*Official* BBCWatcher club

[cfleee]

This tax treatment changed rather recently, so you should check this again with more recent information. Fund managers wanted the ability to pass through the dividend/interest tax treatment of U.S. bonds to foreign investors, and Congress honored their request.

I was triggered recently into a googling spree after I read some blog post that highlighted that Stashaway claims that they will claim back some withholding taxes under the "Qualified Interest Income rule":

It’s not true that US bonds are subject to 30% with-holding tax. Investor can claim back taxes paid on “Qualified Interest Income” (QII) and government bonds’s interest are usually 100% QII, therefore taxation is 0% after reclaim (and StashAway manages the reclaim).
[...]
Of course, as the StashAway team themselves acknowledged, all this is contingent upon the tax application being successful, as they haven’t had a full tax cycle where they could actually implement this. In tax, nothing is certain until you actually get the tax refund in your hand, so I fully understand their reservations.

This seems to refer to certain tax relief provisions deriving from the American Jobs Creation Act of 2004, as extended, and more recently made permanent in the PATH Act of 2015. These provisions currently exist as Internal Revenue Code section 871(k) "Exemption for certain dividends of regulated investment companies" for non-resident alien individuals, i.e. for "Interest-related dividends" and "Short-term capital gain dividends" (and the corresponding section 881(e) for foreign corporations). I guess this is the recent change mentioned.

An 2015 ICI paper lobbying for this exact change described it as letting foreign investors receive the same tax treatment on interest and short-term capital gains through a U.S. fund, as if they made a direct investment in the underlying securities.

A 2016 Virginia Tax Review article explores the whole U.S. mutual fund tax situation in much more detail, and says that "U.S. source interest and capital gains" are covered but not any "foreign source income".

None of a RIC’s foreign source
income is recharcaterized. In particular, the definition of qualified interest
income is limited to U.S. source interest income — the statute does not
recharacterize foreign source dividends (including similar income such as
Subpart F inclusions and passive foreign investment company inclusions),
interest, swap income, or foreign currency gains.
[...]
Consequently, a distribution of a RIC’s foreign source interest, foreign
source dividends, or swap income is taxed as an ordinary U.S. source
dividend, even though had a foreign shareholder earned the income directly
it would have been exempt from U.S. tax.

I guess the key here is having a broker that will either (i) not withhold entirely, which seems rather unlikely, (ii) withhold and then reclassify next March on Form 1042-S so that you can do tax filing on Form 1040-NR to obtain a refund, or (iii) somehow handle the refund process for you?

Clearstream says that "only the final beneficial owner is allowed to claim such refund directly from the IRS". I can't tell whether this is something only necessary while the tax treatment was non-permanent, or if it's still necessary because it takes time for the funds to report the QII percentages.

Now to see what's the cheapest way to test this out... I'm assuming it would need to be a brokerage located in the U.S. to get a Form 1042-S?

 

[BBCWatcher]

Is Mortgage insurance needed? If both husband and wife already have Life, Term and Disability Income Insurance (only the husband), would it better to increase the sum assured of any of these insurance policies instead of purchasing Mortgage Insurance?

I don’t think you need mortgage insurance if you and your suvivors are already well insured. However, I could see how mortgage insurance would be useful if the premium is attractive. As your mortgage is gradually paid off, a mortgage insurance policy will automatically adjust its payout since there’s progressively less outstanding debt. And that’s not a bad thing. So you can mix it with term life insurance to fine tune your coverage and (hopefully) get some more value out of each premium dollar.

And could you advise on which kind of Mortgage Insurance to take up? Fixed vs decreasing term vs others?

Got some product names you’d like me to look at?

 

[peipei1]

Hey BBC, how many downturns market crashes you went through? What were your thoughts then? Your portfolio years gains literally burnt to zero and even negative? Did your asset allocation lessen or even mitigate the pain?

If the market continue to grow past this August, we will be in the longest bull run in history. US's Donny 2 scopes is stirring things, have you planned for emergency exit? I hear economic data is lagging statistics and moreover the reliability of current US and China government to give true data is in question!

 

[BBCWatcher]

Hey BBC, how many downturns market crashes you went through? What were your thoughts then?

Sure. The Global Financial Crisis was the biggest and a genuine crash.

Thoughts? The biggest one was, “Wow, this is epic.” Then I thought about what I might buy, and I did a little extra buying.

What works for me fairly well is to consider what I’d do if Fairprice had a once-a-decade low sale price on laundry detergent, to pick a random example. “Stock up” is the sensible response. People seem to understand this in supermarkets. Why not in stock markets? It’s the same thing.

Your portfolio years gains literally burnt to zero and even negative?

I assume that was true for a few years at the beginning, sure.

US's Donny 2 scopes is stirring things, have you planned for emergency exit?

I haven’t fundamentally changed my saving/investing program in many years. I continue to accumulate stocks. But that also means I’m somewhat on the sidelines since cash has piled up a little faster than I expected, a happy problem to have. I’ll need to make an adjustment at some point, but it won’t be a big one.

I hear economic data is lagging statistics and moreover the reliability of current US and China government to give true data is in question!

U.S. data are quite reliable. I agree the data from mainland China are not, but that’s nothing new.

 

[BBCWatcher]

I’ve mentioned a few times that I haven’t found any better travel medical insurance value than Bupa Global’s “Basic” policy. If you travel more than a couple times outside Singapore each year, especially to moderate or high medical cost countries, then Bupa’s “Basic” annual plan should work quite well for you.

If you’re a new Bupa customer then you’ll pay approximately 100 British pounds for an annual policy (for one adult). However, if you search online you should be able to find a coupon code to reduce that price a bit. Also, renewals tend to be discounted about 25%.

As always, please read the policy fine print carefully. Bupa is pretty good about keeping the exclusions to a minimum, but there are a few.

Has anybody found anything better?

 

[revhappy]

Sure. The Global Financial Crisis was the biggest and a genuine crash.

Thoughts? The biggest one was, “Wow, this is epic.” Then I thought about what I might buy, and I did a little extra buying.

What works for me fairly well is to consider what I’d do if Fairprice had a once-a-decade low sale price on laundry detergent, to pick a random example. “Stock up” is the sensible response. People seem to understand this in supermarkets. Why not in stock markets? It’s the same thing.


I assume that was true for a few years at the beginning, sure.


I haven’t fundamentally changed my saving/investing program in many years. I continue to accumulate stocks. But that also means I’m somewhat on the sidelines since cash has piled up a little faster than I expected, a happy problem to have. I’ll need to make an adjustment at some point, but it won’t be a big one.


U.S. data are quite reliable. I agree the data from mainland China are not, but that’s nothing new.

What if fairprice drops price daily by $x? People will rather wait and watch if tomorrow is going to be cheaper than today.

If I am not wrong Japan has already experienced this. It is called deflation. People postpone their purchases if they know prices are going to fall.

Sent from Xiaomi REDMI NOTE 4 using GAGT

 

[revhappy]

In fact, think about booking a flight ticket and next day you see that the airline has dropped its price. How badly it hurts your psyche. But on the other hand if you see that the price of the ticket had increased, how nice it feels. Even though in both cases there is no impact to you. So shopping or buying stocks there is no difference. In both cases, people want the best deal and don't want to overpay.

Sent from Xiaomi REDMI NOTE 4 using GAGT

 

[BBCWatcher]

People will rather wait and watch if tomorrow is going to be cheaper than today.

Right, but that’s called trying to time the market, something I don’t do(*) and don’t recommend. The supermarket analogy is a decent one, because you’ve still got to eat. You’re always buying during the accumulation decades.

(*) Except only in a very rare and very marginal way, e.g. 1% or less once a decade or less. There’s absolutely no requirement to do that.

 

[klarklar]

Hi BBCWatcher,

How do you handle the fixed income portion of your portfolio? For stocks, it is logical to buy passive stock index ETFs/funds given their long-term track record of beating professional fund managers despite being cheaper. For bonds, do you buy bond index funds/ETFs? I find it somewhat illogical that bond indices components are made up of companies that carry the most debt in absolute terms. Wouldn't more debt mean higher chance of default?

What is your opinion? What is your fixed income strategy?

 

[BBCWatcher]

For bonds, do you buy bond index funds/ETFs?

Yes, for most. I also hold some sovereign bonds directly.

I find it somewhat illogical that bond indices components are made up of companies that carry the most debt in absolute terms. Wouldn't more debt mean higher chance of default?

It depends on how the bond index is constructed. If the index is constructed based on percentages of absolute debt floatation, then what you describe might be a concern. But it's also possible to construct a bond index in other ways, with different weighting formulas. The devil is in the details.

However, even for bond indices that are constructed based on absolute floatation shares, there are still a couple factors working to mitigate risks. One is that some industries simply generate lots of bonds as part of the normal course of their business, more than other industries. This "industry skew" doesn't come with any particular risk as such, but it tends to crowd out the companies that have the higher debt ratios within lower debt issuing industries. For example, Exxon issued a lot of bonds not too long ago, as is fairly typical in the oil and gas industry. And that's a pretty safe thing to do, because their bonds fund oil extraction of (typically) well proven resources. It's a capital intensive business, so floats can be big, but well established oil companies know this drill (pun intended). Relatedly, some U.S. companies in certain industries with lots of overseas profits issued a lot of bonds due to how the U.S. corporate tax code worked, as a way to repatriate earnings in a lower tax way. There was/is nothing particularly risky about that. It was just a money laundering exercise, really. Another factor is that there are rating agencies hopefully doing at least a decent job to filter out junk, assuming you choose investment grade bonds and bond funds.

What is your fixed income strategy?

Since I expect many years ahead before retirement, the fixed income elements are not too big for me yet. I just do three basic things, really:

1. An investment grade, low cost, corporate bond index fund;
2. Some high quality sovereign bonds, held both directly and via a fund, and including a little bit of U.S. TIPS and I-Bonds (U.S. dollar inflation-protected bonds);
3. Bond-like sovereign life annuities, especially when there's a tax benefit.

 

[MrHighlander]

Hi BBCW,

Can you share which investment vehicles/ETFs you use to buy the bonds (investment grade corp, sovereign, TIPS etc)?

Thank you

 

[BBCWatcher]

Can you share which investment vehicles/ETFs you use to buy the bonds (investment grade corp, sovereign, TIPS etc)?

I'm a U.S. person, so Vanguard (U.S.) works for me in most of those areas, with a little bit of help from TreasuryDirect.gov at the margins.

For non-U.S. persons, there's CORP, the iShares bond ETF listed/traded in London, and its various brothers and sisters as potential choices.

In Singapore, in Singapore dollars, the sovereign bonds are well covered with Singapore Savings Bonds (SSBs), other Singapore Government Securities (SGSes), and A35, the reasonably popular bond fund -- in that order, I'd suggest. CPF is quite bond-like and with some Singapore tax benefits, so that's another nice choice. The Singapore dollar denominated corporate bond universe is pretty dismal, I'm afraid, especially for retail investors. Unless and until that changes, I think you just have to work around that gap, using the government bonds and possibly CORP or something else offshore.

Occasionally an insurance company in Singapore offers a fixed deposit-like endowment plan that's reasonably attractive, so you could consider that if/when it pops up.

 

[little pupsky]

BBCW, since we are on the topic of bond funds, what are your views on N6M/QL2? You’ve already given your views in response to Tangent’s suggestion of QL3 somewhere upthread.

 

[BBCWatcher]

BBCW, since we are on the topic of bond funds, what are your views on N6M/QL2?

Let's take a quick look....

The management fee is pretty reasonable. Trading volume looks on the low side, which is a common problem and which can result in some wide bid-ask spreads. All of the bonds the fund holds are U.S. dollar denominated, and the fund itself is quoted/listed in the same currency. So it's a 100% U.S. dollar play, which fits if you're retiring in the United States, Panama, any of several Middle Eastern petro countries, or some other U.S. dollarized country.

I don't understand why Asian (ex-Japan) bonds are any better or worse than bonds from other continents. Has anybody got a reasonable investment strategy argument for that part?

 

[little pupsky]

Thanks, BBCW. For me, my simple (simplistic?) layman reasons for having QL2 in my bond portfolio is because it seems less risky than QL3, and yields better than CORP and A35; and also like you have already mentioned several times, the lack of better alternatives in good corporate bond funds locally. The USD denomination doesn’t bother me yet as I’m still open as to where I would like to retire eventually.

 

[klarklar]

A few things I don't understand with your fixed income portfolio.

Junk bonds are absent in your fixed income portfolio. Why no junk bonds since you are ok with equity risks? When it comes to risks, equity is more "junk" than junk bonds.

Another puzzling aspect of your fixed income portfolio is annuities. Annuities are for retirees, not for people of your age. I am guessing you are middle-aged since you sound too wise to be too young, and you mention you still have many years ahead before retirement. You are probably in your 30s or early 40s. Why buy annuities at your age?

Yes, for most. I also hold some sovereign bonds directly.


It depends on how the bond index is constructed. If the index is constructed based on percentages of absolute debt floatation, then what you describe might be a concern. But it's also possible to construct a bond index in other ways, with different weighting formulas. The devil is in the details.

However, even for bond indices that are constructed based on absolute floatation shares, there are still a couple factors working to mitigate risks. One is that some industries simply generate lots of bonds as part of the normal course of their business, more than other industries. This "industry skew" doesn't come with any particular risk as such, but it tends to crowd out the companies that have the higher debt ratios within lower debt issuing industries. For example, Exxon issued a lot of bonds not too long ago, as is fairly typical in the oil and gas industry. And that's a pretty safe thing to do, because their bonds fund oil extraction of (typically) well proven resources. It's a capital intensive business, so floats can be big, but well established oil companies know this drill (pun intended). Relatedly, some U.S. companies in certain industries with lots of overseas profits issued a lot of bonds due to how the U.S. corporate tax code worked, as a way to repatriate earnings in a lower tax way. There was/is nothing particularly risky about that. It was just a money laundering exercise, really. Another factor is that there are rating agencies hopefully doing at least a decent job to filter out junk, assuming you choose investment grade bonds and bond funds.


Since I expect many years ahead before retirement, the fixed income elements are not too big for me yet. I just do three basic things, really:

1. An investment grade, low cost, corporate bond index fund;
2. Some high quality sovereign bonds, held both directly and via a fund, and including a little bit of U.S. TIPS and I-Bonds (U.S. dollar inflation-protected bonds);
3. Bond-like sovereign life annuities, especially when there's a tax benefit.

 

[LittleFinger123]

Any advice on P2P lending platforms?

 

[MrHighlander]

Hi BBCW, for disability income insurance, any views on GE PayAssure versus Aviva idealincome ?

The way I see it:

GE pay assure has a decidedly more pro-assured definition of disability - i.e. the occupation you are engaged in immediately prior to the disability fullstop. For Aviva, it’s the occupation you are immediately engaged in prior to disability (same as GE) but after 2 years it reverts to the more stringent standard of not able to perform any job you are suited for by reason of your training/education (for instance, a doctor could perform the job of a male nurse and thus disability coverage would presumably not be triggered).

Aviva non- working disability is triggered by 3 out of 6 ADLs whilst GE is 2 out of 6.

Aviva has 3 % annual inflation whilst payout has been triggered whilst GE don’t have.

Having said the above, I think Aviva is 25-30% cheaper in premium on a same sum assured, same coverage period than GE.

Wondering if you have any thoughts to go with which ?

Thank you !

 

[BBCWatcher]

Junk bonds are absent in your fixed income portfolio. Why no junk bonds since you are ok with equity risks? When it comes to risks, equity is more "junk" than junk bonds.

Precisely because there’s already equity in the portfolio. There’s no need to add more vehicles to achieve my goals at this point in time.

Where junk bonds might get slightly interesting is if you want more Singapore dollar denominated bonds, and the junky ones are the best you can do in the circumstances since the Singapore dollar denominated bond market just isn’t offering too many investment grade corporate bonds. Then you’d blend the junky bonds with government bonds, of course.

Another puzzling aspect of your fixed income portfolio is annuities. Annuities are for retirees, not for people of your age.

You might be confusing “annuities” with “immediate annuities,” a particular sub-type. I never mentioned that I’m receiving annuity income at present, and I’m not. However, I’m adding to assets that will generate higher annuities with future starting payouts. CPF is an obvious, typical example, but others are possible.

Like practically anything else, annuity prices fluctuate. That’s even true for CPF, to a degree, because alternative outlets for cash, and tax brackets, can fluctuate. So when annuity prices are relatively, comparatively low, and you’d like some more, it’s a good time to buy them.

That’s not to suggest you need a super abundance of lifetime annuity income, and I also don’t recommend trying to time markets. But you can generally predict your tax bracket fairly well, and it’s quite reasonable to make such timing decisions with that information.

 

[BBCWatcher]

Wondering if you have any thoughts to go with which ?

How do the premiums compare if you look at GE’s policy with a 6 month waiting period versus Aviva’s longest waiting period?

Bear in mind you can blend policies. For example, if you’re trying to obtain $5,000 of coverage then you’re allowed to buy $3,000/month from Aviva and $2,000/month from Great Eastern, as an example. There are situations when that “dual allegiance” makes sense.