No More CPF-SA After 55, So How?

As an investment blog, I seldom talk about the dimension of personal finance, but after hearing from the Budget 2024 about the changes to the CPF Special Account (SA) and seeing the vast number of reactions to it, I decided to pen this post on the issue. The reasons being first, it somehow affected our step-down plan; second, it touches on the topics of portfolio drawdown and the portfolio multiverse, which are chapters in my eBook; and third, a lesson on risks and diversification.

To summarize in a one-liner: from 2025 the SA would be closed for all who are 55 years and above of age, and any balance from the SA would move to the Ordinary Account (OA) after setting aside the selected retirement sum into the Retirement Account (RA), if applicable. This meant that SA “shielding” (investing the SA funds to “shield” it from being swept into RA) and the subsequent treatment of SA as a high-yielding interest account would be rendered useless.

 

Our Step-Down Plan

 

With the announcement on Friday, many people online and my friends and acquaintances were busily recalculating the retirement models on their spreadsheets, and we did the same, too. Our moment of step-down was after the age of 55, and we used the assumption of no SA shielding to keep things projectable and simple. With the new ruling, however, two parts of our model were affected: the loss of an additional 1.5% thereabouts compounded from the supposed balance in SA, and the calculation of yield/withdrawal rate of our step-down income from CPF. For the former point, after reworking the numbers, the loss from a lesser compounding effect is not that much as our runway between 55 and the step-down age is relatively short. 

 

For the latter point, instead of using a generic 4% yield/withdrawal rate across our portfolios (which was based on the SA’s 4%), we would have to use two sets of withdrawal rates: 2.5% for the OA portion and 4% for the rest of the portfolios. With the new numbers, our projected annual income is down by around 9.5%, and to us we are still comfortable with the new amounts.

 

As mentioned in this post on our step-down, a good financial plan takes a lifetime, and this SA closure thing is an example of the kind of scenarios where you need to relook at your models and figures, and adjust accordingly to fit into the changing situations.

 

The Importance Of Diversification

Personally, I dislike the word “riskless” and yes, risks are everywhere. The only thing that differentiates between the risks is the probability of them happening. The false security comes when one who did not experience a risk happening would assume that the item/event would never occur, and thus label it as riskless.

 

Why I brought in the topic of risks is the general assumption by some on CPF keeping the things they are in years to come. While it is known that the risk of CPF not paying interest is close to zero, there is another that few did not realise is policy/regulatory risk, which is the possibility of change of rules and regulations pertaining to a policy. If one remembered decades ago (for younger ones you can approach your family elders to verify), one’s CPF funds could be fully withdrawn at age 55, and OA rates were once 6.5%.

 

The main countermeasure to reduce (not eliminate) risks is my oft-preached act of diversification, not just on asset classes but also portfolios, hence our portfolio multiverse concept. Whilst the CPF itself is reliable in fulfilling financial obligations of safekeeping of funds and interest payments, it is good to have at least another investment portfolio funded with cash to augment the former, just in case there are further policy changes. Overall, it is not recommended to base an investment and income strategy solely on one portfolio or even asset class.

 

The Search For Alternatives

 

The caveat that I want to put here is, besides RA, there is no known financial instrument (at least to me) that offers the near-consistency and simultaneous low risk level and high yielding characteristics of SA. So, if one plans to have a higher CPF Life payout from age 65 onwards, topping up RA to the prevailing Enhanced Retirement Sum would be a prudent idea.

 

For those who are not eligible for CPF Life yet and/or wanted to have a higher-than 2.5% yielding cash flow, some risk would have to be taken in the form of investing in equities for growth and/or dividends, and it would be better if the investment time horizon is long. There are bonds, too, and they are currently favoured with the prevailing high interest rates, like fixed deposits. Still, everyday is not a Sunday for equities, bonds, or even real estate investment trusts (REITs) and commodities due to the phenomenon of market cycles.

 

Like it or not, we would need to take it upon ourselves to learn and look for other alternatives if one door is closed. If the world of investment is too daunting, then approach it passively and periodically (e.g., dollar cost averaging into index exchange traded funds). The final word here is there is no excuse for not learning, for it is one’s own financial future that he/she is responsible for.

 

Reference

 

https://www.cpf.gov.sg/member/infohub/news/cpf-related-announcements/budget-highlights-2024?cid=cpfprel:bn:bau:alsgm:cpfoverview:cpf101:announcements

Inside The Bedokian’s Portfolio: iShares FTSE China A50 ETF

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, I will discuss about the Hong Kong listed iShares FTSE China A50 ETF (2823.HK).

 

Overview

 

Incepted 0n 15 Nov 2004, 2823.HK tracks the FTSE China A50 index, which consisted of A-class shares (A-Shares) from 50 of mainland China’s largest companies traded on both the Shanghai and Shenzhen Stock Exchanges. The underlying assets are denominated in Chinese Yuan (CNY) and listed under two currencies in the Hong Kong Stock Exchange, CNY and Hong Kong dollars (HKD). The ETF has around 13 billion CNY under management with a fee of 0.35%, and the dividends are distributed annually (usually paid out in December).

 

Why 2823.HK?

 

Back on 3 Oct 2022 I had mentioned about holding this ETF. As stated in that post, I had selected 2823.HK due to two reasons: the A-Share holdings and the diverse sectors it presented. 

 

If you had ventured into the Chinese stock market, there are a few classifications of equities, like the commonly known A-Shares (shares issued in China of Chinese companies listed in the Shanghai or Shenzhen Stock Exchanges) and H-Shares (shares of Chinese companies listed on the Hong Kong Stock Exchange), on top of others. Though technically these two classes of shares are similar, there were instances where price divergences happened between the two, even if both share types were from the same company. This characteristic could be attributed to the availability of share types to different groups of investors; H-Shares are available to foreign participants easily while A-Shares are for mainland Chinese investors/traders and a regulated small group of foreign institutional investors. For investing in a country, our style is to own the securities as direct as possible where available to capture the local investing environment, hence we went for an A-Share ETF.

 

For the reason of diversification of sectors, this is obvious as it plays to our investment playbook. 2823.HK contains a vast spectrum of companies in different sectors such as the distillery Kweichow Moutai (consumer staples), Bank of China (financials), Foxconn Industrial (information technology), etc., thus representing the microcosm of the Chinese economy.

 

For our strategy, 2823.HK is a growth and dividend play in the portfolio.

 

What’s Next?

 

Chinese equities market and economy had gone through a rough patch due to a myriad of reasons including its overleveraged property sector and weakened consumer demand. The authorities had announced further stimulus measures to bring up the economy, so there is some economic positivity over the horizon.

 

The current price is HKD 11.74 (as of 9 Feb 2024). This presented a good opportunity for us to average down based on our previous entry prices (see under Disclosure below) so we may add more in the coming weeks. 2823.HK currently represented less than 1% of our Bedokian Portfolio holdings.

 

Disclosure

 

Bought 2823.HK at:

 

HKD 19.29 at Jul 2021

HKD 18.17 at Jan 2022

HKD 14.20 at Oct 2022

 

Disclaimer

Some REITs Are Having Lowered DPU. Should We Be Worried?

Recently a few REITs in our portfolio had reported their earnings and not all are having good news. To name a few headlines:

Paragon Reit posts 1.9% lower H2 DPU of S$0.026¹

 

Lendlease Global Commercial Reit H1 DPU down 14.5% to S$0.021²

 

Aims Apac Reit’s 9M DPU down 4.1% to S$0.0699 on enlarged unit base³

 

Words such as “down” and “lower” do sound queasy, but if we read the news articles in detail, these were mentioned:

 

“Paragon Reit’s manager on Monday (Feb 5) attributed the lower overall DPU to rising interest cost.¹”

 

(Lendlease Global Commercial Reit) “The lower DPU was primarily driven by higher borrowing costs amid the higher interest rates as compared to a year ago.²”

 

(Aims Apac Reit) “This was due to an enlarged unit base resulting from an equity fundraising in July 2023 to strengthen the…(Reit) balance sheet and support asset enhancement initiatives and future growth opportunities.³”

 

We need to know that the REITs were reporting on past periods. While this is like a report card for them, we must understand the reasons why the distribution per unit (DPU) was lowered and we need to look into the future beyond the numbers published. 

 

Paragon and Lendlease REITs’ lowered DPU were attributed to high interest rates, and this was no secret as rates accelerated during the past 1.5 years or so. Even so, we see potential in these two REITs for the following two major reasons: the REITs’ crown jewels are malls that are situated along the Orchard Road shopping belt and could benefit from the rising number of tourists visiting Singapore, and; interest rates would be lowered earliest within this year (at least what the Federal Reserve announced, barring any unforeseen economic situations) so the weight of high gearing costs could be lessened.

 

For Aims Apac REIT’s case, the reduced DPU was due to unit dilution, but the increased capital was for future growth opportunities. Industrial properties are more resilient than office ones as the former do not suffer from the “work from home” issue. Furthermore, future asset enhancement initiatives could see increasing occupancy and tenant retention rates, which stood at 98.1% and 80.3% respectively in their latest report⁴, not to mention the potential positive rental reversions.

 

The conclusion thus would be that we would continue to hold these three REITs and may add more to our positions depending on their prices and sizing in our portfolios.

 

Disclosure

 

The Bedokian is vested in the mentioned REITs.

 

Disclaimer

 

1 – Zhu, Michelle. The Business Times. 6 Feb 2024. https://www.businesstimes.com.sg/companies-markets/paragon-reit-posts-19-lower-h2-dpu-s0026 (accessed 8 Feb 2024)

 

2 – Oh, Tessa. The Business Times. 1 Feb 2024. https://www.businesstimes.com.sg/companies-markets/energy-commodities/lendlease-global-commercial-reit-h1-dpu-down-145-s0021 (accessed 8 Feb 2024)

 

3 – Tay, Vivienne. The Business Times. 31 Jan 2024. https://www.businesstimes.com.sg/companies-markets/aims-apac-reits-9m-dpu-down-41-s00699-enlarged-unit-base (accessed 8 Feb 2024)

 

4 – AIMS AA REIT 3Q FY2024 Business Update, p5. 31 Jan 2024. https://investor.aimsapacreit.com/newsroom/20240131_065714_O5RU_XL1B2BYE753WKKFQ.1.pdf (accessed 8 Feb 2024)

The S&P500: How High Can It Go?

One of the most common soundbites that I hear while listening in to the financial news channels over the years is this:

“The S&P 500 is at an all-time high today.”

 

And by looking at the charts, it is true; it is climbing, and its rise further accelerated since emerging from the ashes of the Global Financial Crisis of 2008/2009.

 

The obvious question now is: how high can it go? I believe this question has been asked many times before.

 

My answer to this is just four words: I do not know. As with all investment charts, high can go higher.

 

Digging in further, we know that the S&P500 is being hard carried by the Magnificent Seven counters of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The potential and advent of artificial intelligence, as well as favourable earnings reports for some of them, spell further upside for the index.

 

But there are some talk that S&P500 is overvalued to some degrees, depending on the time frame used; using 5-, 10- and 20-year periods, the average price-to-earnings ratios for the index was 25.49, 23.83 and 24.7 respectively, lower than the current 27.13¹.

 

I had mentioned that the S&P500 is a good entry for newbies who are venturing into the United States (U.S.) market, being an index and representing the microcosm of the U.S. economy in general. However, if you are still worried on whether to go in given this perceived high, then you may want to go on a dollar-cost averaging (DCA, available for unit trusts and regular savings plan) and/or go in at a set number of shares per regular period (e.g., 100 shares of S&P500 ETF every quarter). This way you would not be worried about whether you went in on a low or a high, because the entry prices would be smoothed out, or averaged, over time.

 

Disclosure

 

The Bedokian is vested in the S&P500.

 

Disclaimer

 

1 – PE Ratio (TTM) for the S&P500. Gurufocus. 2 Feb 2024. https://www.gurufocus.com/economic_indicators/57/pe-ratio-ttm-for-the-sp-500 (accessed 4 Feb 2024)

“What’s Happening?”

Whenever the price of a share goes down, the most common question asked around would be “what’s happening to this stock?”. I got asked this many times before, and most of the time, I do not know the answer. On occasions, I would be criticized for not knowing, with comments like “you are a shareholder, how would you not know?”, etc. I admit I do not monitor the market 24/7, and I am not on anyone’s alert list, so that’s that.

Curiosity is a human trait, and naturally we will want to know the answers if something happens. The main problem is, however, at that point of time, not many people know what is really going on. To find the answer, we would have to look for it (via Google or word-of-mouth), but this gets tricky when the happening is constantly evolving with old and new (and sometimes wrong) news coming in.

 

In the realm of investing, when the share price falls, there is something going on with the company concerned. Is it that the company missed its expected earnings? A major tenant not paying their rent? A product recall? When these questions are popping in one’s head, note that the price had already fallen.

 

While it is good to know what is going on for later analysis, there are probably many people who knew of the news faster than you had exited their positions, thus leaving you in what is called a bagholder situation. By then even if you knew the answer, what are you going to do about it?

 

This is a reason why I seldom show concern whenever a share of mine had its price dropped, because these can be avoidable if the right company is selected in the first place. If the company is fundamentally sound, such drops would likely be less catastrophic than those weaker ones. In fact, this may present a buying opportunity for averaging down. 

 

It is always good to take a step back and see what is going on by reading the reason(s) for the dip, conduct a quick fundamental analysis regarding its present and potential future, before making a sounder decision.

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)