Annuity using leverage

[cadvin]

Bringing the discussion back to the original topic, annuity using leverage isn't a bad idea, but it depends on your use cases.

It's "like property", but only in the perpetual income distribution, but it lacks the "capital growth" capability.

Unless TM Retirement GIO counts.

When leverage is in a different currency of the annuity it is usually a bad idea though...

To keep your analogy of buying a property, it's like if you were buying a house in Indonesia, collecting rent in IDR but taking a mortgage in SGD.
Your mortgage rate in SGD will be much lower compared to the mortgage rate you would have if you had borrowed in IDR. This would give you a very attractive leveraged yield. However, if IDR starts to go down against SGD you would quickly be in trouble as you wouldn't be able to meet your SGD mortgage payments.

Borrowing in safe haven currencies like CHF or JPY for an annuity in SGD is quite similar even if SGD tends to be a stable currency. CHF or JPY usually strongly appreciate against other currencies (including SGD) in time of market stress.

 

[chrisloh65]

Hello, did you make a mistake?

According to PIMCO GIS Income Fund factsheet here
https://www.pimco.com.sg/en-sg/investments/gis/income-fund/e-sgd-hedged-inc

The weighted portfolio yield (before Management fees) is currently 3.79% pa, not 2.39% pa which you mentioned.

So after Management fees of 1.45%, net return before leverage = 2.34% pa.
After leverage the return will be much higher but one has to factor in the risks he/she is bearing.
This is same as investing in low return products like insurance annuities or even FDs over the long-term. On the surface, the risk is very low, but over the long-term, the risk of the purchasing power of your money depreciating and dropping in value due to inflation is extreme!

That's still infinitely higher than the zero sales charge over at POEMS, dollarDEX, and FSMOne.


The PIMCO GIS Income Fund is an actively managed fund that invests in U.S. dollar debt securities. It holds a mix of debt instruments, including sovereign and non-sovereign, investment grade and junk, U.S. based and non-U.S. based (but still almost all U.S. dollarized, except for 6% of the holdings). Its fund managers charge a whopping 1.45% per year in fees, which is quite high. The underlying weighted portfolio yield is currently 2.39%, which means that if bond prices and interest rates don't vary and if all these debtors pay all their debts (no defaults), this fund should provide an annual net yield of 0.94% (in U.S. dollar terms) to fund holders. For perspective, if you merely park U.S. dollars in 2 year U.S. Treasuries the net annual yield is currently 1.58% (assuming a non-U.S. person in a tax free jurisdiction such as Singapore). That's the world's very safest vehicle for parking U.S. dollars, backed by the full faith and credit of the United States Treasury. This PIMCO fund skews mostly toward short maturity instruments with an average weighted maturity of just over 2.2 years, so the 2 year U.S. Treasury comparison is fair. (It's extremely affordable to buy and hold U.S. Treasuries from Singapore via Interactive Brokers for example, especially in US$100K clips. You'll end up with only very slightly less than 1.58% yield, U.S. government guaranteed.)

The odds are very much stacked against you with this fund due to the 1.45% annual management fee. I am not a fan. Please let me know if I've missed anything, but I don't think so.

 

[cadvin]

In my reply I mentioned that 2.39% was the underlying yields net of fees (which basically means after you take the fees into account). PIMCO is kind enough to provide the figure directly (the one with footnote number 6 in the link you posted) so we don't need to recompute it.