Investing My CPF With Endowus

This is an affiliated post with Endowus. All views, opinions and research expressed herewith are solely mine. The intended audience of this post is for individuals who are below 55 years old. Disclaimer applies.

Over the course of the past few years, I had achieved two of my personal financial milestones, and those were the clearance of my home mortgage loan and hitting my Central Provident Fund Special Account (CPF SA) to the full retirement sum (FRS). The next step in my overall (read: lifetime) financial strategy would be maximising my gains and returns in the CPF Ordinary Account (OA).

We all know that the CPF OA returns an interest rate of 2.5% per year (and 3.5% per annum for the first SGD 20,000), but if we are able to invest with a diversified portfolio in the financial markets, we are likely to get higher returns over the course of 10 years, which is my bare minimum for an investment period. For instance, even considering the recent fall of the markets due to COVID-19, the balanced Bedokian Portfolio using U.S. based securities for the 10-year period of 1 May 2010 to 30 April 2020 would have an inflation adjusted compound annual growth rate (CAGR) of 6.3%¹. Even for the basic 60% equities / 40% bonds portfolio in the same timeframe returned an inflation adjusted CAGR of 6.77%².

I had started implementing my Bedokian Portfolio with the CPF OA (you can read up on how to do it here: Part 1 and Part 2), but there are limits imposed on the investable amount for shares (35%) and gold (10%). Though Exchange Traded Funds (ETFs) are not part of the abovementioned limits (with the exception of the SPDR Gold ETF), you can only choose from (currently) four, all of which are focused on the Singapore market. Therefore, to invest my CPF OA in overseas markets, I would have to look for another financial instrument. 

This is where unit trusts come into the picture (I understand that there are investment-linked insurance products, or ILPs, that has unit trusts, too, but I want to keep this post purely investment-related). They are professionally managed products and have a wide range of exposures ranging from asset classes to regions and individual countries. Although I am not against unit trusts (they are good investment vehicles in some cases), the major gripe I have with them is their high total expense ratios (TER) (as compared with ETFs). On top of the annual management fee (mostly around the range of 1.5% and above for equity unit trusts, based on the list here), there is still the one-time initial charge or front end load fee.

Enter Endowus

About eight to nine months ago, I stumbled upon Endowus on the Internet, and I believe they were (and still are) the only robo-advisory platform that can invest your CPF monies (they can invest in your cash and Supplementary Retirement Scheme savings, too). Through their selected funds (CPF approved, of course), I am able to invest my CPF OA in the international markets at a lower TER than if I had invested them myself, due to Endowus rebating 100% of the trailer fees. Being a robo-advisor, they could do a rebalance of the unit trust funds in the portfolio back to your desired allocation. For all these, Endowus charges an access fee of 0.4% of your assets under advice per year, quite a reasonable rate among all robo-advisors. 

With the above plus points, I decided to go for it by investing an initial SGD 10,000 with monthly injections from my CPF OA into the portfolio. 

My experience of setting up the Endowus account was pretty straightforward, but you need to have some information at hand, such as your CPF investment account (CPFIA) number. If you do not have this yet, go to either DBS, UOB or OCBC to open one (you can only have one CPFIA, no multiple accounts are allowed. Please read up on the prevailing charges and fees from each bank before settling on one). Also, an account with UOB Kay Hian will be opened, as the funds purchased under the Endowus platform are transacted by and custodised with them, in your own name. For my case, I used my UOB Kay Hian brokerage account number during the registration.

After the Endowus account had been set up, you are ready to go. The platform will ask for your investment goal (“general wealth accumulation”, “my retirement (coming soon)” and “a significant purchase (coming soon)”), risk tolerance for the goal (“preserve my capital”, “grow my capital by taking some risk” and “maximise my returns by taking greater risk”) via dropdown menus, and a slider for “worst 12-month percentage loss I can tolerate for my investment” for the latter. 

I chose my investment goal as “general wealth accumulation”, risk tolerance of “grow my capital by taking some risk” with 35% percentage loss tolerance, and I was recommended a 60%/40% equity/bond portfolio with the following funds, their focus (condensed from Endowus website) and their portion in percentage:

Equity Portfolio (60%)

• Lion Global Infinity U.S. 500 Stock Index Fund: The U.S. S&P 500 index. This is a feeder fund to the Vanguard U.S. 500 Stock Index Fund (24%).
• Natixis Harris Associates Global Equity Fund: Invests in companies whose shares are trading at a substantial discount to its intrinsic value (18%).
• Schroder Global Emerging Market Opportunities Fund: Invests in companies especially from emerging markets such as China, Korea, Brazil, etc (9%).
• First State Dividend Advantage Fund: Focused on Asia ex-Japan based companies that have potential dividend growth and long-term capital appreciation (9%).

Bond Funds (40%)

• Legg Mason Western Asset Global Bond Trust: Primarily on high quality debt securities from Singapore and major global bond markets such as G10 countries, and Australia and New Zealand (16%). 
• UOB United SGD Fund: Money market and short-term interest-bearing debt instruments and bank deposits, majority from China and Singapore (12%).
• Eastspring Investments Singapore Select Bond Fund: Consisted of Singapore government, quasi-government and investment-grade debt securities from outside Singapore (12%).

The funds are well diversified, besides the obvious diversification of asset classes; there are regional (U.S., Asia-Pacific), state of the economy (developed, emerging), investment style (value investing and growth) and the type of fixed income (short-term, investment grade, etc.).

My Experiences So Far

Overall it is a seamless experience, but that is what robo-advisors are all about; you just contribute the amount needed and they will do the selecting, transacting and rebalancing automatically. If you want to make some changes (e.g. changing the monthly contribution), you can do it on their platform, which to me it is easily navigable and user friendly. You will be informed via email a few days before the scheduled deduction from your CPF OA for the monthly investment, and when the investment is done.

More on the user interface, you can view the breakdown of the equity and bond sector allocations and their top 10 holdings, something like what you see on a unit trust fact sheet, the difference being this information are from all of the underlying funds in your Endowus portfolio, not just one. I also find the interactive goal projection chart interesting as it showed, based on their simulations, the range of possible outcomes for your portfolio. 

Conclusion And Caveat

Before jumping in on the CPF investment bandwagon, you will need to do a self-review of your CPF commitments, if any. A lot of people used CPF OA for their home mortgage payments, and some for funding their children’s education. Being also one of your major retirement schemes, you have to consider if you are able to hit the future basic retirement sum (BRS), FRS or enhanced retirement sum (ERS) to facilitate the eventual CPF-Life payouts. It is important to note that investment is long term (at least 10 years in my definition), so do plan ahead carefully and know what you want.

Past performances of the funds stated in this post do not guarantee future results.

Click on this link and get SGD 10,000 managed free for six months (SGD 20 equivalent). 

All proceeds gathered from the affiliation will be donated to charity.

1 – Portfolio Visualizer (https://www.portfoliovisualizer.com) Backtest Portfolio Asset Allocation. Balanced Bedokian Portfolio of 35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash using their representation counters VTI, BND, VNQ, GLD and CASHX respectively (accessed 20 May 2020).

2 – ibid. 60/40 equity/bond portfolio using VTI and BND respectively (accessed 20 May 2020).

References

Investment Products Included Under CPF Investment Scheme (CPFIS). Jan 2020. https://www.cpf.gov.sg/Assets/members/Documents/CPFISInvestmentProducts.pdf (accessed 20 May 2020)

The Oil Conun-Drum

By now, you may have heard of the news of crude oil prices plunging to the negative regions (minus 37.63 US dollars (USD) per barrel, from this news source) due to the drop for its demand in the current COVID-19 situation. 

Before assuming that free oil is around the corner (hurrah for vehicle owners), the crude oil market is not as simple as it looks. First, if you read carefully from the same news article, the negative price is for the West Texas Intermediate (WTI) May 2020 futures contract, which had just expired on Tuesday (21^st April 2020). The WTI June 2020 futures contract as at the time of my writing was USD 14.57. Oil, being a commodity, is mainly traded through futures, which I had explained the mechanism of it in my ebook¹. Because of oil’s low demand, very little buyers would want to take delivery on the batch of WTI crude oil associated with the May 2020 contract, and the producers would instead have to pay the buyers to get it from them, if any.

Second, there are many other crude oil types traded in the market, not just WTI. The other oft-traded crude oil is the Brent, which was at USD 20.58 as at the time of my writing, and it is extracted from the North Sea between the United Kingdom and Norway. There are many others, like Dubai Crude from Dubai, Bonny Light from Nigeria, etc., hence there is no universal crude oil price.

Third, even if a barrel of oil is at the negative price region, there are costs incurred in storing, refining and delivering before it reaches the end user, which brings the price back to the positive region (so no more hurrah for vehicle owners). On a side note, a lot of companies are involved in this whole process chain, and by sectoral association, most of their profit margins may be affected with the low oil price.

So Why Talk About Oil?

Crude oil is one of the three items that I had stated in the ebook² for the commodities portion of the Bedokian Portfolio. Investing in oil is a bit tricky; Unlike the other two commodities, which are gold and silver, there is no convenient way of holding physical crude oil (unless you have a large tanker ship or own a regulated oil storage facility). Although investing in oil related companies is one common way, I would not recommend it as they are still companies at heart, i.e. equities, and profit margins, expenses, productivity, etc. varies across them, even if the price of oil is the same. Another way is to go the oil futures path, but if you are not familiar with this instrument then I suggest you steer clear from it.

There are exchange traded funds (ETFs) for crude oil, but unlike its commodity siblings gold and silver, which have the actual physical assets backing them, their holdings are consisted of oil futures. With this characteristic, the prices of oil ETFs do not really correspond the actual rate of increase or decrease on the item that they cover (e.g. the price of spot oil may have gone up by 10%, but the ETF price may be only up by 3%). This is due to the result of contango³, which is existent in futures market.

Having stated the above, plus the points on oil in my ebook, it is up to you on whether to add oil into your portfolio, especially now the price had hit rock bottom. If you are not familiar with futures and the dynamics of the “black gold”, then you could just remain with gold and silver as your commodities.

Disclaimer: The Bedokian is vested in United States Brent Oil Fund (BNO).

1 – The Bedokian Portfolio, p37-39

2 – ibid, p42-43

3 – Chen, James. Contango. Investopedia. 20 Apr 2020. https://www.investopedia.com/terms/c/contango.asp (accessed 23 Apr 2020) 

Of Emergency Fund And Liquidation Of Portfolio (To Tide Things Over)

A global recession is in the works; Due to the disruptions caused by the measures (e.g. lockdowns) in response to the COVID-19 pandemic, the global economic machine has slowed down tremendously. Unless a quick relief, like a vaccine or falling rates of infection, takes place, a longer delay may result in irreversible changes, as businesses may not sustain the fixed overheads despite grants, force majeure of loans and contracts, and macroeconomic stimulus being rolled out. The entire global economy, like a huge machine, is made up of different parts (countries, sectors, industries, companies, etc.) that are interdependent on one another. A stop in certain parts of the machine will cause others to slow down, and a prolonged halt may cause the whole thing to be damaged.

With this, individuals like you and me not only being preoccupied of keeping one’s family safe from the pandemic, but also keeping them sustained with a constant flow of income. In such times, for most of us, our primary sources of income, which are employment and/or business/profession, could be threatened, in terms of a huge reduction or worst case, a total cut-off. Even if we have secondary sources of income such as from investment portfolio and/or properties, these, too, are likely to suffer a cut as almost everyone and everything around are facing the same issue.

There are a few ways to mitigate this predicament, such as adjusting the lifestyle and cutting down on unnecessary expenses, look out for some side gigs to tide things over, and/or use your network built over the years to gain some opportunities. For this post, I will take on the investment portfolio side of things and most of the points here are related to what I had in my eBook.

The Emergency Fund

The emergency fund, by definition in my eBook, is for you to tide over unexpected situations in life, such as sickness, unemployment or just about anything that will eat into your money¹. I had also mentioned here that the emergency fund is separate from your savings. There is no agreed upon quantum as it depends on your income, expenses and number of dependents.

I had recommended that the emergency fund be built before starting any investment, as this amount is treated as a buffer between your daily monies and the investment pool. If a drawdown has to be done, do it from the emergency fund first. 

The Cash Component

Depending on the size of the emergency fund, it should last at least a month or two and hopefully the COVID-19 would be controlled or optimistically be gone by then. However, if it does not abate, and if there are not many or ineffective alternative income streams, then the painful decision of drawing from the investment portfolio is to be made.

If you are following the Bedokian Portfolio’s methodology or any others of having a cash component in the portfolio, then shift that amount back into your emergency fund.

Partial Liquidation Of The Portfolio

If the conditions, be it the COVID-19 or your other income streams do not improve by the time your cash component is used up, then the liquidation of your investment portfolio is inevitable. Frankly speaking, by this time the portfolio would have shrank and the equities and REITs asset classes would have been hit the hardest.

The next question will be what to liquidate first? For this, my opinion is to firstly suspend the notion of asset class allocation and diversification temporarily. Secondly, see which asset class(es) the market is flocking to (note: capital moves between those that provide the greatest returns during boom days and the greatest safety during bust days), and liquidate that off, which in this case government bonds and commodities (especially gold and silver) are the probable ones.

For individual securities, you could use the selling triggers² in the eBook as an initial screener, then conduct a full fundamental analysis before deciding if the counter is to be kept or sold off. At this stage you must be objective and keep your emotions in check; never mind the losses incurred or harping on the efforts in building up the portfolio. Live today, fight tomorrow. Once the whole thing blows over, set a time and conduct a full rebalance of your battered portfolio to the preferred asset class allocation.

Stay safe, stay liquid and stay invested.

1 – The Bedokian Portfolio, p64-65

2 – ibid, p101-103

Picking Up The Pieces

Since 24 February 2020 till now, both the S&P500 and the Straits Times Index (STI) had fell at least 25%. If you had looked them up graphically online from finance sites such as Yahoo Finance, Bloomberg, etc., it resembled a steep, almost vertical cliff face. The COVID-19 outbreak continued unabated across most parts of the world, causing panic, as well as a huge unprecedented and unplanned global social experiment in terms of lockdowns, social distancing and telecommuting. This sudden disruption and behavioural shift had caused several sectors and industries to an almost standstill, especially airline, tourism, hospitality, logistics, physical retail, etc. As we know the entire financial market and economy is made up of different sectors and industries which are interdependent on one another, a stop in a few will likely result in an overall slowdown, and with this the looming threat of a huge recession.

Portfolio wise, test subject Bob’s Bedokian Portfolio was down about 20% year-to-date (YTD) and our own Bedokian Portfolio was down by around 17% YTD. Viewing our (not Bob’s, as he would see it again sometime in end-June 2020) portfolio as a pie chart, not only had it grown smaller in size but also the respective asset class slices went out of their threshold percentages, thus as an active investor I would need to bring the portfolio back to its initial balance. Instead of what a majority of other market participants did as in selling their stake wholesale, we activated the surpluses on top of our emergency fund limits to pool into the cash component of the portfolio and began to “nibble” the ETFs and individual counters of the asset classes that were beaten down.

This was a time when I had used my “10-30 Rule”¹ to determine the entry signal; I had so far carried out two series of purchases (particularly equities and REITs) for both the STI (2800 and 2500 levels) and S&P500 (2500 and 2300 levels). As I had injected funds into the portfolio, the cash portion had grown to about 8%, so the 10-30 would be based on this rather than the 5% example I gave in my eBook. Select counters that, based on your own analysis, would likely to emerge once this COVID-19 situation passed, and/or whose prices were battered down due to the general fear and for no obvious reason but were still fundamentally sound. If you are still unsure on which one(s) to get, then it would be better to go for index or asset class ETFs.

So how would the economy and the markets recover from this? My guesstimate would be a V-shaped recovery, if most of the following happenings occur (in no particular order): declining rate of infections and no/smaller second wave appearing; a standard treatment or vaccine is developed; easing of loan repayment schedules and lessening the credit crunch; assumed large amount of pent-up demand for sectors and industries that are currently unavailable or halted.

Stay calm, stay safe and stay invested.

1 – The Bedokian Portfolio, p119-120

If...

If you had just started investing, the huge fall of the Straits Times Index (STI) earlier on Monday may have spooked you. Surely, a 6% drop of the STI within a day was a horrible feeling, especially so for those who did not go through such sudden huge declines and/or got used to the boom times in recent years.

If you had disregarded your emotions and adhered to your investment principles and strategies, then whatever happened on Monday would be like a walk in the park for you. Knowing what to do next, whether in a bull or bear market, is a good sign of control and rationality.

If you had identified opportunities even when the sky was falling around you, this meant that you were able to see a silver lining amongst the doom and gloom. Prices of equities may be near your calculated valuations, so it is probably time to load them up on the cheap; not all in, though, maybe some nibbles.

If you had a diversified portfolio made up of different asset classes (e.g. The Bedokian Portfolio), your capital would be less affected than those which were in just one asset class (in this case, equities). The different correlation between the asset classes act as counterbalance to one another in different market and economic conditions, hence your losses would be mitigated.

If you are a passive investor, do not be mindful of such happenings. Instead, you should just rebalance your portfolio during your designated date and carry on with your everyday life. 

Stay calm, stay rational and stay invested.

All About Price: The 52-Week High/Low

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. For this post, I will talk about one of the most used metric in determining a buy or sell call, the 52-Week High/Low (52WH/L).

I had used the 52WH/L as one of the indicators during my trading days. After I had identified a counter for trading, I would look at its 52WH/L price: if the current price was within the bottom 30% of the high/low range, then it was a buy opportunity. Similarly if the current price of my holding was within the top 30% of the high/low range, and if I was in-the-money, I would consider selling it.

Due to the emphasis of the 52WH/L by so many market participants, it had somewhat become an implicit resistance-support number in technical analysis terms, and the amount of trading volume will typically increase if the price approaches those two numbers.

Nevertheless, using the 52WH/L has its benefits and caveats. Let us have a look at some of them in a nutshell:

Some Benefits

#1 – Good for high price-to-book securities: Ever wanted to invest in a good company or REIT but it seems to be always on a high price-to-book ratio? Usually such securities are seldom near their book value, let alone being at it. The 52WH/L will give you, among other factors, an indicator to enter them at an appropriate price.

#2 – Applying multiple points of entry: If you are not comfortable at going in one shot on a new or existing share or REIT, you may apply a few price points along the 52WH/L. You can do it any way you want, like for example take the range between the high and low, and divide it into quartiles or quintiles, once per every week or month. Then you may contemplate going in once the price goes below a certain range, using a percentage of your deployable funds.

Some Caveats

#1 – Low can go lower: Investors and traders often overlook one of the main characteristics of price, which is if it is at a low, it can go lower. The 52-week is an arbitrary time period used in many investment and trading publications and websites, hence it formed some sort of a mental frame. Therefore it is suggested to look at the prices beyond 52 weeks, like maybe two or three years.

#2 – High can go higher: The opposite effect of caveat #1 can happen, too, regardless if there was a point in the past where a share/REIT price went higher than the current 52-week high, or it could be approaching an all-time high never seen before. Investors must look out for signs in the fundamentals (or for traders, momentum) that could point to a rise in price beyond the high limit, and then decide if the counter is to be kept or sold.

It is up to you whether to include the 52WH/L metric into your fundamental analysis. Past prices are not indicative of their future movements. Due diligence must still be practiced.

Check out the other posts in my All About Price series.

All About Price: Introduction & Valuation of Value

All About Price: Buyer/Seller Remorse and Premorse

The Coronavirus Outbreak: What To Do As An Investor

The coronavirus outbreak is, without a doubt, the most talked about topic on everyone’s lips now. We all have been inundated by the news and topics related to this microscopic threat: the number of cases in Singapore and various parts of the world; its asymptomatic trait that makes it even more undetectable; the difficulty in getting masks and sanitizers from retail outlets, and so on.

Whilst I encourage all to have good hygiene practices and carry out preventive measures for yourself and your loved ones, one constant is clear: life has to go on, even on the investment front. In this blog post, I shall share some of my views as well as strategies on navigating this period.

The Markets And Outbreaks

The markets traditionally have an inverse relationship with epidemics, and it is due to the common emotion of fear. Yes, fear of not only what an outbreak can do to you, but also what it will do to everything else. When there is an epidemic (especially those that has no known vaccine or cure) and almost everyone talks about it, the impact, real or imagined, is felt. Self-preservation takes over and most everyday activities will be slowed down or halted at the worst. With this, most industries and sectors will, like a domino effect, be affected and thus the perceived economic outlook is definitely not good.

To bring things to a comparison and a parallel, most of us tend to look back at the last instance of a similar scenario, and you guessed it, the SARS epidemic of 2003. Between the months of March and May, where it was considered a crucial period, the Straits Times Index went down to a low of almost -10% using 2003 year-to-date (YTD) reckoning. However, after that period, it recovered and finished off the year with +32.08% 2003 YTD (see Figure 1).

Fig. 1 – Straits Times Index, 2 Jan to 31 Dec 2003. Source: Yahoo Finance.

While it is good to see the past for lessons to be learnt and to glean some experience, the future is still a big unknown to us. This epidemic caused by the coronavirus, dubbed as the 2019 Novel Coronavirus (or the Wuhan Coronavirus based on its first occurrence in the Chinese city), was just slightly over a month, yet it had infected numbers far surpassed to that caused by SARS. As of the writing of this post, the World Health Organization had declared it a global health emergency and some countries are imposing or imposed travel restrictions. How all this will pan out eventually, we are not very sure.

But, there is bound to have an investment silver lining in situations like this. Let me share with you what they are and which investment strategies and thoughts to apply. Bear in mind that the following strategies are not mutually exclusive and you could combine them and/or their sub-points together. 

#1 Look At The Winners

Masks and sanitizers are in demand now, judging from the numerous “out of stock” notices displayed in pharmacies, supermarkets and hardware shops. Clearly, manufacturers that produce masks, sanitizers and even gloves are having a profit field day. Expanding this thought, it is deemed that the entire medical and healthcare sector and industry will stand out as winners. In our local Singapore Exchange, we had seen some counters in the abovementioned fields rising in price over the past few days.

Going after winners (companies, sectors, regions and asset classes alike) is a bit difficult, particularly at the point where they are about to take off. You need to have a really, really good foresight of what is coming, if not then you need to be an early mover to get in cheap before the others start to move in. Sometimes such a strategy can be seen as a trading one, where profits can be realized once a set price is reached.

Still, there is some plus points in looking at winners. If a proper fundamental analysis (FA) is conducted and the company shows some potential over a long period, then it is worthwhile to invest in it, even though its share price is rising at the moment. As long as the price is well below your derived value after FA, you may still consider going into the company.

#2 Look At The Losers

With travel restrictions and city-wide lockdowns, some business segments are bound to lose big. Transportation, retail (physical ones), hospitality, etc. are likely to take a big hit, for a lot of people would not want to risk being exposed. Given the fact that China is a substantial source of tourists to a number of countries, those destinations may feel a deep dent in tourism revenue.

This is a good time to look at companies with direct and indirect exposure to the sectors and industries highlighted in the previous paragraph. Using FA, it is prudent to sieve out those that can withstand this down period (maybe for at least a year or two) from the ones who are maybe on the brink of liquidity crisis. A strong free cash flow, adequate liquid assets and/or diversification of revenue streams are some of the points to look out for when analyzing a company.

On the asset class front, equities on the whole are dipping, so on a broad front it is good to initiate some small positions in index ETFs and carry out averaging down or up when necessary. It is up to you to decide on the points of entry based on the index numbers, like the example of my 10-30 rule in my ebook¹.

#3 Look From The Sidelines

Sometimes doing nothing is considered as doing something. You may want to adopt a wait-and-see approach, as probably the influx of news and numbers may cloud one’s decision-making process and it is hard to have a good guesstimate on how things will go.

If you still want to do something, then you may want to adopt a passive index investing approach, where its proponents would just rebalance their portfolios at a set date and forget about it until the next cycle. You can create a new portfolio dedicated to passive investing or add in asset class ETFs and slowly transform your portfolio into a core-satellite one², if you had not started yet.

Stay safe, stay healthy and stay invested.

1 – The Bedokian Portfolio, p119-120

2 – ibid, p122-123