Exchange Traded Funds (ETF) – reits version

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The Singapore equity market is really slow to say and there are only a handful of reits ETFs that were launched previously (that was like 3 to 4 years ago). Quite a number of people were rather yield starved back then and with that bullish USD interest rate hike (Before Covid-19) it was almost a guarantee that this will happen. I blame the media for setting off such rumours, the central bank will never act on just pure speculation but rather more than data and in today’s world, even more data that they can ever get. A big economy like the USA is something that most people watches although that has slowly diminished after successful propaganda by the emergence of our Chinese neighbours. Don’t get me wrong, it is kind of good that they are getting their act together, it is just that there’s much more skepticism more than ever since anything and everything can be fake. Profits over anything else some people say so I say stay alert.

Well, back to the point here. I was trying to look for yield related stuffs that could add on to the portfolio and when I did a quick filter away from reits, there isn’t much that is available on the SGX that is sizeable (i.e. blue chip enough) and so to diversify that reits risk thingy, I went into the details and tried to see if I could mimick the fund portfolio. As it turns out, it might be too much of a challenge.

Diversity lies in the location: Singapore, Hongkong, China, Australia with the scope to add on more countries according to the fund manager. (Exposes some FX risks along with fees, fund management, platform fees)

Diversity in the types of holdings: Office, retails, industrial, others and more diversified real estates (Exposes to certain sectors that are cyclical in nature)

Lower fees as compared to a fund, as it is structured as an ETF (Exchange Traded Funds), it’s annual management fees are also lesser than usual. (Cheaper but more passively managed)

Yield: approximately 4-5% p.a. nett for all the trouble, perhaps even using different brokers and also different FX rates. Believe it or not, institutions get a better Forex rate just because they have the size to do so and sometimes, the fees on the allocation can be rather cheaper than a retail. It’s pretty much how you value it. Some people prefer total control, counting the pennies (every cents counts) while some delegate with a little bit of fees paid that is reasonable to them.

NIKKO AM – Straits Trading Asia Ex Japan ETF (Check that out here: Nikko AM reits ETF) and Philips SGX APAC dividend Leaders reit ETF (Check that one here: Poems reits ETF)

Pretty much in similar context just that with Philips, the majority holdings will be Australian reits (about 60%) while Nikko AM will be the majority with Singapore reits (about 60%)

Always do your due diligence, after all everyone has different risk levels. There are always other options. ETFs are just one of the many tools.

Bond/Debt

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For an extended period now, the Marine, Oil & Gas industry is going through trying times for some time now. Going forward, it is going to be difficult to say what is next for them and many other industries

We know that bad times don’t last so are the bankers/relationship managers just out there to sell investment products for their own benefit? During good market cycles, when the company books are looking great, bonds are being issues to help provide the working capital for these companies. The moment the cash-flow stops, the banks stop lending or restructuring. Quite a tough and sad moment though.

I discussed about bonds/debts a few posts back and talked about public/private financing in the capital markets. What most companies did was to find some banks to finance their working capital with contracts and assumption of a stable cash flow and they would pay off interest to bondholders over a period of time. What the lead banks provided are in turn offered out to retail/institutional/HNWI to take on a portion of the bond. Most of the time, financing is offered in terms of Loanable Value.

Let’s use this example: I buy Bond S.Limited on point of purchase for the initial offering at Par Price (100.00) and as a bank I syndicate this capital raising and offer a portion to other parties so as to diversify the risk the bank takes on. When “Sophisticated” investors take on these investments I offer a 60% Loanable value, it just means that for every $1 worth of S.Limited bonds, The bank will be willing to finance you $0.60 and all you need is $0.40 worth of cash and on each reinvestment amount, you get another 60% in loanable term. When S.Limited announces that they may have issues repaying bondholders, then the same banks who finances the bond syndication would deemed these investments as not so valuable now and decides to tell you that you can’t lend anymore from the $0.60 previously as what they have valued the investment at so you have to make back the full amount in a few days’ time. I would think that this is as good as lenders telling the company that they will stop lending. To raise $0.60 from elsewhere isn’t really a problem for most people but how about $600,000 or $6,000,000 which I really doubt many of us have that kind of cash waiting around somewhere.

Just to put in down in illustration and mathematics so that it can be easily understood (not really isn’t it looking at this complicated piece of calculation table) This is basically a long form of maximizing the full loanable amount and then re-investing them back into the same investments and over again:

Name of SecurityCash for InvestmentLoanable ValueLoan AmountCash UsedBalanced CashValue of Portfolio (Nett of Loans)
S.Limited 6.00% 20251,000,000.00S$60%600,000.00S$400,000.00S$600,000.00S$1,000,000.00S$
600,000.00S$60%360,000.00S$240,000.00S$360,000.00S$1,000,000.00S$
360,000.00S$60%216,000.00S$144,000.00S$216,000.00S$1,000,000.00S$
216,000.00S$60%129,600.00S$86,400.00S$129,600.00S$1,000,000.00S$
129,600.00S$60%77,760.00S$51,840.00S$77,760.00S$1,000,000.00S$
77,760.00S$60%46,656.00S$31,104.00S$46,656.00S$1,000,000.00S$
46,656.00S$60%27,993.60S$18,662.40S$27,993.60S$1,000,000.00S$
27,993.60S$60%16,796.16S$11,197.44S$16,796.16S$1,000,000.00S$
16,796.16S$60%10,077.70S$6,718.46S$10,077.70S$1,000,000.00S$
10,077.70S$60%6,046.62S$4,031.08S$6,046.62S$1,000,000.00S$
6,046.62S$60%3,627.97S$2,418.65S$3,627.97S$1,000,000.00S$
3,627.97S$60%2,176.78S$1,451.19S$2,176.78S$1,000,000.00S$
2,176.78S$60%1,306.07S$870.71S$1,306.07S$1,000,000.00S$
1,306.07S$60%783.64S$522.43S$783.64S$1,000,000.00S$
783.64S$60%470.18S$313.46S$470.18S$1,000,000.00S$
470.18S$60%282.11S$188.07S$282.11S$1,000,000.00S$
282.11S$60%169.27S$112.84S$169.27S$1,000,000.00S$
169.27S$60%101.56S$67.71S$101.56S$1,000,000.00S$
101.56S$60%60.94S$40.62S$60.94S$1,000,000.00S$
60.94S$60%36.56S$24.37S$36.56S$1,000,000.00S$
36.56S$60%21.94S$14.62S$21.94S$1,000,000.00S$
21.94S$60%13.16S$8.77S$13.16S$1,000,000.00S$
13.16S$60%7.90S$5.26S$7.90S$1,000,000.00S$
7.90S$60%4.74S$3.16S$4.74S$1,000,000.00S$
4.74S$60%2.84S$1.90S$2.84S$1,000,000.00S$
2.84S$60%1.71S$1.14S$1.71S$1,000,000.00S$
1.71S$60%1.02S$0.68S$1.02S$1,000,000.00S$
1.02S$60%0.61S$0.41S$0.61S$1,000,000.00S$
0.61S$60%0.37S$0.25S$0.37S$1,000,000.00S$
0.37S$60%0.22S$0.15S$0.22S$1,000,000.00S$
0.22S$60%0.13S$0.09S$0.13S$1,000,000.00S$
0.13S$60%0.08S$0.05S$0.08S$1,000,000.00S$
0.08S$60%0.05S$0.03S$0.05S$1,000,000.00S$
0.05S$60%0.03S$0.02S$0.03S$1,000,000.00S$
0.03S$60%0.02S$0.01S$0.02S$1,000,000.00S$
0.02S$60%0.01S$0.01S$0.01S$1,000,000.00S$
2,499,999.97S$

Okay, in short form it really is Total Amount / (1-Loanable value) = $1,000,000 / (1-60%) = $2,500,000

So, With $1, the bank can loan you up to $2.50 presumably that you reinvest them into the same bond. Your total investments become $3.50 (Nett of loans, $3.5 – $2.5 = $1) Your nett portfolio value still remains the same but that comes with plenty of risks:

1. You leave no buffer for any mark to market movement
2. You become concentrated into one single asset class and one company
3. Loans means you have to service the interests on a regular basis so with increase in interest rates, that brings your return lesser though you have taken more risks
4. In times of liquidity and crisis, most likely you will not be able to sell your holdings as fast
5. When you hit a margin call, you most likely have to top-up your cash balances as soon as possible or that would become a sell-out eventually at the current price.

On the flip side,

1. You maximize fully what leverage can bring you
2. Your Yield is increased because of the leverage factor
3. Returns will eventually increase with a higher risk taken

Again, it brings us back to basics again. What is your investment profile? That high risk taker with a long horizon? The conservative investor that is skeptical? Don’t be surprised though that there are high risk takers who are willing to take the risk. Then again, if you know the risks you are taking then take it with integrity and principles. I’ve met and known people who can’t lose and yet take on aggressive investments but the bad times arrives, they do put the blame and point the finger on others even though they know the risks involved. When it comes to money, humans are not exactly what they are. A.

There are business who keeps increasing their loan size at every maturity and when you look at their cash flow, they are paying out more than 100% from what they make. It is akin to spending more money than what you can afford. In this aspect, it seems like the company wanted to:

1. Keep investors happy that they are receiving the dividends
2. Ensure that their stock price on the exchange stays stable
3. Waiting out for the bad cycle to ride through and business to pick up again.

But by doing so:

1. The money paid out have to be taken from somewhere and most of the time it is from a bond and restructured many times most likely
2. Anyone who digs deeper into the company details will know the state of their company
3. The cycle may not ever recover for the company to be relevant anymore

It is important to be thrifty and know how much you can afford to spend. Does looking rich or being rich matter more to you?

The need for an Emergency Fund?

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So, the last few weeks I saw and discussed with many others about the need for an emergency fund, the purpose of an emergency fund and the reason for an emergency fund. I can’t say more that I am a pro-believer of an emergency fund. Yes, the naysayers are out there thinking about the every single penny that is without a higher interest cost. After all, everyone is programmed differently and we react differently in the response of what we termed as a “decision”.

With the Covid-19 situation, I do not think that the previous requirements apply now. Taking reference in the medium Singaporean salary on MOM stats in 2019 (~SGD 4,563), a really safe bet is no longer the 6 – 9 months of emergency funds but 12 – 18 months of safety net. Each and every individual is different, as humans we also adapt to situations quite adequately.

How much one’s emergency fund really depends, a fresh graduate (For example who make three grand a month) may not have much disposable income after netting off parents’ allowances, school loan if any and daily expenses. A typical planner would say probably three to six months worth of cash fund to tide through any sudden surge in expenses. I’ll say that is rather quite a decent sum to begin with. How then should the emergency funds look like for someone who is in his 30s, 40s and 50s? A $9k emergency fund ten years down the road does not reflect an emergency fund 20 years down the road. People change, society change, lives change and money value changes certainly. I can’t speak for everyone but I do see that almost everyone’s spending pattern increases when they get a promotion, get married, buying a house, buying a car, having children, family members becomes sick, friends who are retrenched, friends who fall into financial debt and many more. We are not the person we were at ten years old so neither will we be at twenty years old.

Against others who says there isn’t a need for such funds, perhaps the only uncertain thing in life is to know that no one ever knows what or when something is going to hit us hard and fast until probably we have to come facing it on our own. It is probably then too late to realise so. If there isn’t a need or purpose to think of that in such a manner, at least think of it as paying/investing in yourself first before other things. Away with the thoughts of “Spend first save the rest or Save first and spend the rest” There isn’t really a one size fit all theory. Afterall, how many of us are blessed to have people taking care of our education, exposures, overseas trips, trend and fashion purchases when we were still young and not understand the meaning behind financial planning.

To pay/invest in yourself, perhaps there is that profession certificate that you are aiming for or even to build those first $100K before age 30 or 25. Even before you dwell into that, put that emergency funds aside because there will be a time where there will be a use for it and it could prove to be extremely useful when the time comes. We have seen this in the most recent budget release where our country’s reserves are being utilised to tide through this unprecedented period of distress.

So, I hear folks who tells me bonds, equities, funds are liquid and they can easily get funds out when they need them. I’ll probably say no because emergency funds are defined as emergency funds and you got to understand the reason why it is called that. It should be as liquid as cash on hand, cash in bank and at most in Fixed Deposits that can be pre-terminated early.

Bond price, equity prices, fund prices will rise and fall. In times of recession, the true sellers outweighs all buyers and it is a false sense of security on the understanding of liquidity. In times where there is immediate use of the cash on hand. Emergency funds gives that comfort and security in doing so and I find there there is no better way at this moment unless there are disruptions that change the way we may be able to do these.