Saving my ILP - Part 5

This is a continuation from Part 1, Part 2, Part 3, and Part 4.

When it came to reducing the insurance components of my Investment Linked Policy (ILP), I learnt that I had to still pay for the minimum death benefit of $170,000. The premium is $126 at 34 years old, increasing to $14,600 at 85 years old. Over 50 years, the total premium is $164,000, which is close to the death benefit. This more or less is a rough gauge how ILPs calculate the premiums. However, if I live beyond 85 years old, the premium for the next 10 years will grow at an exponential rate. I would have to pay $16,000 at 86 years old and $33,000 at 95 years old. The total premium over that 10 twilight years is about $240,000!

Initially my calculations were against a $80,000 death benefit. After revising the death benefit to $170,000, which is double, the benefits were not that far off, probably because there is still sufficient runway to benefit from effects of compounding.

$80,000 death benefit: breakevens at 3% annual return over 60 years

$170,000 death benefit: breakevens at 4% annual return over 60 years

I went ahead to submit my application to remove the Critical Illness and Early Critical Illness insurance components. The $170,000 death benefit includes Terminal Illness and Total and Permanent Disability (TPD). I also removed the riders for female illness, medical reimbursement, and accident. 

However, in view of the high up front cost of an ILP, I decided to retain the crisis waiver rider, which cost 10% of the premium paid or $269.90/year. I estimate that I will need to keep it for another 15 years (or when the cash value exceeds the premiums paid, whichever happens earlier) where all ILP premium payments will be waived for life in the event of Critical Illness. If I were to terminate the ILP now, I will lose about 8k. Most of the agent's commissions are paid from the first 3 years' premium. As I am in the 4th year, the additional loss I incur is marginal. If I terminate the ILP next year or any other year, I will probably lose about 10k. Going back to the calculations, the ILP will break even at year 18 assuming a return of 3% or 4%. Difference is slight because the compounding effect can only be seen after 30 years. As such to mitigate any losses from early termination of the ILP plan, I must have enough money to sustain it. For now, I will treat the  $269.90/year as a "Critical Illness term plan" that pays out $2,699/year for life as a benefit. It is expensive and I will definitely terminate it when I have secured my passive income flow.

What I had learnt: I bought it with the intention to diversify my investment portfolio. This product was created with the US tax system in mind where the capital gains from investments and estates of dead persons are taxed. The rich people bought such ILP plans to avoid tax legitimately. Insurance payouts are not taxed. This plan works around the insurance policy requirement where 1% of the value must be used to buy insurance. In Singapore, there is no estate or capital gain tax. As such, there is no need to buy an ILP to avoid tax. I do not mind buying a whole life plan, like this ILP I bought, but I think that it is not necessary if I can manage my cash flow well. I will still prefer the ILP over fixed term whole life plans where you pay a fixed amount for 10 or 15 years, and it pays out a fixed death benefit upon death. The ability to allocate 1% to insurance and 99% to investment makes it a really powerful investment vehicle to force one to save, provided one has life's runway to accumulate and benefit from effects of compounding.

Stock Review: Dairy Farm International Holdings

The share price for Dairy Farm had been falling over the past few year. In fact, it has fallen by 50% from its peak in 2013. However, at the current price of US$6, it is still much higher than its price more than 10 years ago.

Historical stock prices for Dairy Farm

Historical USD/SGD exchange rates for the past 5 years

Assuming that at its peak of US$13, and an exchange rate of 1 USD=1.2 SGD, it briefly translated to S$15.60 to buy a unit of share.

Assuming a present day exchange rate of 1 USD = 1.4 SGD, it briefly translates to S$8.40 to buy a unit of share now. This simple calculation exercise shows that the exchange rate fluctuations are independent of the share price movements.

Dairy Farm has a Scottish beginning. The current management belongs to the 5th generation of the Keswick family that also manages the other conglomerates Jardine Cycle & Carriage, Jardine Matheson Holdings, Jardine Strategic Holdings.

Cash flow has been positive every year until Dairy Farm decided to plonk US$925M in a mega investment (20% stake) in Yonghui Superstores in Aug 2014. According to the bloomberg article's research, Yonghui is the 5th largest hypermarket with a 4.6% market share. The two largest chains have 14% market share each. A year later, in Aug 2015, Dairy Farm plonked another US$210M into Yonghui's rights issue.

There are many ways to enter a China market. They could have started small by launching their own international brand (difficult route), or they could have bought smaller stakes with a fraction of their free cash flow (easier route) which has been their typical investment appetite. Taking up a huge loan to finance a huge investment certainly seems a little desperate.

Based on the historical price charts, assuming that Dairy Farm bought shares at an average of of RMB7, dividend yield is estimated at 1.7% (assuming 12 cents dividend). Yonghui's share price peaked at RMB 16.96 this year.

For me, it is really a stretch to realise the gains of a US$1.135B investment at a 1.7% yield. Just for the sake of cost-benefit-analysis, I will assume that the investment is fully financed by a loan. Bank fixed-term loans rates are at an average of 2.7% which actually makes this investment seem like a -1% yield investment (-US$11.35M/year). There has to be some other benefits to this investment that I am not seeing.

At a price of US$5.81 (4 Dec), Dairy Farm has a never-seen-before attractive 5.5% yield. It is tempting, but the thought of Yonghui always eating into cash flow is worrying. There are currency exchange risks as well if we would like to buy a stake in Dairy Farm. Events that will cause Dairy Farm's prices to continue to slide:

• USD appreciating against the RMB and SGD. Continual appreciation of the USD may potentially reduce Yonghui's yield rate.
• Rising loan interest rates.
• Losing market share to digital commerce platforms and the only solution is to reduce profit margin.
• Lack of creative strategies to regain market share. (Of course they will not disclose their internal strategies, but I certainly have not seen any differences in the way the Dairy Farm-managed shops operate in Singapore.)

The writer does not own shares in the companies mentioned.

Looking back and taking stock

As we are approaching the end of another year, I think about the roller coaster rides and ask myself whether I could have done better.

I had been probably waiting for a correction like what happened in the later half of the year for four years. It was a case of increasing opportunity cost as the wait lengthened. At a certain point, I actually decided to stop waiting and bought some shares for income. After buying in Dec 2014, the market rallied and peaked in April before the sharp correction came in August. I regretted a little, but learnt an important lesson -- always be consistent in a strategy. If the strategy is to wait, then wait. If the strategy is to stay invested, then stay invested. I wavered and switched strategy while waiting and got a little burnt.

I used to time-the-market. I told myself that as long as I sit out and wait, one day I will catch the boat (the market crash/major corrections). My patience paid off and I caught the boat a few times, and I thought that it was the way to make money. I missed a few other boats too. What I realised this year is that time-in-market is a much much better way to make money. What I did was to continuously buy on every 5% dip or when a share price reaches a new low, but I stucked to just one strategy. I spent lots of money though because sometimes it feels like catching a falling knife.

Fortunately, because I had been waiting for two to three years, I had the warchest to spend. Unfortunately, I feel a little broke now. Some companies' prices were still higher than they were three years ago even after the market correction. It is really hard to time-the-market. Who will know the oil price will drop so much? What will think that the China market will crash by itself without impacting the rest of the world that much? Who will know that European Central Bank (ECB) will actually have negative interest rates? It is a crazy world.

After going on a spending spree, I have 20 different share counters in my portfolio now. Before that, I only had 4. My overall portfolio market value is negative though, -12%, but I am getting about 6% yield for it. The yield rates range from 1% to 10%. I decided to build my own "index fund" with a wide-range of businesses, but only selecting those I like. I cherry-picked the companies that I like and belong to the Straits Times Index (STI).

I still feel the need to have sufficient warchest to buy more if the market crashes anytime soon. After factoring in the additional income from half a year's work and the dividends collected from the new shares, I probably still have some buffer to buy a few more shares if they are really worth it.

Warchest allocation ratio based on a fixed sum.

Snapshot of portfolio distribution from CDP in Nov

Overall, I am quite satisfied that I had the guts to buy when market sentiment is bad. This gut feel is always backed by my own stock reviews (detailed analysis of the financial reports) and knowing that my warchest is sufficient, i.e. if the market crashes 40% tomorrow, I still have the money to buy even more.

Stock Review: Accordia Golf Trust

In my first review, I mainly looked into the financial reports and the motivations of their parent company that is listed in Tokyo. At that time, the share price was S$0.70. Five months later, their share price is hovering around S$0.60. I will attribute this decrease to the overall weakness of the market, and not specific to the company. As such, does a lower price present a buying opportunity?

I decided to look into the more optimistic aspects of the future. Yen appreciation? Economic recovery after 25 years of sluggish growth? Increase interest in golf? I don't want to bet on those factors that are intangible. The only tangible aspect is the location of the golf courses, which I decided to study a little bit more.

Japan is huge. Some people believe that the Tokyo Olympics in 2020 will turn the economy around. As golf is also one of the new sports to be featured in the Tokyo Olympics, there are people who believe that it will generate interest in golf and the golf courses will be profitable.

I will sidetrack a bit to illustrate a fallacy in logical reasoning.

A: People love to watch movies
B: People find DVD rental is a cheap way to watch movies
Therefore, DVD rental shops is a good business to be in.

However, what if there is a new way of watching movies that is as cheap as the cheapest DVD rental?

A: People love to watch movies
C: People find that Google Movies/Netflix is as cheap as DVD rental
D: People find that Google Movies/Netflix is more convenient than DVD rental because they can get it instantly, without having to wait for the DVD to be available, or travel to and fro the shop or wait for the DVD to be delivered.

Therefore, DVD rental shops is not a good business to be in.

Notice how the introduction of new business models can potentially kill off a business model that was successful earlier?

Back to the reasoning for golf. Even if interest increases, more people play golf, does it mean that more people will play golf at golf courses? Are there equivilents of Google Movies/Netflix in golf?

The golf course where the Tokyo Olympics will use had been identified. Check out the wikipedia page -- Kasumigaseki Golf Country Club, which is located in Saitama (埼玉県). For those who are not too familiar with Saitama, it is not that near to Tokyo to experience a tourism/expatriate boom from an Olympics event.

Accordia Golf Trust (Singapore) has a few golf courses in Saitama. The portfolio of golf courses are published on their website. If you read the English version, click on Tokyo region. As most of Google Maps is in Japanese, I referenced the Japanese list to make sure that the words match. There are seven golf courses under Accordia. However, there are many more golf courses in the same area and in fact, nearer to the residential areas and the olympic golf course.

Kasumigaseki Golf Country Club and Tokyo Golf Club are side by side on the map

I show this picture first because on Google Maps, only Tokyo Golf Club is shown when I zoom out.

Map of  golf courses to the east of Tokyo Golf Club

Accordia's golf courses are in red, while the other golf courses big enough to be visible on the map are pink. Take note of the mountain ridges too.

Map of  golf courses to the west of Tokyo Golf Club

Map of  golf courses to the north-west of Tokyo Golf Club. This joins to the top left corner of the "west" map.

My thoughts after going through this map study
There are many many more golf courses than what I had circled in pink. Those that are still visible on the map to be circled are large golf courses. While I was browsing the map, there were many smaller golf courses that are peppered all over the place. Some were called mini-golf clubs.

The Google Movies/Netflix equivilent in golf courses could be these mini-golf clubs that are in the residential and urban areas. Assuming that interests in golf really increases, and people want more than play golf on a Wii console at home, then the next best convenient and cost effective way will be at the mini-golf clubs or golfing stations where you are sheltered from the sun and rain, don't have to pick up golf balls, and still play golf.

There will still be people who want to watch movies at the cinemas or rent movie DVDs from shops, so these businesses, if they manage to survive with good cash flow management, will still be profitable, but you will be kidding yourself if you are expecting year-on-year growth in profits.

If I were to buy a tiny stake in a golf course company, I will opt for a more pessimistic valuation model based on the land, instead of the membership fees or playing fees. I may consider buying a tiny stake in a mini-golf club if there is such a company. For now, I have not convinced myself.

The writer does not own shares in the companies mentioned.

Stock Review: Singtel

My friend asked me what price is a good buy for Singtel. I told him I don't know, but that I am keen to buy Singtel over its competitors M1 and Starhub because Singtel still has a monopoly in the traditional telecommunication network (fixed lines used by businesses). They also have indirect ownership of the fibre broadband network through NetLink Trust (previously known as OpenNet). Starhub and M1 will not have that long-term advantage Singtel has. That is why, financials aside, from a business standpoint, Singtel has a monopoly advantage.

Growth potential
Digging into Singtel's financial report, what stands out is that Singapore contributes to just a quarter of its EBITDA (earnings before taxes, depreciations, etc.).

Singtel's EBITA by geography

Regional mobile associates include India's Airtel, Philippine's Globe Telecom and Indonesia's Telkomsel. Australia's share comes from Optus. AIMS AMP Capital Industrial REIT (another company listed on the SGX) has a 49% stake in Optus Centre. You can consider looking at that REIT if you think that Optus Centre is a good investment.

If you think that Singapore is crowded enough, I bet the developing neighbours are just as crowded. Just based on the assumption that population will definitely grow in these developing countries, we can safely assume that the growth potential (over a very long term of 10 to 20 years) of Singtel is high. Organic population growth effects take many years to materialise.

Quality of Earnings
Singtel has an impressive investment income. What I mean is income it gets from doing nothing. Ok, they probably still have to do some work, but it is basically income derived from just shareholdings. 63% earnings come from its operations (Singapore, Australia) and 37% from its associates and joint ventures. This is akin to you having a full-time job with a gross salary of $63, say per day, and at the end of the day when you go home, you have another $37 waiting for you at home. Some people call it passive income. This diversification provides a substantial cushion for localised or seasonal dropped in earnings (e.g. Australia dollar depreciation, or drop in iPhone sales in Singapore, etc.)

Singtel's EBITA by source

Stock volatility/stability
Stock volatility or stability is important to me. I personally feel that Singtel's price spread (reaching a high of $4.40 and $3.60 low in a span of 6 months) is just an effect of the wider market swings, so I am not concerned. The Straits Times Index had a 20% price spread as well.

Singtel's stock price changes

What I am more interested in is who the price swingers are. Flipping through the financial report, we will see that the top 20 shareholders own 97% of its shares. There is also stock options granted to staff and there are activities every month. What this means is that the people who are buying and selling everyday on the SGX are likely day traders, small fries looking for long-term investments (like me), or staff who want to cash out their stock options (of course they have to pay tax on their gains too).

The daily volume has been in the range of tens of millions in the past few months, which is small, compared to the approximately 16B shares in total. 3% of that is 480M. If you see 20M shares changing hands on a day, it's only a very small portion of investors.

Singtel's Top 20 shareholders

So if you can accept that price will fluctuate because of the profile of sellers, then you should not worry about the price you pay.

Assuming a dividend of 16.8 cents (an payout has been consistent), and it's last closing price of $3.64, a yield of 4.6% is decent. The market price will likely follow the STI trends, i.e. if STI drops by another 5% from 2830 to 2690, then we can expect the price to drop from $3.64 to $3.46. Similarly, if the STI rises, then the price will rise. So the more important question is whether you are happy with the 4.6% yield based on the current price.

Singtel's dividends over the past 6 years

A buy plan that I may consider that costs ~$7,000 with eventual average price of $3.46 for 2000 units:
Buy 500 units at $3.65
if the price drops by 5%, buy 500 units at $3.46
if the price drops by 10%, buy 1000 units at $3.29
if the price goes up, just be contented that I had bought some and wait for the next opportunity.

The writer does not own any shares mentioned.

Stock Review: If I were to pick a Commercial Trust

So many candies... which to pick?

Some people buy a stock based on its price vs past 1 year, vs what they previously paid for, vs what the IPO price was, vs dividend yield, vs price-to-book ratio, etc. I have a preference for stocks that have sustainable income, and this can mean monopoly in industry, selling of goods or services that are daily necessities, companies the country cannot do without.

I had (long, long ago) divested stocks in Capital Mall Asia (2009) and Mapletree Commercial Trust (2013) shares that I got in the Initial Public Offering (IPO) after locking in capital gains of 25%, mainly because I feel that online shopping puts a strain on retail shops and it's impossible to continuously increase rents by 10%.

Commercial trust broadly includes office space, retail space and convention/exhibition space. Today my focus is on office space.

If I have only $5,000 to spend on commercial trust shares, and all the yields are attractive -- 6 to 7% -- which will you choose?

1. CapitaLand Commercial Trust (CCT)
2. Keppel REIT (K-REIT)
3. Fraser Commercial Trust (FCT)
4. OUE Commercial REIT (OUE C-REIT)
5. Mapletree Commercial Trust (MCT)
6. Suntec REIT

Comparison of key attributes among commercial trusts

Debt
CapitaLand Commercial Trust (CCT) has the least debt, which means they have more room to grow or higher profit margins, depending on how you look at it. K-REIT's debt is too high for comfort and that is possibly a reason for its suppressed stock prices, given the uncertainty of an interest rate hike.

Profit Margin
Interestingly, Suntec REIT has the lowest profit margin based on my interpretation. I re-read the financial statements a few times just to make sure that I didn't read it wrongly, and I think I lifted the correct figures. As these massive landlords also invest in different properties, I must also commend K-REIT earns a profit that is 127% its revenue. i.e. it is able to generate sizable passive income, i.e. income from its investments from subsidiaries or joint ventures whose buildings are not directly managed by the company. CCT's overall profit margin is 91%, which I like a lot.

Price-to-book ratio and yield
All look attractive. MCT is the only exception trading above book value, which reflects investor confidence, but its portfolio is 70% retail and Vivocity is doing very well.

Occupancy
CCT is particularly attractive because of high occupancy and longer average leases, which means its income stream will likely be more stable than its competitors. While at a portfolio level, FCT's lease look healthy (3+ years), when you drill into the specifics, the Singapore leases are about 1.5 years, and the Australian leases are 10 years. Income from their Australia properties form a smaller percentage, hence FCT will probably have higher operating costs trying to renew and add tenancy contracts.

Overall
CCT looks the most attractive, but there is a risk of dilution of units. The dividend of 8.5 cents assumes that none of the convertible bonds (they call it CB 2017 in their financial report) will be converted to units. The total value is $175 M at a conversion price of $1.54, representing 3.9% of total units, which will mature on 12 Sep 2017. For as long as the market price remains below $1.54, it is unlikely the investor will convert to units. The dilution effect is about -10 cents in annual dividend per share.

The writer owns some units of Keppel REIT.

To Buy or Not?

For the past one month, I had been on a mini buying spree. My friends asked me every week whether I bought anything and I was buying something every week. At the end of one month, I felt poor. I was referring to shares on the SG stock market. Money not enough. I deployed partial warchest meant for -10% correction and -20% correction all within the month of Aug 2015. The last time I deployed partial warchest for -10% correction was Dec 2014 and I had 8 months to save and top-up my warchest. No chance this time.

Theoretically, the idea was to have 100% capital control, i.e. for every $1 invested, $1 is contributed to the warchest.

When the market makes a -5% correction (benchmarked against the  highest STI reached), spend 5% of warchest, and only buy when the price drops. When the price is on the uptrend, then save money.

In the worst case scenario (based on history), when the market makes a -50% correction, spend 100% of warchest.

The rationale behind the 100% capital control is that in the event of a flash crash of -50%, I will be able to pick up stocks at half the price which will offer double protection of my invested capital in an upturn. That was the theory.

What happened between Jul and Aug was that prices dropped by 5% consecutively every one-two weeks. Following the theory, I should have spent 20% when the market was -20%, but I overspent. I spent 25%. That sucks.

So to buy or not to buy...

1. Sit out from the market for a while to top up my warchest.
2. Take a little risk and continue to buy little by little since -20% corrections are once every 4 years and we are still not near the once every 10 year crash cycle.

I think I will continue to buy, and my friends will continue to watch me buy. Nobody dares to buy and I like it that way (until I am done shopping).

Saving my ILP - Part 4

It has been four months since I drew up my strategy to save my ILP and I am glad that the insurance industry isn't as bad as I had expected.

I consulted an independent insurance broker, ok, maybe not really really independent, but I tried my best to source for an independent broker and I found one (yes, after four months). Some criteria I had was the person must be rich and contented to not want to take advantage for me. The person does not try to sell me products that I don't need. This made my search very hard because it meant that I need to look for the person, instead of the usual salesman/salesgirl trying to grab you while you are shopping. I willingly heard sales talks from Manulife and Great Eastern, but none met my requirements. Google for independent financial advisory services, that was where I got some leads.

The broker shared that in the market, only Prudential and Great Eastern protect their agents and do not allow brokers to sell. All others, including the (rather expensive) AIA, are available through brokers. According to the broker I spoke to, the brokers' commission is lower than the agents who represent the company, because brokers have no vested interest. This met my criteria that the person is likely to offer me the most value for money deal in the market to convince me that it's good and cheap so that they can close the deal.

Just to recap, my Investment Linked Policy (ILP) had $100,000 death benefit, critical illness, early critical illness cover each. I also had riders: $50,000 accident, $1,000 medical reimbursement, $10,000 female illness, and premium waivers. The yearly premium is $3,317.

What I will do in four months' time after my new policies are in-force, is to minimise the ILP  insurance coverage to just $80,000 death benefit and make it an investment policy. My revised yearly premium will be $2,699 (-$618). That translates to a saving of $18,540 over 30 years. That lean and mean investment policy can then give me potential returns that I had earlier calculated in Part 1:

Assuming I live a long life until 95 years old, exceeding the average life expectancy of 85, at a 3% yield, I could also surrender the policy after 13 years to break-even.

Now I share a little about my cost comparison. Based on mortality charges listed in the ILP, the total premium cost is $197,000 over 30 years, versus term insurance premium of $57,000 (30% of the ILP premium) over 30 years for the following coverage:

• $1M death benefit (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

I was contemplating whether I should also terminate my more expensive 20 year Term Life policy ($500,000 benefit) for a cheaper equivalent to save $440/year. The savings would be depending on how much coverage I want to have too. I decided to retain it. I was also deciding between 20 and 30 year terms. I decided on 30 years for coverage up to 65 years old, which will be the retirement age in a decade or so. Critical illness cover also does not really make sense beyond 65 years old in an ILP. I think I will feel a bit "naked" if my term plans all end at 55 years old and I am still working. Another morbid thought was that the chances of falling sick between 55 and 65 years old is also higher than 35 to 55 years old, so I should extend my coverage to the maximum possible. Getting struck with critical illness at 60 years old will be a terrible experience if all my term plans had terminated and I would have felt that I wasted tens of thousands of premiums. If I get struck with critical illness at 70 years old, I will probably tell myself that I am too old and expensive to be insured.

A ball park figure of a $1M death benefit is cheaper than a $500,000 death benefit on a per dollar basis. Although I contemplated a long time whether I will need $1M death benefit, As $1M will be $500,000 after 30 years of inflation, I thought that it was a reasonable sum. I also decided to retain the 20 year term life policy for $500,000 death and accelerated total permanent disability (TPD) benefit, mainly because I had money to spare and my life is probably worth more than $1.5M at the moment, in terms of opportunity cost. The financial adviser introduced me to a concept of projected net worth at retirement age of 65 years old if I continue my earning, saving, spending and investing habits. At 65 years old, I will supposedly be valued at $2.4M and have more than enough money to retire.

Next was how much coverage I will need for critical illness and early critical illness. I decided on $300,000 for critical illness and $100,000 for early critical illness. The total cost is at least an additional $2,088/year and $1,472/year after 20 years. I decided to ditch the accident insurance. [Edit: premium amount updated on 1/8/2015]

New policies that I will buy at a cost $2,088.

• $1M death benefit (30 years, up till 64)
• $500,000 TPD benefit (accelerated, meaning consumes from the death benefit) (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

Existing policies that I will keep at a cost $3,139.

• $80,000 death benefit + investment component (whole life)
• $500,000 death benefit (20 years, up till 54)
• $500,000 TPD benefit (accelerated) (20 years)

I will be dropping the riders that costs $618/year. Total cost will be $5,227/year now, which is within my current annual dividend income from equities, so I feel that I do not need any income replacement insurance now.

Private shield plan is now $700/year (but increases with age) for 100% private hospital single-bed ward coverage. This will gradually increase to ~$4,000/year at 65 years old and increase by $400/year every year to ~$13,000 at 85 years old. I did a comparison between term plans terminating at 65 and 75 years old. The total cost is double for the last 10 years. I would rather force myself to exercise and eat healthy instead. Therefore, I had decided to stop all the term plans by 65 years old, which is the expected retirement age.

[Edited on 1/8/2015 with revised term plan cost.]

Stock Review: If I were to pick an Industrial Trust

I divested my shares in Mapletree Industrial Trust in 2013 at $1.40 after buying it at an IPO price of $1.15 in 2010. Reasons why I bought it were high yield (6%) and strong sponsor, Mapletree. One of the reasons why I sold the share was because I could pocket a "guaranteed advance dividend payout" for the next 3 years by means of realising a capital gain of 20%. On the back of vacancy uptrend and increased supply entering the market in the next 5 years (up till 2018), I thought that I could hold cash and wait for opportunities.

My friend asked which Industrial Trust I will pick if I were to pick an Industrial Trust in the current market. My initial response was that I am still bearish on the industrial market and I will probably still not buy into Industrial Trusts. However, I will force myself to read and choose one, even if I am not buying any.

The first thing I look out for is the demand and supply trends. For that, in Singapore, we have Jurong Town Corporation (JTC) that publishes these statistics quarterly.

Vacancy rates - extracted from JTC

Based on vacancy trends, I will pick warehouses and single-user factory. Logistics companies sometimes have their distribution centres classified as warehouse or single-user factory.

The second thing I look out for is rental prices. JTC also has statistics for rental index.

Rental index - extracted from JTC

Based on the rental index, I will pick single-user factory as it is reporting an uptrend.

The third thing I did was to comb through the financial reports -- Fundamental Analysis. Without knowledge of the industry, I will need to read these reports to make a relative comparison to identify which share to choose in the current market.

Side-by-side comparison of key numbers I look for - 
extracted from individual companies' financial statements and presentations

If there were any transcription errors, it was unintentional. I went through the reports over a few days and I re-read some numbers which looks strange. I couldn't find some of the numbers I was looking for in Ascendas, hence I left it blank -- and it didn't matter too. For each number, I marked out in green the most preferred number (e.g. highest yield), and in red the least preferred (lowest yield).

Just based on the first preference of choosing warehouse and single-user factory, my preferences will be bias towards Cache Logistics. However, we need to keep in mind that Cache Log pays out 100% of its earnings in dividends, hence growth is limited. There are some numbers to like, such as high profit margin, high occupancy, and low trade receivables, which are healthy signs of a single-user factory -- fewer tenants to manage and tenants also pay promptly.

If I have to choose a second preference, I will choose AIMS AMP Capital for the same reasons as Cache Log. The higher weighted land lease expiry is 10 years higher than Cache Log because they have freehold land in Australia (by virtue of a 49% stake in Optus Centre), which they used 99 years as part of the calculation.

Ascendas is my least-liked share. One thing I didn't like in the report was how they perceived lower than market average occupancy as potential revenue. Their profit margin is the lowest among the five companies compared here, and significantly lower than the other four companies. Hence, I am made to believe that there are probably operational inefficiencies within the company. However, some people may like that fact that Temasek Holdings (government-linked) and JTC (government) are reputable sponsors to Ascendas. Having an Ascendas' CEO who was an ex-JTC CEO and ex-EDB deputy managing director, could probably hint that some government-style management is present.

Ascendas CEO - extracted from Ascendas website

Ascendas ownership - extracted from Ascendas website

The writer does not own any shares in the companies mentioned.

Singapore Fixed Deposit - Jul 2015

Seems like banks are competing for fixed deposits this Jul with the Singapore Savings Bond. I compile this out of personal interest as I am also doing some shopping for my soon-maturing FD.

Excludes priority/privilege promotions because I am a commoner. All fresh funds.

One Year

Hong Leong 1.6% p.a. 12 months 50k

Standard Chartered 1.5% p.a. 10 months, min 25k

UOB 1.5% p.a. 13 months, min 20k

CIMB 1.45% p.a. 12 months, 25k

Maybank 1.45% p.a. 12 months, 25k

OCBC 1.4% 12 months, min 20k

Two Years

CIMB 1.95% p.a. 24 months, min 25k

Hong Leong 1.8% p.a. 12 months 50k

Standard Chartered 1.75% p.a. 10 months, min 25k

Stock Review: Accordia Golf Trust

What made Accordia Golf Trust (AGT) stood out was its supposedly 12% annual yield. That was what prompted me to take a deeper look at the company. When they launched their IPO in Aug-Sep 2014, I just spent a few minutes to browse the prospectus and then decided to give it a miss. This article I am writing is a result of 3 hours of reading.

First, we look at how the 12% calculation was derived because it is a critical assumption to make us feel that it is a good buy. Dividends were promised in the IPO prospectus -- 100% of profits would be paid out -- which turned out to be 5.7 cents for the period Aug 2014 to Mar 2015 (8 months). Using straight-line extrapolation, it is 8.55 cents. At the market price of 70-71 cents/unit, the yield is 12%.

Assumptions to take note of: 1) 100% payout of profits as dividends (which will probably leave no money for the company to grow it's business for the next year unless they borrow); 2) straight-line extrapolation of earnings which may not have happened.

Next, I look into the business model. Income mainly is derived from usage of golf course (65%), restaurants (24%) membership fees (10%). The revenue stream is seasonal where 4 months of the years (winter) will see fewer golfers. How much fewer? I did a ballpark estimate based on dip in income for the winter quarter and derived 30% lower in winter months. However as the expenses are constant, annualised profit margin becomes an important factor. Profit margin is 8% for the 8-month period. Straight-line extrapolation will assume 8% for the whole year.

Presentation slides and Financial Report for period Aug 2014 to Mar 2015

We also look into the history of AGT. AGT's parent is Accordia Golf Co Ltd (AGC), which is listed in the Tokyo Stock Exchange. 

Goldman acquired Accordia a decade ago and used it to buy up dozens of golf courses across Japan at a time when land prices were depressed after the bursting of the 1990s property bubble but demand for the game was still strong. - 6 Jan 2011, Goldman Eyes Clubhouse in Japan Golf Deal, nytimes.com

Golf membership prices soared in Japan during the 1980s bubble economy, then slumped as the country fell into four recessions in the past two decades. At least 800 golf clubs have gone bankrupt since 1991, according to Meiji Golf, which trades club memberships in Tokyo.

Membership values at Accordia-owned courses have fallen faster than the nationwide average, Kazunari Tsutsumi, executive director of Meiji Golf, said in July last year.

- 6 Jan 2011, Goldman Sachs Sells Stake in Japan Golf Course Owner, bloomberg

Accordia is considering several options to give shareholders better value than the 81,000 yen ($990) a share offer by PGM, ... include bringing in a strategic investor and raising dividends, the people said.

- 27 Nov 2012, Accordia Golf Said to Hire Daiwa to Counter PGM’s Buyout Bid, bloomberg

Why will AGC want to create AGT? Selling some shares away to get cash seemed to be the reason to list AGT because they have high valuations for their land and boosted the maximum yield they could (100% payout). Not only did the IPO open below the IPO price, but the price had never risen back to the 97 cents per share paid by 72% of its IPO shareholders. AGC only retained 28% ownership of AGT.

In AGC's financial statement for year ended 31 Mar 2015, it wrote that AGT was a business trust-based asset-light strategy to address issues of its business management, including an improvement in asset efficiency. Due to this strategy, AGC received repayments for the consideration for transferring the operation of 90 golf courses and existing loans receivable.

As a result, capital efficiency and return on equity had improved. AGC will continue to make intensive preparations for additional asset-light strategies for golf courses with confirmed stable profitability by improving their revenues. 

So AGC intends to continue to sell golf courses to AGT. How is AGT going to fund this? Rights issue? Bank loan? 

The yen has fallen about 5-10% a year in the past 2 years. If that yen trend continues, the share price for AGT may continue to drop because earnings are converted to SGD. What this means is that 10% earnings will be negated with 10% yen decrease. A 10% earning decrease + 10% yen decrease will result in 20% earning decrease.

If earnings are expected to rise, why should AGC sell the golf courses to AGT? They would have been better off collecting all the earnings themselves.

Finally, the location of these golf courses are near the mountainous areas, many hours drive away from the cities. The capital appreciation opportunity is limited without population growth. The land are also likely to be too expensive to be converted into agricultural land. Immigration is not easy too because Japan speaks predominantly Japanese. Their society also excludes foreigners in many aspects -- visas, property ownership, employment, marriages.

I am also not too optimistic about "golf tourism" in Japan when there are cheaper golf courses in Asia.

Oh yes, and I normally will mention that their cash holdings is only a fraction of their debt.

[Editted on 26/11/2015: Follow up review here.]

The writer does not own shares in the companies mentioned.

Getting SRS tax relief for $153,000 and get back $400,000 tax-free!

I was searching online but could not find an answer to my question: How will I receive dividends if I have bought stocks with money from my Supplementary Retirement Scheme (SRS) account?

It is definitely NOT paid to your usual Central Depository (CDP) GIRO account, so you will not have usable cash. The dividend paid shows up as cash available in your SRS account balance, which can be re-invested in more stocks!

Next is the question on what is exactly taxable when we were to withdraw the SRS money at 62?

Dividends are taxed at source (Corporate Tax) and Singapore does not have Capital Gain Tax, BUT when the dividends and capital gains are paid back into the SRS, it will be taxable... I hope I am wrong, but it seems to be that way. Given such a situation, it means that one will probably stop contributing to SRS once the available balance is close to $400,000, based on current tax rates, or whatever the minimum taxable income is when we are 62. $400,000 is the current tax-free break-even point. You can read the detailed illustration on the IRAS page.

Based on a contribution cap of $15,300/year from 2016, an investment horizon of 10 years (provided you start by 37 years old) will easily get back $400,000 (with dividends (5% yield) reinvested and a conservative 0% capital gain included.) If you are 37 years old this year, you are in luck! If you are younger, you probably don't even need to contribute for 10 years.

What to buy as a first stock?

Recently I met a young guy who was interested to invest. He started investing a few months ago and had earned a few hundred dollars. I was curious to find out whether it was a continuous lucky streak or something methodological.

The method he used:

1. Read blogs written by Singaporean bloggers (there are a few popular ones that show up when you google) and buy on recommendation.

2. Read forums patronised by Singaporean retail investors and investors wannabes. Buy on recommendation by credible forumers.

3. Finally, sell once the price passes buy price + 5%. If there is strong momentum, wait and see to how high it can go. Once it starts to fall, sell.

Interestingly, this is actually very methodological, but is akin to playing a game of musical chairs. The good thing is everybody knows that they are in a game of musical chairs and they don't want to be the last guy standing, so this method of investing is speculative at best.

I would not discourage this practice as this was the same way I learnt about the stock market. I joined multiple games of musical chairs and earned a tidy sum. However, if I were to go back in time to advice my neophyte self what to buy as a first stock, I will recommend the 1 lot (1000 units) of the STI ETF to lock in some dividend income first (yield is secondary). At today's price, it will cost about $3500 (average yield 2.5%). After that, play a few rounds of musical chairs to experience what it is like to play a speculative game and observe and learn how to recognise speculative patterns.

The writer does not own any shares mentioned.

Stock Review: King Wan Corp

King Wan released its Q3 results on 13 Feb 2015. It has been giving consistent dividend over the past few years and the dividend looked impressive.

Extracted from SGX Stock Facts

When I read through the Q3 financial report, I had concerns over a few observations:

1. High Earnings per Share (EPS) was a result from a one-off gain from selling their Thai subsidiaries, which contributed majority of the profit.

2. $36 M unsecured loans payable in 1 year of less or on demand. There was no mention about what they intend to do with this. Their M&E profit of $85,000 for Q3 (or $0.085 M as written in the report) is no way near that amount.

3. $54 M worth of "Available-for-sale investments" on their balance sheet. This was very fishy because I read the accompanying notes but I did not manage to get any information about what made up that $54 M. Considering that their net cash position is in the range of $1 M, the revision of valuation of these assets could create substantial debt/profit.

I suspect the $54 M probably referred to the unsold Skywood Condominium units that King Wan invested in (property development) and the $36 M probably is the construction loan for the property development project.

Sidetracking from their King Wan's M&E's business, their subsidiary Kaset Sugar, listed under SET (Thailand Stock Exchange), looks promising, as it has been King Wan's dividend generator.

Disclaimer: The writer does not own any shares from companies mentioned.

Saving your first $100,000 could be easier than you think!

After I graduated and started on my first job, I did some calculation in a spreadsheet to extrapolate my salary after 5 years. All was rosy until I actually received my increment letter - $144 or  6% of my then $2,400 salary. Bonus was 1.5 months, which was considered relatively good in the company. I typed the numbers into the spreadsheet and I decided to find another job after looking at the projected number after 5 and 10 years.

Working backwards, I calculated how much increment I would need year on year to achieve a salary of an arbitrary $7,000 after 10 years. $7,000 was the 90th percentile from the Department of Statistics Income distribution curve then. 10% year on year increment was needed to achieve that from a $2,400 starting pay.

Every year I calculated how far I was away from my required increment. When the "extrapolation" numbers looked unfavourable, with a heavy heart each time, I make my move.

Every year, every day, every hour, every second, I make sure that every single action I did was contributing towards building relevant skill sets to increase my market value.

I would not recommend this approach of job hopping as its detrimental to the economy, but I thought I should share some ideal examples for the fresh grads jumping into the market. The starting pay is VERY important. It is your bargaining power for the next hop and future hops. I regretted not bargaining for more.

More importantly, saving your first $100,000 could be easier than you think! Once you hit that milestone, I am sure you are all set for more milestones.

Poly Grad (F) 5% Inc

Poly Grad (F) 10% Inc

As you can see, a 5% increment and 10% increment will result in 50% difference in pay after 10 years.

In this example, you can see that the amount one can save is also a lot, just based on a 5% increment, which is closer to the market average, provided your company pays you 3 months bonus a year. What this means is that if your company pays you less than 3 months bonus, and you think you are capable of getting more, then you are probably better off hunting for a more generous employer.

I had also put a very reasonable monthly expense of $900. If you save less than what the spreadsheet says, it is CERTAIN that you will not save the projected amounts. Simple.

I had also done up the same tables for different starting average pays for poly grad M, uni grad F and M just for completeness. Make the right step!

Poly Grad (M) 5% Inc

Poly Grad (M) 10% Inc

Uni Grad (F) 5% Inc

Uni Grad (F) 10% Inc

Uni Grad (M) 5% Inc

Uni Grad (M) 10% Inc

CPF Special Account

I was looking at the Central Provident Fund (CPF) bonus interest scheme that pays an additional 1% interest per annum on the first $60,000 of a member's combined balances.

I enquired that the priority of the accounts that make up the $60,000 is as follows:

1st:      Retirement Account (RA), including balances used to pay for the annuity premium under CPF LIFE
2nd :   Ordinary Account (OA), up to $20,000
3rd :    Special Account (SA)
4th:     Medisave Account (MA)

At present, OA pays 2.5% and SA pays 4%. Assuming one does not have an RA, to fully benefit from the 1% additional interest, one should minimize the amount in OA and plonk as much as possible into SA. One way to do it is to just make an IRREVERSIBLE transfer from OA to SA. In the past, one could probably use the money in OA for investment to empty it out and then cash out on investments when they need the money.

In any case, I still did a transfer from OA to SA, but I left a year's worth of mortgage repayments in my OA in case I need the money in future.

CompareFIRST - Insurance Comparison

The first thing I was looking for was the cost for Critical Illness but I could not find it.

There were Whole Life, Term Life, Endowment, Investment-Linked Policies (ILPs), and a new category called Direct Purchase insurance products, which is quite similar to buying insurance online directly from the insurer.

Pros
You can see at one glance which Term Life is the cheapest.

You can see at one glance which endowment has the highest guaranteed payout for the premiums paid.

This is probably the most straight-forward case.

Cons
It is not so clear when one selects "Yes" to Critical Illness cover. In the search results, I got some with mortgage insurance, some with accident and terminal illness, one says there is a choice of 4 plans (how can there be a choice if there is only 1 price listed?), one as Total and Permanent Disability (TPD) and premium waiver benefit. I did not have the patience to scroll and read all the search results.

It is also difficult to compare the distribution costs across different products.

Overall, it is a good attempt. I would prefer they put in some recommended insurance based on typical average Joe scenarios for people to have a rough gauge of how much insurance one ought to buy.

How much have I earned and lost?

How much have I earned and lost from shares?

This lady is a few years younger than I am and she asked me this question over a casual lunch.

Hmm... I probably earned $50,000 and lost $30,000, so a $20,000 nett profit could be a close estimate over the past 10 years. These are realised profits and losses. The unrealised losses were much more during the 2007 and 2009 "crashes".

After that, I decided to compile a year-on-year income "report" to track how much I had earned and lost over the years. It took me quite a few days to dig through my archives of spreadsheets that I had used to track my income and expenses and reading them reminded me of how I evolved my spreadsheet format and investment "strategy" if I could borrow that term to represent my exploratory journey.

We all love visuals, so I decided to make one too.

Year-on-Year income breakdown

I cannot remember when I exactly started buying shares, but it was probably in 2001 or 2002 when I was school and I remembered it was after getting my first exam results. I realised that I was in the bottom half of the bell curve and will need to look for alternative sources of income to make up for my shortfall in income compared with my peers with much better grades (who will likely get a head start). I am a pessimist, and still am. I did work hard for my four years in school but I was still below the curve when I graduated.

Shares appeared to be an "easy" option because there was an online platform, you spend a few seconds to click to buy and sell, and then you make money. It sounded like the perfect early retirement plan. That was the nirvana I was seeking. That drove me. On hindsight, it was no where close to easy. It is sheer hard work learning, cash flow management, and patience.

In 2002, China Initial Public Offering (IPO) stocks were the "hottest". Every IPO was a 100% hit. It is a definite 10% gain and sometimes as high as 300%. I made quite a bit of what the industry calls "kopi lui" or coffee money. I profited $10 to $100 each trade. I use the term trade because I bought and sold usually within a few days.

When US waged war against Iraq in 2003, stock markets rallied. Oil companies stood to benefit from higher oil prices because it was perceived that the Iraqis will have to stop digging and selling oil to fight the war. It sounds comical, but that was how it was perceived. The actual supply shortage from Iraq to cause a supply crunch is debatable.

When SARS hit in 2003, the market "semi-crashed" and IPO fever died down. As I was riding on speculation fever, many of these China stocks fell and I clocked my losses. That could be said to be my first burn -- speculation.

The market started to pick up in 2005 when HDB changed their housing policy to allow PRs to buy flats, and foreigners to buy condominiums (condos). That created the demand for HDB upgraders to mass market condos. Previously, foreigners were only allowed to buy certain walk up apartments, or high-end luxury condos. In Singapore, people called the phenomenon "Boom Town Charlie".

In China, there was a construction boom, and all property stocks were hot and speculative. Those shares that were hot in pre-SARS era had mostly been delisted by then, and new batches of China IPO shares flooded the market. I made kopi lui again.

My second burn happened in 2007 -- over-exposure. Warren Buffett launched his war chest to buy out the US banks while I sucked my thumb with no war chest. I started to build my war chest.  I counted my blessings to be able to live to watch the Lehman Brothers trickle unprecedented impact across all stock markets. To be honest, I still feel that the Lehman Brothers was not that big a deal, but it was the sensation it caused that trickled fear into every household worldwide -- who will be next?

Ben Bernanke became an overnight celebrity. There was a cartoon drawn about him sitting in his airplane and flinging out wads of cash. Quantitative Easing (QE) made it into case studies of many Economics textbooks. To date, I think QE is the most daring invention, after fractional banking. In those days, I call QE a damping function. In physics, a damping function is one that gradually slows you down to a halt instead of an sudden stop.

In 2009, there was another "semi-crash" because of fear of QE money disappearing and that markets were inflated by invisible demand created by QE. Round 2 of QE came in to save the day. This time round, I launched my war chest and made handsome profits. I will forego a short-term profitable stock than spend my war chest in peace times. This milestone also marked my recovery of past losses, and I decided that I need to change my strategy to increasing the proportion of income from dividends.

So the high-level strategy was (and still is):

1. Buy shares that give at least 4% dividend yield. For riskier shares, I give myself higher margins of at least 6% yield. Every share must have at least 4%, so that I don't need to track every share to the last $1 of income.
2. Buy IPO shares and sell on target price. Generic target price is at least 20% above cost price to get a return of 4 years dividend income to hedge against the risk of another market downturn. Not all IPO shares can yield such capital gain, hence #1 applies as well.
3. Build up war chest of at least $100,000, which is also to be used to apply for IPO shares as well to get higher allotment.
4. Track shares with consistent and good dividend income and wait for the "right" price -- which is the price that gives me at least 4% yield (inclusive of forecast performance).

With this strategy, it also meant that I had to adjust my portfolio to dump those that have met the target price and I don't intend to hold, in order to free up cash to fulfill #4.

I am still adopting this strategy, but I introduced some "governance" of apportionment to "manage risks". At peace time, shares should not exceed 50% of my portfolio (which includes cash, fixed deposits, future income for the next 3 months). For me (a pessimist), a comfortable proportion is 25% shares, to allow for gradual build up when opportunities in #3 or #4 arise. In addition, condition #3 is triggered when the market index drops by at least 30% in a week.

The thrill from kopi lui doesn't excite me anymore. Dividend income is taxed at source and exempted from personal income tax, at least while one remains a Singaporean.

In the spirit of knowledge sharing and learning, I don't mind sharing how much I had earned and lost, and you can even work backwards to calculate how small/big (relatively) my portfolio is, just as long as you don't ask me for money or free meals. :P.