How to squeeze the most out of local banks

The purpose of this post is to highlight some of the great products offered by local  (Singapore) banks  which many might not be fully aware of, or how to make full use of them. I divided them into 2 categories, Savings Accounts and Credit Cards.

Savings Accounts

1. Standard Chartered BonusSaver Account
The main draw of this account is that it gives 1.88% p.a. interest on your  checking account, on a monthly basis provided you hit the minimum monthly spend of $500 using the linked debit or credit card. Some of the items that can be paid by Credit cards includes telco bills, ez-link card via ez-reload, groceries at NTUC etc.

Even if you can hit the minimum spend say every alternate months only, it still translates to a respectable 0.94% interest on your checking account. The amount that can earned this 1.88% is capped at $25,000, which is roughly six month worth of salary for the average income earner, so no reason you shouldn't be earning close to $40 per month if you hit the monthly $500 spend. Look at it from another perspective, the $40 translates to about 7.8% cashback on your $500 spending, and no other credit cards in the market can beat this.

April '14 Update: The OCBC 360 Savings account beats the BonusSaver account at time of update.

2. CIMB Starsaver account
This account gives 0.8% p.a. on the balance in your account, credited monthly. The pre-requisite is that you maintain a $100 incremental value to your account during that month. You can also deposit a one lump sum of say $10,000 and for the next 100 months the 0.8% interest will automatically be applicable.

The ATM card that comes with the account also allows free ATM withdrawals worldwide.

Credit Cards
1. Grocery Shopping
If you do shop at NTUC, Cold Storage, Sheng Shiong, the Maybank Friends & Family card is the best as it gives you 5% cashback for the above merchants (and a few others), credited within the next statement month, and has no minimum spending requirement. As you might have notice NTUC would promote its Plus Visa card which gives 4% rebate, but comes with its own set of Terms and Conditions which I don't bother to read through all. This card beats it hands down. As an added bonus, it has 0.5% cashback on all other spending.

2. Travel
Earning Miles- The ANZ Travel card is the best if you are buying tickets directly from airline website, awarding 2.8 miles for every dollar spend. If you hit $1500 within a 30 day period,you can get a redeem a free ride to the airport as well. Be aware of 2.5% extra charge if the website is overseas though, due to dynamic currency conversion. ANZ has one of the highest DCC charges. Maybank Travel Horizon card gives you 2 miles for every dollar spend overseas, with free conversion to Krisflyer miles.

Feb '14 update: Maybank will start charging miles conversion. 

Free Travel Insurance- The Visa Signature cards and World Mastercards from various banks gives you free travel insurance if the full air tickets or travel package are bought using the respective cards.

Airport Lounge access- You can get up to 13 lounge access at airports, here's how.
Priority Pass- Citibank PremierMiles, ANZ Travel Card, DBS Altitude Visa are some of the cards that makes you eligible for a Priority Pass membership. The card gives you 2 access to airport lounges worldwide within the 1 year membership, and yes 3 cards gives you 6 access, so stagger the application of the cards.

Feb '14 update: ANZ no longer comes with Priority Pass, but gives cardholders free unlimited access to "Veloce Lounges" worldwide.

ANZ Travel Card gives you 2 SATS lounge access at Changi Airport. Amex Krisflyer Ascend gives you another 4 entries to SATS lounges and other limited lounges worldwide.

Diners club card gives you 1 entry to lounges worldwide every calendar year 1st Apr till 31st March the following year.

Permanent Portfolio Nov 2013 Update

As mentioned in one of my previous posts, my next rebalancing of my US Permanent Portfolio is in October. Looking at the performance of the 4 asset classes, I bought Gold (IAU) and Bonds (TLT) to rebalance my portfolio to my pre-determined allocation. The chart below shows the performance of the 4 asset classes YTD.

The 2 white ovals represent the period where I re-balanced. Of course in between these periods, there are lots of market noise, e.g. to taper or not to taper QE etc. In the next six months, if bonds and gold drop further, I would be able to buy them even cheaper. If the stock market crashed, I would have avoided buying stocks at a high. Win-Win situation. Let's wait and see what will happen during April 2014.

STI ETF vs Unit Trusts performance

The proponents of index funds or ETFs always cite low cost as the main advantages over unit trusts or mutual funds. This is especially so for books/websites which "condemn" mutual funds in the US, stating that more than half the funds under-performed the indices they tracked in the long term due to high costs (management fees, sales charge etc). This view is echoed by Andrew Hallam as well, a blogger who I follow.

I only did a brief calculation into performance of local unit trusts vs STI ETF and never really looked in depth into it, until I came across this blog which did a comparison in 2009:
http://www.moneytalk.sg/2009/05/true-performance-of-sti-etf-and-unit.html

I was quite surprised that the effect of dividends paid out by the ETF played a quite a significant role. As I am vested in unit trusts myself, I decided to do some math myself to find out if the under-performance of unit trust still hold today.

The above shows the 5-year annualised gain of SPDR STI ETF over a five-year period. Excel's XIRR function was used to calculate the annualised returns. Negative values refer to cash outflow whereas positive value refers to cash inflow (dividends in this case). An annualised gain of 4.61% was obtained. Note that dividends are not reinvested.

Next, shown above is the annualised performance of all Singapore unit trusts invested in the equity sector, obtained from fundsupermart.com. The performance includes dividend re-investment, but excludes sales charge and annual platform fees, which are 0% and about 0.5% currently. They are sorted by their 5-year performance value. As highlighted in green, almost all the unit trusts outperformed investing purely in STI ETF.

If the annual 0.5% charge (which I try to avoid) is taken into account, I guess the list reduces to about 51 out of the 12 funds. So if you plan to invest a lump sum, it makes more sense to pay a one-off higher sales charge and avoid the annual platform fees.

From the above comparison, I think there is still a high chance in beating the index by investing in unit trusts, as long as the fees are managed well.

My investment strategies

I spread out my investment across different strategies at the moment, so that hopefully in the next 5 to 10 years, I will have first hand experience on which one works better. Another reason is that it is still scary to put all you money into one strategy (e.g. Permanent Portfolio as  the actions you do is really counter-intuitive/scary). However, there is one thing common among all the different strategies, and that is not to buy in heavily on the asset class which price has gone up significantly. This is much easier to put in action compared to selling and locking in profits after price has run up signifcantly.

The following is a brief description of what I am vested in:

1) Unit Trusts consisting of bonds and equities

2) Stocks, which contains REITS and STI ETF only at this moment

3) Modified Permanent Portfolio made up of US ETFs

Unit Trusts

My plan for this investment class is to use Mebane Faber Timing model as a guide to determine my buy-sell decision. As mentioned before, this investment class also contain "Short Term Bonds" which serves as alternative to my bank deposits. I'll try to allocate funds in excess of my 6-month salary into the "Short Term Bonds". They will also serve as opportunity funds to buy into equities when there is a crash.

Stocks

Have dabbled/speculate/invest a bit in these since University days. Don't really want invest heavily in individual stocks at current levels. Only actively buying 100-200 shares STI ETF about once a month over the past year. I prefer to wait for market crash (be it 5 years or 10 years) before investing significantly in it, for margin of safety.

Modified Permanent Portfolio

Ideal allocation:

25% US Equity (VTI)

25% World Stocks (VEU)

20% Gold (IAU)

30% 20+ year Treasury Bond (TLT)

I started this around Jun 2012, and initially I bought into the 4 different asset class every month. After a while, I realise this is not very effective, and hence decided to buy in only every 6 months. I last rebalanced in around April 2013, after which gold crashed. As of now, profits can be considered negligible since the Bonds and Gold asset class has negated the gains achieved by the equity classes. I'll have to wait till about October before rebalancing it again.

I will stress again that being diversified on different asset classes makes your overall portfolio less volatile, compared to say 100% invested in stocks. An indirect effect is that you will be affected less emotionally during large price swings, as your overall portfolio value will not swing as much. This will prevent you from making any rash decision. Investing after all shouldn't involve our emotion.

Sell in May and go away?

It seems that critics were wrong again for the 2nd consecutive year that this "Sell in May and go away" rule won't materialise (additional proof why you shouldn't pay much attention to those experts/analysts you read or see in the news, they don't know any better than you). The mayhem started in late May this year, after a strong run up. What is happening exactly? I only know this (after I got back from overseas on 30th May), Ben Bernanke hinted that QE3 may start slowly tapering off. This means less money to buy bonds and shore up equity prices, and interest rates will rise. What is the effect on the different asset classes? I'll give my 2 cents on the effect on equities and bonds.

As mentioned in my previous post "Alternatives to bank deposits", I mentioned rising interest rates are what I will watch out for, due to the high danger of the bond bubble bursting. Hence, I divested all my high yield bond unit trusts. What about the lower yielding ones like the 2 relatively safe short term bonds recommended previously? Below is the chart showing their performance:

Well, fluctuation is not much. Nevertheless, I still sold a portion of both bonds to lock in some gains. Note that since these bonds are short-term, hence their prices are less susceptible to interest rate changes.

Moving on to equity, what is happening now presents buying opportunities. For those in the know, P/E ratio for US equity indicates that the prices are still cheap despite the recent run up. This is due to the strong corporate earnings. Corporate earnings are what ultimately drive up stock prices. Hence, I hope the equity market will experience a much greater drawdown, so that I can finally increase my equity allocation substantially.

For those who still subscribe to "Market Timing" strategy,  you would have sold off in late April or early May. (Which is what I mentioned in this post). Did you?

For those who subscribe "Security Selection", the stock you hold should be able to withstand the recent selldown. If it did not, your belief should be that is will rise back in value. The last thing you want to do for the above 2 strategies would be to "buy high, sell low".

Till now, I haven't mentioned in detail what mix of strategies I am adopting. Will do so in my next post, and also shed some light on how my "Perfect Portfolio" has performed.

Fees and Charges

For those people who have their investments managed by professionals (e.g. independent financial advisors), there are 2 type of fees being charged from my experience:

1. Sales charge, typically 3.21% (theoretically can charge up to 5% according to most fund's prospectus)
2. Annual fees, around 1%. This is usually chargeable at 0.25% per quarter, based on portfolio value.

The above fees are applicable for investment in unit trusts. How the sales charge works is that if you invest $100 in a fund, only about $97 is used to buy into the fund, and the remaining amount is the commission. For the ongoing annual fees, the amount is paid by selling the units of the best performing fund in one's holdings, executed automatically by the system every quarter. The rationale behind these fees is to remunerate the team of analysts who are doing research behind the scenes, so that your advisor can advise you accordingly on what or when to buy or sell. Therefore to justify paying those fees, the outperformance of your portfolio should outweigh the total amount of fees paid. I feel is a matter of personal preference if one wants to put his/her trust in such a system.

So how much does are those fees in absolute terms? I came up with the following scenario to have a clearer idea. Say an investor who invests $600 monthly for 14 years, in a fund which grows steadily 339% of its original value (approx 8.5% annualised gain, actual performance of a real life fund).

Below are the numbers at the end of 14 years if there are no charges of any kind at all:

Total amount invested: $105,000
Portfolio value: $205,716
Profit: $100,716

If there is a 3.21% sales charge payable, the profit would be reduced by $6,603 to $94,112.
If there are both sales and annual charges, the profit amount reduces by $16,432 to $77,680.

The above translates to paying an average amount of $470 and $1170 annually over the 14 years. Thus, it can be seen the 1% annual fees makes up a much larger chunk of commission compared to the 3% one-time charge.

As I have mentioned, some may find it justifiable to pay such fees while some may not. The above is just an illustration which is meant for individuals to make their own informed decision.

Timing the market

In one of my previous posts, I mentioned about timing the market, which is difficult to execute well in reality. However, there is one strategy which one can apply to do this.

I came across this book "The Ivy Portfolio" by Mebane Faber, in which he talks about the exceptional performance of Harvard and Yale endowment funds (That is how I knew about David F Swensen). Similarly, he preaches about asset allocation. In addition, he introduced readers to a method of when to buy and sell the assets.

The rule is simple. Dedicate one day of every month, check if the price of the asset class is above or below its 10-month simple moving average (SMA). If it is below the 10-month SMA, sell. If it is above, hold or buy. This strategy was backtested in his book and the annualised returns are about 9%. This review is done once a month only to factor out the noise in the market.

A link is provided at the end of the post, which shows the price charts of several asset classes with their 10-month SMA. The site also provides a link to a paper published by Faber, where this model is looked into in more detail.

Mebane Faber Site

Alternatives to bank deposits

I was introduced to the world of unit trust (or mutual fund) about two years back when my financial advisor introduced it to me. However, it was about a year back when I started looking into the funds available, and it led me to discovering a class of funds which have very good risk-adjusted returns. They all belong to the "Bond" asset class. I put in apostrophe because unlike traditional bonds, their price or Net Asset Value (NAV) generally rise in tandem with the equity markets. I shall be highlighting two such funds which I think are great alternatives to leaving your cash in banks or fixed deposits.

The first is "Nikko AM Shenton Short Term Bond Fund (SGD)", which has an annualised returns of about 3% (about 30x of bank deposit interest rate). It has very low volatility, and its maximum drawdown is 4.3% during the end of 2008. This means you would have lost the maximum amount of 4.3% on your investments if you had invested during that period, which is much less worse than the 40% drawdown suffered by equity markets around the same period.

Next, there is the "UOBAM SGD Fund Class A", with an annualised returns of about 4.6%. Of course, a higher returns would mean a little bit higher volatility. Its maximum drawdown is 3.4% and it occurred during the a start of the European crisis in Aug 2011.

A 5 year chart of these 2 funds (from dollardex) are shown below, illustrating that both the Nikko AM and UOBAM funds would have netted you about 30% and 12% gains respectively over this period. Their relatively low volatility (minimum price fluctuations) and above average returns are why I park my excess cash in these two funds rather than in banks.

For comparison purpose, I am showing another chart below which factors in the STI and Dow Jones indices. A mix of these 2 bond funds easily beat the Equity indices. Also note their price fluctuations compared to the 2 equity indices.

Hence I personally really like these 2 funds. If you still require additional incentives, some fund distributors (like dollardex) charge 0% sales charge. Thus you pay nothing to buy, hold and sell these funds!

For those who plan to invest in these bond funds, do take note of the "bond bubble" which some experts cautioned will eventually burst. When the economy has really stabilised, the stock market starts entering a bull run, that is when the interest rates will rise. When that happens, I expect to watch the price movements of these funds more carefully.

Buying into different asset classes in Singapore

First let me start off with the most simple and straightforward asset class, which is Singapore equity. There are currently two Mainboard listed ETFs on the Singapore Exchange, SPDR STI ETF (ES3.SI) and Nikko AM STI ETF (G3B.SI). There are arguments supporting the former being a better choice of the two, citing reasons such as lower expense ratio, better index tracking, higher volume etc., which I don't think those really matter much if you take a long term view. However, I do want to point out one main difference in these two ETFs, which would be a decisive factor for many to choose which of the two to invest in, and that is their board lot size.

Nikko AM STI ETF board lot is 100 shares, which mean that the minimum investment is around $340 at current levels. On the other hand, SPDR STI ETF has a board lot size of 1000 shares, making the initial and subsequent cash outlay to be around $3300. Therefore buying into Nikko AM ETF makes it easier to invest monthly or to rebalance. Consequently, you would have to use Standard Chartered as your brokerage for such trades as they do not charge the minimum commission of $25 per trade.

Investors in Singapore faced a problem if they want to buy into other asset class, such as bonds. The purpose of including bonds in the portfolio is due to its negative correlation with stocks. However, a retail investor can't find a local bond investment product  that meets the requirements of high liquidity, low minimum investment amount, and denominated in SGD currency. One exception to this might be Singapore Government 30-year bond (PH1S) traded in board lot of 10 shares, making a minimum investment/rebalance amount of around $1000. I have read from certain blogs recommending UOB Kay Hian to transact this bond as its bid-ask spread is more reasonable compared to say DBS Vickers. Another fellow blogger also highlighted this to me, quoted from SGS site, "The SGS Primary Dealers are appointed to act as specialist intermediaries in the SGS and S$ money markets. Primary Dealers are obliged to provide liquidity in the SGS market by quoting prices on all SGS issues under all market conditions."However, the bid/ask spread might still be wide if there is low demand for them. Since I personally am not vested in this, I won't be able to comment much on this bond. A chart showing the negative correlation between this 30-year government bond can be seen below:

Moving on to the other asset class, Gold, there are options available in Singapore such as UOB Gold Savings Account. You can read more about it from the links I posted in the previous post. Why it might not be suitable for some is because of its administrative fees. Depending on the investment amount, the fees might work out to be around 3% annually.


For reasons such as liquidity, minimum investment amount etc., I decided to invest in the different asset classes via US ETFs. For US ETFs, the choice is abundant, as there are ETFs tracking all sorts of indices, such as the US Total Market index Wilshire 5000, US Large cap index S&P500, FTSE All World index, and the list just goes on. The drawbacks of investing in US ETFs include currency fluctuation and the initial "sales charge" which is derived from the currency exchange bid-ask spread. Standard Chartered FX spread is around 2%. One solution I have adopted is to forecast the USD amount you will need to rebalance in 6 or 12 months time,  and exchange a small amount every month, thus averaging out the fluctuations. Fortunately, USD is near an all time low against SGD, so it should not be much of a worry at the moment.


In the Permanent Portfolio model, there is a cash component as well. Rather than having this cash component in lying banks earning around 0.1% interest, I think there are better places to park them. I will elaborate more on this in my next post.

Asset Allocation

        David F. Swensen is the chief investment officer of Yale University, and has been known to generate good returns consistently over the past decade. In his book I have read, “Unconventional Success”, he states that there are three factors that influences the returns on an investors, namely

1. Asset Allocation
2. Market Timing
3. Security Selection

Asset Allocation refers to how your investments are spread out across the different asset classes, such as equity, bonds, etc. Market Timing refers to when you buy and sell, and lastly Security Selection which company’s stock you select to buy. A study has shown that the factor that plays the greatest part on investors’ returns is Asset Allocation.

The result of this study makes sense to me. The “buy low, sell high” mantra is a no-brainer, but unfortunately I think humans’ brain is not psychologically wired to do that. How many of us did dump in our money during the 2008 crisis buying stocks at low prices? At time of writing, the STI index has hit a five-year high, and how many of us are selling at this five-year high? Due to our greed, wanting to catch the peak, this “buy low, sell high” principle is difficult to apply in reality.

            Next, on stock picking, I mentioned in the previous post that unless you have the time and talent for analysing companies’ annual report, business models, competitive advantage, etc, picking “hidden gems” before their prices have run up is not easy. Only when the price of those companies have risen significantly before people starts to take notice, and of course do what we are psychologically wired to do, and that is to “buy high”.

           

            Moving on to the all-important factor of Asset Allocation, it involves how you divide your investment into different asset classes. The most common being stocks and bonds (Difficult to achieve this in local context, which I will touch on in the next post). There are several other allocation models and I will be introducing two models, which I find are worth adopting. The first is “The Permanent Portfolio” devised by Harry Browne in the 1980s and the other is a mixture of bonds and stocks proposed by local expat Andrew Hallam. I won’t rehash  their strategies here, readers can follow the links at the end of the post to find out more.“The Permanent Portfolio” historical record can be trace back to 1972, and has a decline in portfolio value of 0.7% when the world equity market plunged by 37% in 2008. Similarly in Andrew Hallam’s blog, you can read about how he constructs his portfolio using low cost index funds. You can click on the related links at the end of this post or google them to find out more information.

            What makes the Asset Allocation method works is that you must rebalance your portfolio, once or twice or year depending on preference. It involves selling the asset classes that has risen in value, and buying those that has fallen to return individual asset to their original allocation. This achieves the “Buy low sell high” principle. Do note that this requires discipline to do so. For example , if you were rebalancing during end of 2008, you would be buying into plummeting stock prices. Or if you are rebalancing during this period (Apr 2013), you will probably be selling your equity funds, and putting money in gold!

            Although in Andrew’s blog, he does mention how to implement such a strategy in Singapore’s context, I think there can be certain tweaks that can be made. I will elaborate more on this in the next post.

Related links:
Permanent Portfolio Historical Returns
Implementing SG version of Permanent Portfolio Resource A
Implementing SG version of Permanent Portfolio Resource B
Andrew Hallam's Blog

Introduction

         My aim of setting up this blog is to share my personal views and experience on investing in Singapore's context. In particular, this blog is targeted at those with no experience in investing but wish to take their first steps. It might be scary for those taking the plunge for the first time, for example, putting down your first few hundreds or thousands you have saved up into a company's stock, and watching its price fluctuations for the next couple of weeks. Some might also find it not worth the effort to invest, thinking that the initial meager returns do not justify putting in a few hundred dollars each month into a regular savings plan. The money could have been spent on holidays or buying a car etc.

     

         Unfortunately, our schools did not equip us with the knowledge, tools and the benefits of making our money work for us, maybe aside from the power of compounding learnt in our Math lessons. The power of compounding is one of the reasons extolled by many to start investing at a young age, however, I feel the exponential growth story does not really reflect the realities of the market, which has its ups and downs. To achieve the "exponential growth", one might require certain strategies. These strategies are what I what to share through this blog.

         Personally, I think I am quite a risk-averse investor, which is the stance I feel most should take if they are just starting their investment journey. Ultimately, capital preservation is one of the key tenets of Warren Buffet's investment principles. Hence the strategies I will be proposing will be of lower risk (low volatility), takes a long-term view, but still gives decent returns. I am not an expert in economics or finance, thus I do not know the nitty-gritty details of the European crisis, US fiscal cliff, etc. Neither do I have the know-how of dissecting a company's annual report and forecast its future growth. Luckily, you do not need to know those things in-depth (maybe just know of their existence if you must) to invest successfully. This also mean you can ignore analyses by the so-called "experts", which can influence your investment decisions. (A case in point: I remember reading an article painting a gloomy picture of Starhub losing its BPL rights, leading my to sell my Starhub shares in late 2009 at around $1.90. As of today, its share price is above $4.) Fundamental analysis does have its merits though, but unless you are half as good as Warren Buffet, it is more of an art, which just improves your odds when investing.

         In my next few posts, I will cover some of the strategies proposed by others which I have come across, and  am adopting myself. They are my own personal take, so feel free to tweak them to suit your own expectations and goals if necessary. It has been about a year since I started, and there has been no significant market crash to test the resilience of my strategy. Hence, one should keep in mind of the risks that are inherent in any kind of investments.