodities; Chapter 6 REITs p45-50.

Before You Jump In, Some Admin Stuff To Look Into

It felt good being a first time investor; after reading The Bedokian Portfolio or some other investment books or material, you will feel the urge to jump straight into the action. You may quickly want to open up a brokerage and/or regular savings plan account, start to look for securities to invest in, and voila, you have started an investment portfolio.

Then as the months or years gone by, suddenly you have discovered something; your Company A and REIT Z shares are straddled between your Central Depository (CDP) and your regular savings plan accounts. Your Corporate Bond Q is split between a custodian brokerage and a bond fund brokerage account. If you want to sell say, Company A shares, you may have to incur twice the transaction costs because they are placed in different platforms. Ditto for buying with the added headache of choosing which platform to buy.

Just as you had taken the time to learn about investing, you should also take the time to do some research into how to go about it. Administrative matters, though they are trivial, must be aligned with your overall investment strategy. They will sometimes give you the greatest headache if things are not falling into place.

Brokerages and Trading Platforms

A few fellow investors and traders I spoke to placed commission charges as the top priority. While this is correct as such transaction costs erode our returns, we have to consider other factors in place, such as where the securities are being kept (CDP or custodian), further charges like custodial and dividend handling fees, and the value added features, e.g., reports, videos, etc. in the trading platforms.

For myself, I use CDP-linked brokerages for local individual securities (equities, REITs and bonds), and a custodian brokerage for foreign securities and exchange-traded funds (both local and foreign). The main reason why my securities are with CDP is to have more control when corporate actions occur, like rights issue, attendance of annual general meetings, etc.

Regular Savings Plan

Firstly I would like to declare that I do not have any regular savings plan (RSP) in place. I had mentioned in my ebook that it is preferred to have your holdings in a good-to-look number to facilitate ease of transaction during rebalancing¹. Since RSP uses dollar-cost averaging in the form of a fixed dollar amount per month, the chance of having odd-lots (number of shares not in multiples of 100s for locally-listed shares) is very high.

That being said, I am not against RSPs. In fact, I have thought of a way to incorporate RSPs into your regular Bedokian Portfolio. Remember the core-satellite approach?² For RSPs, it is better to use them to purchase ETFs for your core, since the core would be rarely touched during rebalancing. You could also view your holdings in the RSP as the “inner core”, with ETFs bought using usual brokerage means as the “outer core”, so in case that the rebalancing reaches the core, the outer ones would be transacted first.

One More Thing

The last part of the admin of your portfolio management would be the securities themselves. If you have bought Company A shares from a brokerage using CDP as custodian, then any further purchase of the shares must be bought using this same channel. This is to prevent additional transaction costs incurred as stated above, and also an accidental short sell. The latter could happen if you cannot recall the quantum of shares allocated between the types of custodian and unintentionally oversold.

As for ETFs, following the RSP section recommendation, you could use RSP to buy in regularly for the inner core, and select one form of custodial arrangement for the outer core.

1 – The Bedokian Portfolio, p77-79

2 – ibid, p122-123

Further references

The Bedokian Portfolio, Chapter 2 – The Workings