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.