*Official* Shiny Things club - Part 2

[Shiny Things]

1) To start trading, besides opening a savings account (like the e$avers account?), an online trading account and a SGD/USD settlement account, do I also have to take the SIP test as regulated by the MAS? I don't have a financial background, so I wouldn't pass the CAR.

2) On a related note, I see that one of the criteria for CAR is having done 6 transactions in the past 3 years. Does this have to be on SCB

You just have to say you’ve done six transactions. They don’t actually check.

3) I've seen it mentioned several times that S27 on the SGX is illiquid. Indeed, there is hardly any trading volume. However, I thought all ETFs should have market makers so it's still possible for retail investors like us to trade it? So what does it mean to be "illiquid"? Does it mean it's difficult to buy/sell it?

Basically, yeah. ETFs should have active market makers quoting tight prices, but not all of them do.

Instead of S27 - which, incidentally, only buys US stocks; it misses out on big European, UK, Japanese, and Australian stocks - you’d be better off with IWDA on the LSE, which owns stocks from all over the world, and does have active market makers and tight pricing.

4) I'm looking to invest for the long term (30 years or more). While I think trading on SGX (like S27) where the ETF are held in my CDP account under my name gives me greater peace of mind, I've read here that in the (unlikely) event SC goes bankrupt or pulls out of Singapore, they would just sell their accounts to another bank and we would not be greatly affected. That is still true now?

Yes, that’s correct.

So at that point, I just bought part USD and part SGD when I wasnt sure.

Man, your FA really didn’t do a very good job of explaining it to you!

The thing about “hedging costs” was rubbish. As far as I can see, the SGD class of First State Dividend Advantage doesn’t do any FX hedging; it’s just priced in SGD instead of USD.

I am still mulling over this. (tentatively thinking of my FSDA USD and SGD go into IWSA USD and UOB HY Bond and Aberdeen India goes into STI to have the close to 50:50 ratio).

IWDA, not IWSA - IWSA is something different.

This strategy is good. There’s no good reason to have you so heavily exposed to India, or to high-yield bonds (both of which have awful risk-reward at the moment); you’d have a smarter portfolio if you got rid of those and the mess of FSDA, and bought some IWDA to give yourself a much broader global exposure. And some STI to give you some exposure to your home market.

1. I find it difficult to do DCA manually to buy IWDA using scb. Is there any platform for such automatic purchase like posb RSP? Or close alternative.

2. Recently there are news on inverted yield curve, what are your thoughts on it?

1) I wish there were. Unfortunately, I don’t think anyone does that; if there are any entrepreneurs out there who want to start a fund manager together, call me.

2) I built a website just for this question: http://www.istheyieldcurveinverted.net

I'm currently serving NS without much savings to invest, I have been investing $100 every month out of my NS allowance into G3B.SI through POSB Invest-saver for the past 5 months and it's looking good so far and I would like to expand my portfolio.

I am thinking of investing another $100 every month into A35.SI, what are your opinions on this? or is there another way I could make better use of this $100?

You’ve made a great start. POSB Invest-Saver is a solid way of doing it, and yes, adding $100/month to A35 is a really good way to diversify.

Once you’re out of NS and got some more time to yourself, you can re-evaluate your investments; for now, though, you’ve got a really good strategy and you should stick with it.

That was my fat hope to receive 'perpetual' interests though with the understanding of calling dates.

I am ok with below-market interest rates as long the amount is sufficient to form part of my regular income.

Trust me, you won’t be OK with earning worse-than-market interest rates, for two reasons:
1) That means you’ve lost money on the perpetual bond. If you sell something that gives worse-than-market interest rates, you’ll get back less than you put in.
2) The most common reason that perpetual bonds don’t get called is that the issuer is about to do a Hyflux.

Owning a perpetual bond that doesn’t get called is BAD NEWS.

 

[hwckhs]

2) I built a website just for this question: http://www.istheyieldcurveinverted.net

Nice! Currently, it is showing:

Is the yield curve inverted?
No.

The 10-year US Treasury yield is 15.6 basis points higher than the 2-year US Treasury yield.

Now stop freaking out about it.

I am curious what will it show when the yield curve did invert?

 

[unhinged_loon]

I am curious what will it show when the yield curve did invert?

The current "curve inversion" is between the 3 mth and 10 year, but the magnitude is small. The curve is flat, but it's not the end of the world. Dallas Fed's Kaplan will explain it better than I can. Go to 4:45 for the particular section on the yield curve:

https://www.bloomberg.com/news/vide...n-on-monetary-policy-and-global-economy-video

 

[revhappy]

Nice! Currently, it is showing:



I am curious what will it show when the yield curve did invert?

I manually calculated it and it is accurate
https://www.cnbc.com/quotes/?symbol=US10Y
https://www.cnbc.com/quotes/?symbol=US2Y


10 year is 2.499
2 year is 2.343
Difference 15.6 basis points.
When it inverts it will have a negative sign in front of it.
I guess, the message will say, you can freak out now, or has Shiny implemented a case statement like >= -10 <0 'Its okay, its minor' >= -20 < -10 'Okay, it is getting serious now' <-20 'Hell is breaking loose'

 

[hwckhs]

Reason for recommending MBH over A35?

Hi ST,

I have a follow up question to an answer you gave me many pages back (page 303). You don't really need to check my original question, as I have quoted the essentials below.

Basically, I am trying to understand your reasoning for recommending MBH over A35 in the latest version of your ebook. This is meant to be an academic style discussion, no offense intended .

I choose A35 instead of MBH because I read that corp bond is not worth investing in. It takes on more risk but gives only a little higher return.

This is not right. The risk-return on IG corp bonds at the moment is pretty great - you’re looking at 50-70bp higher yield for a default rate that’s a fraction of that even in bad years.

We know bonds have these characteristics:

1. low/zero/negative correlation to stocks
2. fixed income
3. low volatility

In both good and bad years, we receive regular income. But in bad years specifically, bonds allow us to rebalance the portfolio by selling bonds to buy stocks (hopefully the bonds holds its value well).

Between the 1st and 2nd characteristics, which one is more important?

A35 was launched before GFC, so it's not difficult to see how it performed against the STI.
STI vs A35 monthly graph since A35's inception:

A35's value did not sink during GFC. Very good.

Next, let's compare A35 and MBH which was only launched last year.
A35 vs MBH weekly graph since MBH's inception:

Generally, A35 and MBH seem to move in similar fashion, but MBH's history is not long enough (eg. since GFC) for us to see if it performs well during market distress.

I could not find many article that discusses how corporate bonds perform during a crisis. The best I can find is https://www.vanguard.co.uk/documents/adv/literature/adviser-guide-to-bonds.pdf (page 48) which shows the correlation of UK bonds to equity.

Correlation of investment grade corp bonds to UK equity: 0.42
Correlation of UK government bonds to UK equity: -0.17

The correlation of 0.42 doesn't sound fantastic. I know the above is for UK, but I don't know how to check the SG corporate bonds, particularly the index which MBH is tracking.

Questions:

1. Will ES3, A35, and MBH have similar correlations as those of UK?
2. Will MBH hold its value well during the next crisis?

Hope you can shed some light. Thank you.

 

[Shiny Things]

Nice! Currently, it is showing:

I am curious what will it show when the yield curve did invert?

It always says "now stop freaking out about it", because everyone needs to stop freaking out about yield curve inversions. 2s-10s inverted like two years before the peak in the late-90s.

And anyway, that's the US yield curve. There's no reason for Singaporean investors, especially those who care about the long term, to freak out about the shape of a different country's yield curve.

 

[Shiny Things]

1. low/zero/negative correlation to stocks
2. fixed income
3. low volatility

In both good and bad years, we receive regular income. But in bad years specifically, bonds allow us to rebalance the portfolio by selling bonds to buy stocks (hopefully the bonds holds its value well).

Between the 1st and 2nd characteristics, which one is more important?

Turns out it's #2. I did a really quick-and-dirty analysis, using US corporate bonds vs US treasuries in a 60-40 portfolio.

Here are the results, thanks Portfolio Visualizer. TL;DR: a portfolio with corporate bonds instead of government bonds had a slightly larger maximum drawdown during the GFC (which makes sense), but the higher yield of corporate bonds meant that they outperformed by a lot over the long term: 0.4%/yr over the last 15 years.

So, in answer to your questions:

1. Will ES3, A35, and MBH have similar correlations as those of UK?
2. Will MBH hold its value well during the next crisis?

Hope you can shed some light. Thank you.

1) Probably, yeah.
2) It should. It doesn't need to hold all of its value, though. As we saw above, significantly higher yield in the good times more than makes up for a little bit of underperformance during drawdowns.

 

[BBCWatcher]

You’ve made a great start. POSB Invest-Saver is a solid way of doing it, and yes, adding $100/month to A35 is a really good way to diversify.

However, there’s no geographic diversification.

I’m going to disagree a bit here. I don’t think A35 is worth doing at all, not in this case. It’d be better to just buy a $500 Singapore Savings Bond every 5 months. That’d also help build up an emergency reserve fund, which is quite useful in this case (NSman who is saving).

 

[hwckhs]

Here are the results, thanks Portfolio Visualizer. TL;DR: a portfolio with corporate bonds instead of government bonds had a slightly larger maximum drawdown during the GFC (which makes sense), but the higher yield of corporate bonds meant that they outperformed by a lot over the long term: 0.4%/yr over the last 15 years.

Thanks very much for your reply! It's nice to have a visual confirmation.

 

[FrostWurm]

Hi! Does anyone know any good USD-denominated high-yield bond ETF (US or EM Asia or Global) to recommend?

 

[skywander]

Hi Shiny, what are your thoughts on CNDX:L for more tech exposure in the portfolio? It's 0.33% expense ratio and reinvests dividends, so could be better for Singaporeans than QQQ?

 

[aaaaarrrgghhh]

Firstly, I don’t think CAPE is worthy of your time; cyclically-adjusted PE is pretty much useless as a predictive measure. Stocks can be "overvalued" or "undervalued" by their CAPE measure for huge, huge periods of time

Yes I understand that - its not a short term market timing tool. I was going one-shot in and not DCA, so had to take a call based on valuations.
And CAPE seems to have pretty good predictive power over the subsequent decade (my first horizon is 11years), so this metric was the only one I could use to choose amongst alternatives.

And a big thing in the "change in the market environment" is lower interest rates. Lower interest rates tend to mean that PEs will naturally go higher. So if you blindly compared post-GFC CAPEs (when cash rates were 0-2%) with pre-GFC CAPEs (when cash rates were anywhere between 2 and 20%), you'd think that the CAPE post-GFC was "too high" - when in reality, the post-GFC CAPE mostly just reflects that interest rates are lower and therefore valuations are higher.

Yes, Vanguard proposed a fair-value CAPE to consider this aspect - using real yields. Even with that measure, they believe US returns will be lower over the next decade. ("Improving U.S. stock return forecasts: A “fair-value” CAPE approach")

I don't want to give the impression that I'm a CAPE crusader . I think all investors need some guideposts to make decisions and follow through - for the time horizon in question, and a lumpsum investment in early 2018, Developed APexJ and EM looked better on CAPE, PB and DY basis to me plus the expected return for that portfolio seems to be in line with my needs.
Will people get positive returns from US? yes, most likely. But the returns won't be in line with this past decade.
I'm holding back now, because that story hasn't changed!
Thank you for sharing your thoughts - the last thing i want to do is become complacent and stop learning, so this dialogue is extremely helpful!
EDIT: Here's a new paper from Shiller https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3258404
he addresses some of the concerns.

 

[lancer6238]

Do I have to fill in the w8ben form if I'm buying IWDA from LSE?

 

[BBCWatcher]

Do I have to fill in the w8ben form if I'm buying IWDA from LSE?

If your broker requests that form (or Form W-9 if you're a U.S. person), yes, you're required to file that form. Your broker is always free to stop doing business with you and is much more likely to stop doing business with you (i.e. close your account, report the account to relevant authorities) if you fail to file, file inaccurately, or file incompletely.

Yes, do it.

 

[lancer6238]

If your broker requests that form (or Form W-9 if you're a U.S. person), yes, you're required to file that form. Your broker is always free to stop doing business with you and is much more likely to stop doing business with you (i.e. close your account, report the account to relevant authorities) if you fail to file, file inaccurately, or file incompletely.

Yes, do it.

I took a quick glance at the form and it looks pretty complicated. Probably better to go down to the SCB branch and ask them to help me with it?

 

[BBCWatcher]

I took a quick glance at the form and it looks pretty complicated.

It looks quite simple to me. What's so confusing about it?

 

[limster]

Do I have to fill in the w8ben form if I'm buying IWDA from LSE?

If you apply for SCB online trading and do not tick the US box, SCB doesn't require w8ben.

If you want to buy S&P500 ETF listed on Hong Kong stock exchange, FSMOne doesn't require w8ben.

What should I do to trade in US Stocks?
To trade in US stocks, besides acknowledging the Risk Disclosure Statement (RDS) relating to Securites and Risk Warning Statement (RWS) for transacting in Overseas-Listed Products, you are required to complete the W-8BEN form via Account Update to ceritfy your Non-US tax status. Alternatively,you can also find a copy of W-8BEN form here for completion. All W-8BEN form will be subject to review and approval by FSM.

W-8BEN form is an Internal Revenue Service (IRS) form that certifies the Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. Submission of this Form is compulsory if you intend to invest in US securities.

Please note that W-8BEN form cannot be used by certain persons as prescribed in the form and is generally applicable only if you are an individual and a non-US tax resident. This should not be construed as tax advice and we recommend you to consult a professional tax adviser for tax-related questions.

 

[lancer6238]

It looks quite simple to me. What's so confusing about it?

I was confused about Part II, but I just did a quick google and saw a sample, as well as a thread here. Now it looks fine.

I will try and see if I can open a SCB savings, trading and settlement accounts online to buy IWDA.

 

[revhappy]

I don't want to give the impression that I'm a CAPE crusader . I think all investors need some guideposts to make decisions and follow through - for the time horizon in question, and a lumpsum investment in early 2018, Developed APexJ and EM looked better on CAPE, PB and DY basis to me plus the expected return for that portfolio seems to be in line with my needs.
Will people get positive returns from US? yes, most likely. But the returns won't be in line with this past decade.
I'm holding back now, because that story hasn't changed!
Thank you for sharing your thoughts - the last thing i want to do is become complacent and stop learning, so this dialogue is extremely helpful!
EDIT: Here's a new paper from Shiller https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3258404
he addresses some of the concerns.

Fed is stopping QT by September and if markets tank in the next few months, we are going to have rate cuts very fast and restart of QE. Current Fed balancesheet, is 17% of GDP. In comparison ECB balancesheet is about 40% of GDP. So there is lot of headroom for Fed to ease.

The last few days markets are going up because of company share buybacks. Now they are entering into a backout period before the earnings. So couple with poor earnings and this share buyback blackout phase, markets could tumble. But eventually Powell could come to their rescue.

 

[Shiny Things]

I might sound a little bit grumpy in today's post, but I'm not, I swear!

Hi! Does anyone know any good USD-denominated high-yield bond ETF (US or EM Asia or Global) to recommend?

So first, tell me whether you want corporate or govvy, USD or local-currency, and then I can point you to one.

That said, I don't think high-yield (at least HY DM corporates) are a particularly compelling trade right now. Spreads have widened a bit, but they're not yet at the levels where I'd really want to open a long-term position. Maybe if that chart (ICE BAML high-yield OAS, a measure of the risk premium for high-yield US corporate bonds) widens to 500bps, it'd be worth opening a position.

Hi Shiny, what are your thoughts on CNDX:L for more tech exposure in the portfolio? It's 0.33% expense ratio and reinvests dividends, so could be better for Singaporeans than QQQ?

I'm going to reject the premise of your question: why do you need more tech exposure in your portfolio in the first place? You're betting that tech is going to outperform the rest of the market, even though it's already trading at a higher valuation than the rest of the market... which means that for your bet to pay off, tech stocks would have to trade at EVEN HIGHER valuations. I don't think that's a great bet, tbqh, especially when huge IPOs like Lyft's are going to suck money away from investors' existing tech-stock positions.

If you explicitly want to make that bet, you want IUIT, which has a 0.15% expense ratio, but that's still a bet I wouldn't make.

Yes I understand that - its not a short term market timing tool. I was going one-shot in and not DCA, so had to take a call based on valuations.

And I'm going to reiterate that CAPE is not a useful metric. It's wrong more often than it's right. It would have kept you out of your one-shot investment for most of the last ten years.

Things like forward PE are a lot more responsive to current market conditions.

Something else I'm wondering about - are you just investing in US stocks? If you're focusing on buying stuff that's trading at low CAPEs, you should love European and Singaporean stocks right now.

The last few days markets are going up because of company share buybacks.

I'm curious - where are you getting real-time measures ("the last few days") of who's conducting buybacks? Unless you're paying through the nose for a subscription to Trimtabs...

I took a quick glance at the form and it looks pretty complicated. Probably better to go down to the SCB branch and ask them to help me with it?

Is there a particular question you're having trouble with? Maybe we can save you a trip to the branch.