This article was contributed to us by Fundsupermart.
Recently, I was approached by a family member who is keen to put some money into investments. Her objective is simple: to earn a higher return than the negligible banks’ interest rates.
We can all agree that the banks’ interest rate is unappealing and the reason we keep our monies there is because there are bills to pay and some form of GIRO arrangement with our insurance companies or mortgage loans. I think in Singapore, most people know this fact very well but the problem is how, what and where to put our hard-earned savings to work.
One thing that I need to be clear on is that this family member is relatively new to investment and does not know anything much about stocks, ETFs and bonds apart from a Regular Savings Plan (RSP into a fund) which she has right now.
While she is relatively new, she has heard about Singapore Savings Bonds (SSBs) which she understands is very safe and yields more than 2% according to the information shared from an article. Additionally, she is considering topping up her own CPF-SA seeing that it was highlighted in a recent article on Straits Times on tax savings and also building up your retirement portfolio.
So from the information gathered, I presumed that she is looking for something that is conservative but is still able to generate higher returns than the banks.
I went ahead to ask these questions: 1) When do you need this sum of money? 2) Can you accept some form of risk? 3) What kind of returns are you looking at? She replied – I do not need this sum of money for the next 10 years or more; I can accept risk, maybe just 10% loss; I just want a higher interest than the banks’ interest rates.
I thought this is quite simple because beating the banks’ interest rates which are at 0.16% as of Feb 2019 will not be too difficult with an acceptable level of risk being taken and lastly, the investment horizon is long. Nevertheless, I said to her that I will think through and propose some ideas for her to consider.
I took the approach of constructing a portfolio rather than putting all the eggs in one basket. Next, I sat down to think about the options available for a new investor. Here is the information I found, inclusive of her considerations.
- Singapore Savings Bond (SSB)
- Retirement Sum Topping-Up Scheme (top up to CPF-SA)
- Buy a retail bond → e.g. SIA retail bond (5 years)
- Dividend paying blue chip stocks
- Managed portfolios aka robo-advisors
From the available options, I can probably allocate the investable amount into 3 portions:
- Conservative investment instruments that provide stability during volatile market conditions
- Building a base with products that can outperform during favourable market conditions and are resilient during market downturns
- Products that could generate higher returns but may also have higher volatility
What we usually do is to determine the client’s risk profile and allocate based on this profile. A balanced investor should have 50% in equity and 50% in fixed income. Subsequently, we could allow a +/- 10% overweight or underweight in equity or fixed income depending on our investment house view.
For this family member, I’m taking a balanced investor approach because information relating to risk-taking is lacking, the investment time horizon is long and she is new to investing. Thus, I will allocate her investable amount in 50% fixed income and 50% equity.
Now, let’s look at some numbers.
|Product||Yield/Past performance (annualised, SGD terms)||Expected duration||Additional notes|
|Singapore Savings Bonds (SSBs) (SBAPR19GX19040X)||2.49%||10 years||Can withdraw anytime before maturity but subjected to lower yield|
|CPFA-SA||4%||Until age 65||Tax relief benefit|
|SIA retail bond||3.03%||5 years||–|
|Portfolio of SG banks stocks (DBS – SGX:D05, OCBC – SGX:O39, UOB – SGX:U11)||Refer to the Appendix for the performance||Can be sold any time||Dividends can be expected on a quarterly basis|
|First State Bridge (recommended balanced fund)||Year-to-date (YTD) return: 5.17%
|Can be sold any time||Dividends can be expected on a semi-annual basis|
|FSM Managed Portfolios (FSM MAPS)||YTD return: 6.1% (Balanced Growth)||Can be sold any time||Portfolio management team will decide the allocation|
Note: Information as at 22 March 2019
Before I start to evaluate what the options are for the portfolio, let’s start with why I removed some options and why they were there in the first place.
The SIA retail bonds have been discussed widely and here at FSMOne.com, we have offered our view as well. Since SIA is a household name for many, I included this retail bond into my consideration. However, my relative has a considerable investment horizon – after five years, she will face the issue of having to reinvest her funds. Hence, I removed the bond from the final portfolio allocation, taking the approach that the portfolio should have a 10-year time horizon.
One of the funds that I suggested was First State Bridge. This has been one of our Recommended Funds for many years now and it is a testament to its ability to manage risks yet being able to generate a consistent outperformance over the years. Coincidentally, my relative is not new to this fund because she has an existing RSP that has been performing very well for her. On that basis, I decided to not add on to her existing investments but look at alternatives instead.
Armed with these information, I started to sketch out what the portfolio should look like, bearing in mind that the investable amount is quite small.
So let’s start with the easiest part: 50% in fixed income to build the portfolio. I thought that the SSB option was quite attractive given that interest rates have gone up. However, I noted that the investor has to open a CDP account and with the understanding that she lacks investment knowledge, I decided to skip this option.
Next, I contemplated topping up her CPF-SA because 4% per annum guaranteed is quite attractive. The downside is that this amount of money will be locked in until she is 65 (assuming there are no changes in CPF policies). I mentioned this to her and she is quite happy to let the returns compound until she is 65. She is also aware that she will receive tax benefit from this top-up. Basically, she will get a one-time tax relief capped at $7,000 for the amount that she tops up into her own CPF-SA.
Based on that, I will use CPF-SA as the 50% fixed income allocation and work the next 50% on equity. Since CPF-SA provides a very stable foundation, I can suggest a more aggressive approach on the equity portion.
I put in the banks’ analyses, having written an article recently on why we like them and where the positive growths are that we are looking at (3 reasons why we believe Singapore banks still have ample room for growth). Besides the growth potential, we also noted the average forward dividend yield is about 4% which is quite decent. Coming from a Singaporean perspective, I think it is easier for her to relate to the local banks and invest in them.
I chose OCBC (SGX:O39) because of its favourable outlook and the investable amount is within the total amount for the portfolio.
After deciding on CPFA-SA and OCBC (SGX:O39), I decided to look at the FSM Managed Portfolios (FSM MAPS) for her portfolio. Here at FSMOne.com, we highlighted the reasons why we like Asia ex Japan and especially China. For FSM MAPS, our GM shared why we have added ETFs into the portfolio to ride on this growth and generate excess returns.
The other consideration that I had was that FSM Managed Portfolios are handled by a team of investment professionals who look at it on a daily basis. They will be in the best position to analyse and make the right judgement calls on how to rebalance the portfolio when necessary. For this family member of mine, she does not need to look at it so closely and she knows that her monies are well taken care of by a team of professionals.
So here is how the portfolio will look like.
|FSM Managed Portfolios (Aggressive Growth)||25%||$2,500|
So taking this approach, I am confident that she will be satisfied with her portfolio returns 10 years from now. CPF-SA provides the foundation, OCBC (SGX:O39) is the base which will generate returns during favourable market conditions while remaining resilient. Lastly, FSM Managed Portfolios (Aggressive Growth) is the aggressive approach to deliver higher returns but she also understands that these will come with higher volatility.
In fact, this portfolio can be replicated quite easily if you have some knowledge of the products and what you are investing into. Many a time, we scratch our heads unsure on how to get started but it is in fact not that difficult. We need to ask ourselves, do we need the money any time soon? How much losses can we accept and what are our financial objectives?
Here at FSMOne.com, we are a source of information on products that you may be keen to get started on and we also have the tools, expertise and know-hows to help you to invest globally and profitably.
For those who are interested, here’s a comparison of the 3 banks’ performances on a year-to-date (YTD) basis and 2018 respectively.
Note: All information taken from Yahoo Finance, dated 25 March 2019.