Nikko AM - Bonding With ETFs

Part 3 of Nikko AM advertistment on Today newspaper - ABF Singapore Bond Index Fund (A35).

Taken from Nikko AM -

The investment objective of the Fund is to provide investors with investment returns that correspond closely to the total return of the iBoxx ABF Singapore Bond Index before fees and expenses.The iBoxx ABF Singapore Bond Index is an indicator of investment returns of S$ denominated debt obligations issued or guaranteed by the Singapore government (or any other Asian government), a Singapore government (or any other Asian government) agency, quasi-Singapore government (or any other Asian government) entity, or supranational financial institutions.

Top Portfolio Holdings (as of 30-Jun-2013)

Cash

Housing & Development Brd

Land Transport Authority

PSA Corporation Ltd

Singapore Government

Sp PowerAssets Ltd

Temasek Financial I Ltd

Do take the article with a pinch of salt. Sure, it stated factually how well it did in "difficult market conditions". I guessed they have forgotten to state how well it did in comparison during good market conditions?

Also, consider the possibility that during difficult market conditions, we instead BUY into equities at depressed prices, how much would we have gained when the market rebounded?

Time is our best friend.

Personally, I'm not recommending that you buy, or do not buy in it. It is merely a matter of choice. With a small capital, I do not touch ABF ETF at all since 1 lot (1,000 shares) costs $1160 at current prices. I prefer to keep cash instead for the "bond" portion of my portfolio.

At the moment, I'm roughly keeping my portfolio at a 70% (STI ETF) vs 30% (Cash) ratio, which I intend to re-balance annually.

Making The Most Of Index Investing

Objective : Achieve Index Returns

To me, there are two key ways to get the most out of index investing.

1. The Simple Act of Re-balancing

I don't invest all my spare funds into STI ETF. I keep a sizable portion (30%) of my money as cash, and invest the rest (70%) into ETF. A bond ETF would have been better than cash for low correlation with stocks but the 1,000 lot size makes it pretty inflexible.

Besides serving the purpose as a buffer during wild fluctuations in the stock market, when stock market crashes it provides you with valuable funds to BUY into STI ETF at low prices! In the reverse scenario, when stock prices surge, re-balancing forces you to sell STI ETF and take profits. It is almost like a blinking flashlight in your face when you see your portfolio percentage that is heavily skewed.

Be greedy when others are fearful. Be fearful when others are greedy.

2. Index investing is about the amount of time I have in the market, rather than timing the market

As long as the selling price (when I retire) is higher than the average price I purchase STI ETF, it will do. The assumption is that the stock market is cyclical in nature and will not remain in a depressed state for an extremely long period of time, such as in the case of Japan.

To keep the average price low, I buy into STI ETF on a monthly basis regardless of the price movements. Furthermore, STI ETF gives dividends twice yearly, further driving down the average price the longer I hold it in my portfolio.

STI ETF Purchase [19-Mar-2013]

I don't really have a fixed date that I execute my monthly purchase of STI ETF, though usually I'll do it at the second half of the month. Just a personal routine that's all.

Got an SMS this morning when my order was filled, which caused me to take a double-take. The day before, I had placed a limit order of 100 share(s) at S$3.32. Imagine my surprise when my order was filled at S3.15!

Today must be my lucky day!

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.32
Average Price : $3.15 !!!
Order Quantity : 100 share(s)
Order Type : Limit Order
Status : Filled

Taking a look at Yahoo! Finance for today's data, you would see the following :

Close : 3.33
Prev Close : 3.31
Open : 3.15
Bid : 3.31
Ask : 3.33

Don’t Pay For Something You Don’t Get

Came across this article on The Motley Fool. Usually I don't like many of their articles, but this one seems pretty applicable to Index Investing, in particular on STI ETF.

Article : Don’t Pay For Something You Don’t Get
Source : The Motley Fool (8th March 2013)
Author : Ser Jing Chong

Some investors choose not to put their money in actively managed mutual funds and unit trusts for various reasons, including a lack of time to monitor the market, or paying someone who is skilled or an expert in this field to manage their money for them. That’s what the management fees are for. The return of these mutual funds and unit trusts often depend upon the investment skills of the fund manager to achieve market-beating returns. But, there might be cases when the management fees are paid for not for any skill at all. 

In an out-of-print investment classic, Margin of Safety, Seth Klarman wrote that ‘since clients frequently replace the worst-performing managers (and since money managers live in fear of this), most managers try to avoid standing apart from the crowd.’ This means that money managers prefer to stick with the herd rather than risk their career by making bold investment choices. This gives rise to closet indexers – money managers who try to mimic a market index without publicly acknowledging it. It’s a case of you can’t go wrong if you follow the crowd in the money-management business, and is unfair to investors – they could be paying lower fees by choosing an index fund or ETF instead.

For those wondering what gives Seth Klarman the right to make such a statement, consider this: he is the founder and president of Baupost Group, a hedge fund company with compounded returns of close to 20% per year since 1992. Remarkably, Klarman achieved such returns while often holding up to 50% of his portfolio in cash. This is a highly idiosyncratic move that few money managers dare to make. 

Let’s take a look at one such example here in Singapore. Amundi Singapore Dividend Growth fund has achieved annualised net-of-fee returns of 4.8% (inclusive of dividends) for its investors from Dec 2009 to Dec 2012. DBS Group Holdings Ltd (SGX: D05), Singapore Telecommunications (SGX: Z74) and United Overseas Bank (SGX: U11), which are all components of the Straits Times Index (SGX: ^STI), make up the fund’s top three holdings as of 31 Dec 2012. In fact, the top 9 holdings in the fund’s portfolio, with a total weightage of 61.32%, are all components of the STI. 

The fund’s movement and the STI might be tracking each other due to the close parallels of their composition. This would make any substantial outperformance of the market for the fund’s investors hard to achieve due to management fees, which eats into the returns. This fact is borne out by the SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) having higher annualised returns of 8.55% (inclusive of dividends) in roughly the same time frame. Investors in the SPDR STI ETF are essentially investing in the STI as the ETF is meant to track the movement of the index. 

The Foolish Bottom Line 

Investors often do not bother checking the portfolio of their funds. But, in cases where even a rough glance shows a very strong resemblance between a market index and a fund’s portfolio, it might be in the investor’s best interest to switch out of the actively managed, high-management-fee fund to a passively managed, low-fee index fund or ETF. After all, what use is there for a management fee if lower cost and better-return alternatives are readily available?

STI ETF Purchase [25-Feb-2013]

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.34
Order Quantity : 100 share(s)

Trade Consideration : $334.00 [$3.34 x 100]
Client Commission : $0.67 [$334.00 x 0.2%]
SG Clearing Fee : $0.13
Client GST : $0.06

Total Transaction Amount : $334.86

STI ETF Purchase [28-Jan-2013]

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.31
Order Quantity : 100 share(s)

Trade Consideration : $331.00 [$3.31 x 100]
Client Commission : $0.66 [$331.00 x 0.2%]
SG Clearing Fee : $0.13
Client GST : $0.06

Total Transaction Amount : $331.85

CPF Investment Account for Index Investing

Can you use money from your CPF to do index investing?
Yes!

If you are using your money from your CPF Ordinary Account (OA), you can open a CPF Investment Account with any one of the three CPFIS agent banks :

1. DBS Bank Ltd (DBS)
2. Oversea-Chinese Banking Corporation Ltd (OCBC)
3. United Overseas Bank Ltd (UOB)

Any amount in your CPF ordinary account (not including the first S$20,000) can be invested into Exchange-Traded Funds (ETF).

Important Things to Take Note

1. Transaction Charges - Check with individual banks for latest rates
2. Service Charges - S$2 service charge, per counter, every quarter

These two will quickly increase your cost if you're investing a small sum monthly!

Nikko AM Singapore STI ETF - Dividends

Does Nikko AM Singapore STI ETF pay dividends?
Yes!

Of course, you might ask : how do I check the dividends history?

1. Go to Singapore Exchange website.
2. Click on Company Disclosure.
3. Click on Corporate Action.
4. Under Company Name, select Nikko AM Singapore STI ETF.

Dividend History

31 Oct 2012 SGD 0.035
11 May 2012 SGD 0.03
28 Oct 2011 SGD 0.035
13 May 2011 SGD 0.03
15 Oct 2010 SGD 0.03
12 May 2010 SGD 0.02
13 Oct 2009 SGD 0.03

When S$300 Isn't Enough To Purchase A Single Lot of STI ETF

A common problem faced by novice investors like myself - what if S$300 isn't enough to purchase a single lot (100 units) of Nikko AM Singapore STI ETF [ticker symbol G3B], which is already the bare minimum?

[Example]
The price of Nikko AM Singapore STI ETF at closing today is S$3.26 - the market kind of rallied after US averted the fiscal cliff, for now. You realize that S$300 is not enough for you to purchase one lot. You simply save the money and wait for next month.

If you're investing and not speculating, you're in this for the long haul. Not being able to invest monthly shouldn't matter to you at all.

[Reading material]
Drizzt from Investment Moat is an excellent writer, and his article that I've linked would be a great read for all index investors. Do spend some time going through his other articles too. I'm sure there is something for everyone to benefit from.

STI ETF Purchase [24-Dec-2012]

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.20
Order Quantity : 100 share(s)

Trade Consideration : $320.00 [$3.20 x 100]
Client Commission : $0.64 [$320.00 x 0.2%]
SG Clearing Fee : $0.13
Client GST : $0.05

Total Transaction Amount : $320.82

Passive Index Investing - What To Buy?

In order to perform passive index investing in Singapore, two of the vehicles you have access to are listed below. Both are Exchange-Traded Funds tracking the Straits Times Index (STI).

What is an Exchange-Traded Fund?

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. [read more from Wikipedia here]

While I'm at this, let me add on a third ETF that would be useful to you, and is also one that I'm intending to blog a bit on in future.

[1] SPDR Straits Times Index ETF | Price via Yahoo! Finance

Fund Information :
The SPDR® Straits Times Index ETF ("STI ETF"), Singapore's first locally created exchange traded fund which was formerly named streetTRACKS STI ETF, seeks to generate returns that closely correspond to the performance of the Straits Times Index ("Index"). The Fund is listed and traded like any share on Singapore Exchange Securities Trading Limited.

Lot Size : 1,000
A minimum purchase is going to cost $3,210 based on 24-Dec-2012 price, excluding brokerage fees etc.

[2] Nikko AM Singapore STI ETF | Price via Yahoo! Finance

Fund Information :
The Nikko AM Singapore STI ETF will initially invest in a portfolio of Straits Times Index (STI) stocks listed on the Singapore Exchange. It will mirror closely the performance of the STI. The STI is a market-weighted stock market index based on the performance of the Singapore stock market. It comprises of the most well-known and frequently traded shares on the Singapore Stock Exchange. The Fund's investment objective is to replicate as closely as possible, before expenses, the performance of the Straits Times Index or upon the Manager giving three (3) months' prior written notice to the Trustee and the Holders, such other index which tracks the performance of Singapore listed equity securities. The Fund will seek to achieve its investment objective by investing all, or substantially all, of its assets in Index Shares in substantially the same weightings as reflected in the Index.

Lot Size : 100
A minimum purchase is going to cost $321 based on 24-Dec-2012 price, excluding brokerage fees etc.

[3] ABF Singapore Bond ETF | Price via Yahoo! Finance 

Fund Information :
ABF Singapore Bond Index Fund (the "Fund") will initially invest in a portfolio of high quality, Singapore government and quasi government bonds. It will mirror closely the basket of bonds in the iBoxx ABF Singapore Bond Index. The target tracking error of the fund is set at not more than 0.4% per annum.

Lot Size : 1,000
A minimum purchase is going to cost $1,180 based on 24-Dec-2012 price, excluding brokerage fees etc.