Building bond ladder with FSM

In the portfolio activity in April this year, I kept the fresh fund for Singapore fixed income in FSM cash fund, instead of building the SGS bond ladder that I have planned. It was because the yield of 5-year SGS bond was low and I was really busy to go to bank to bid for it. But I have overlooked a quick and convenient way to build SGS bond ladder — the SGS bonds offered by fundsupermart (FSM). FSM charges 0.1% of nominal value as initial processing fee and 0.1% of nominal value deducted from coupon payment as annual custody fee.

How much do the fees reduce the yield? To do this comparison, I use the data in SGS web site as the yield before fee; and FSM Bond Factsheet to calculate the yield after fees. For the latter, I point my browser to FSM Bond Factsheet, then select a SGS bond, enter 1000 as the amount to buy, enter indicative price + $0.10 (to simulate the 0.1% processing fee on $1000 nominal value) as maximum price to buy, and finally hit the Submit button the get the net yield to maturity. My assumption is that the net yield from the calculation above includes the fees charged by FSM and the bid-ask spread.

The bonds that I have compared are as follow, with the yield to maturity from SGS web site and FSM calculator respectively. Data are extracted on 1 August 2008.

1. NX01100H; Coupon 3.625%; Maturity 01/07/2011; Years to Maturity: 2.92 (years), 1.36%, 1.10%
2. NX02100S; Coupon 3.500%; Maturity 01/07/2012; Years to Maturity: 3.91 (years), 1.84%, 1.63%
3. NX04100F; Coupon 3.625%; Maturity 01/07/2014; Years to Maturity: 5.91 (years), 2.47%, 2.29%

The fees and spread reduce the yield of the above bonds by 0.18% ~ 0.26%. Compare this with a bond ladder built by bidding SGS bonds at zero cost, this method has the advantage of building a bond ladder faster and saving the trip to banks.

Thanks to this post in sgfunds.com for the information on FSM SGS bonds.

New books: the wise, the intelligent and the manias

Last month, I ordered three books from Amazon and shared the shipping cost with a member in sgfunds.com. Using Office 2.0, we collaborated on Google Spreadsheet to calculate and split the shipping cost. It was quite cool and efficient

The Wise

The first book Wise Investing Made Simple: Larry Swedroe’s Tales to Enrich Your Future by Larry Swedroe uses stories (sometimes the author’s own encounter with his clients) and analogies to explain how the market really works, why the conventional wisdom in life does not work in investing, what the common mistakes in investing are. It aims to answer the “why” questions to indexing and passive investment, rather than the “how” questions to implement such strategy. The book also touches on the “odds and ends” questions in investing that are normally not the main contents in the “how” books of passive investing, such as:

• is there any connection between high expected GDP growth rate and high stock market return? (chapter 19)
• what if everyone indexed? (chapter 21)
• can active management gain competitive advantage in less efficient market? (chapter 21)

I have difficulty in understanding some terms used in sports (e.g. baseball) whenever they are used in the analogies. On the other hand, many stories are written as a dialog between a financial adviser and the client. This makes a good read for any advisers who want to know how to explain the concept of indexing and passive investing to clients.

The Intelligent

The second book The Intelligent Investor by Benjamin Graham is an interesting one. The author and the book are often quoted in discussions on value investing and stock analysis. So I didn’t pay much attention to the book, until it was quoted in John Bogle’s The Little Book of Common Sense Investing about Graham’s comment on indexing. Out of curiosity, I have browsed the book a few times in book store before I decided to buy it. The latest edition comes with Jason Zweig’s commentary on each chapter, which is a good read by itself. I would say if I had read this book before, I would still invest in the indexing and passive ways - the ways Benjamin Graham recommended (albeit implicitly) for the “defensive investor” as defined in the book, expanded and explained clearer by Jason Zweig.

The Manias

The third book Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Aliber is the kind of book that you will come across if you visit Bogleheads forum long enough. After reading books on asset allocation and passive investing to tackle the expense “enemy”, investors are recommended to read up financial history of market crashes to prepare for the emotion “enemy”. Because a sound asset allocation plan is useless if investors cannot stick to it through the up and down of stock markets. I have not gone through a severe market crash since I started my portfolio, so I am reading this book to “bulletproof” my emotion from the next crash. Besides this book, other books on market crashes and financial history can be found in Bogleheads forum topics at Books on manias and crashes ? and Book on great Depression? Or find a movie on the 1929 Great Depression.

Happy reading!

Consolidated my ETF holdings

Last month, as planned in my previous post, I transferred part of my ETF holdings to Saxo. My ETFs are now held in the accounts below.

• DBS Vickers Securities
  • Vanguard Total Stock Market ETF (US)
  • ABF Pan Asia Bond Index ETF (HK)
• Saxo Capital Markets Singapore
  • iShares DJ STOXX 50 ETF (UK)
  • Vanguard Total Stock Market ETF (US)
  • Vanguard Emerging Market ETF (US)

I will use Saxo for my subsequent ETF purchase. ETF in DBS Vickers Securities will remain as it is to save transfer fee.

How long did it take to complete the transfer? After I have authorized both parties (one for transfer-out, one for transfer-in), it took about ten working days. Remember to ask both parties for forms and instruction to authorize both parties to do the transfer. The transfer from optionsXpress to Saxo was delayed because I did not know I also need to inform the party who will do the transfer-out of shares.

Classification of REIT

REIT is part of my portfolio and I try to hold REITs (from SGX) across different sectors. I want to see how my current REIT holdings are allocated, so I use the classification in my favourite PC game SimCity - R.C.I. for Residential, Commercial and Industrial. But some REITs, like hospital REITs, do not fall under any of this category. I refer to the classification in this post and simplify it to R.I.C.H. - Residential/Hospitality, Industrial, Commercial and Healthcare. I calculate the allocation of my REIT holdings according to this classification and it looks like this (total is 100%).

Clearly, when my asset allocation plan says it’s time to add REIT, I will add Residential/Hospitality REIT.

Consolidating my ETF holdings

My ETFs are held in several broker accounts, as shown below. This is because I have changed broker several times when searching for low cost broker for ETF in US, UK and HK exchanges.

• DBS Vickers Securities (formerly DBS Vickers Online)
  • Vanguard Total Stock Market ETF (US)
  • ABF Pan Asia Bond Index ETF (HK)
• POEMS
  • iShares DJ STOXX 50 ETF (UK)
• optionsXpress
  • Vanguard Total Stock Market ETF (US)
  • Vanguard Emerging Market ETF (US)

Each broker has its disadvantage. DBS Vickers Securities is the only broker I know in Singapore that does not charge custodian fee for US stocks, but its commission is higher than others. optionsXpress, which started its business in Singapore later, charges less commission than DBSVickersOnline, but funding the account is a bit troublesome when I use bank draft from Custom House for its lower foreign exchange spread. Finally, POEMS charges custodian fee and dividend handling fee, though its UK trading commission is lower than others. So, it would be good if there is a broker that is easy to fund and with low commission to hold all my ETFs.

Recently, a friend mentioned consolidating his ETF to Saxo Capital Markets Singapore because of its low commission for UK market, zero custodian fee and zero dividend handling fee. I have explored this option before but put off the idea due to the minimum SGD15,000 requirement to open an account. Later I found out from Saxo customer service that I could transfer in stocks to meet the minimum SGD15,000 requirement. So I decide to consolidate my ETFs to Saxo. The advantages are:

1. Lower commission than POEMS for UK stocks.
2. Zero custodian fee and dividend handling fee as compared with POEMS.
3. Ease of funding: you can fund the account by SGD cheque. Trade done in foreign currency are converted using the current spot rate plus/minus 0.5%. This is close to Custom House rate and lower than banks.

As transferring of stocks from one broker to another incurs fee, I plan to transfer my ETFs only from optionsXpress to get rid of the funding headache, and from POEMS to get rid of the high commission, custodian fee and dividend handling fee. I will leave the ETFs in DBS Vickers Securities because they do not incur on-going custodian fee.

The transfer of my ETFs to Saxo is in progress. I will post update when they are done, so stay tuned.

Buying USD-denominated stocks in SGX

Recently I bought Lyxor Japan ETF in SGX which is denominated in USD. I use Lim&Tan broker to buy USD-denominated stocks because its minimum commission is lower at USD12.50. I would usually click the estimated commission link to check how much commission is payable before I submit my order. If I choose to settle the order in SGD, the minimum commission becomes SGD25. Given the current USD:SGD exchange rate, it is more expensive than the commission in USD. If I choose to settle the order in USD, and convert the total order value to SGD, which commission is applied?

I emailed Lim&Tan helpdesk to clarify and received their call on the same day. Below is Lim&Tan’s reply:

1. Settle the order in SGD — minimum commission SGD25.00
2. Settle the order in USD — minimum commission USD12.50
3. Settle the order in USD, then call Lim&Tan within T+2 to convert total order value to SGD — minimum commission USD12.50 converted to SGD, which is currently about SGD17.

Of course, I use the third way to buy Lyxor ETF because the commission is cheaper.

Portfolio activity

It is April, time to do my semi-annual fund contribution ritual. After a few times, it has been quite a routine. Open portfolio spreadsheet, update price, add fresh fund and restore the equity/fixed income ratio to 75/25, allocate fund within equity and fixed income to asset classes that fall below target allocation, then lo and behold, it says I need to top up the following asset classes (fund name in brackets):

• Europe (iShares DJ STOXX 50 ETF)
• Japan (Lyxor Japan (TOPIX) ETF)
• REIT (REIT stocks in SGX)
• SG fixed income (FSM Cash Fund)

SG fixed income is supposed to be SGS bond ladder, but 5-year SGS yield is comparable to FSM cash fund and I am busy to go to bank to submit the application form, so I choose to leave it with FSM cash fund till the next auction.

All seem easy, but there is a problem. My fresh fund is held in many different accounts: POEMS, DBSVonline, FSM cash fund, and I need to consolidate them before buying the funds. Although transferring money to one account is as easy as a few mouse clicks, and digits travel over the wire in lightning speed, the actual time taken is quite long. It took about 2-3 business days for the fund to reach my savings account, and another 2-3 business days to fund the broker. To help me managing and tracking multiple fund transfers, I draw it on a piece of paper.

Once the fresh fund is in place, purchasing fund is quite fast. For REIT, I bought at buyer’s price as the trading volume was high. For Lyxor Japan ETF, the trading volume was low, so I bought at seller’s price as the spread was very small. For iShares DJ STOXX 50 ETF, as it has just announced that April 30 as ex-date and pending my plan to consolidate all of my ETF shares, I am holding off this purchase.

From rebalancing on spreadsheet to fund transfer to fund purchase, it took over two weeks for the dust to settle. Two weeks is quite inefficient. It would be nice to be able to move fund using drag-n-drop on my desktop. I believe the technology today is able to do it, but I have not seen such product in the market. I still have some transactions to record in the spreadsheet but at least the portfolio storm is over. Phew!

Investing in foreign ETF

A reader asked me in email how I invest in ETFs that are not listed in Singapore Exchange. I replied that currently for Vanguard Total Stock Market ETF (VTI) that is listed in the US, I use optionsXpress Singapore; for iShares DJ STOXX 50 ETF (EUN) that is listed in London Stock Exchange, I use POEMS. However, this may change as I am considering other low cost brokers to consolidate my ETF holdings. I will write on this if there is any update.

In my reply to the reader, I also included sgfunds.com topic “Seek Help in Investing in Foreign ETFs“, which has some information on foreign ETF trading, tax and charges.

CPF-SA fund allocation

Today I login to CPF and found my CPF-SA balance is 50 cents. Yup, my CPF-SA has been invested according to my plan and method. After 1 April 2008, the first $20,000 in CPF-SA will not be allowed for investing. And from now onwards, new CPF-SA contribution will be allocated as Singapore Fixed Income in my portfolio.

Passivity and simplicity

I have not written in this blog for nearly two months. I have also not read any investment book for the last two months and have become a silent reader in sgfunds.com forum. Busy is one reason, laziness is another. Sometimes I wonder, am I doing enough to track my portfolio? Is there anything I have missed? Have I become complacent after setting up the asset allocation plan, the spreadsheet for tracking the portfolio and the necessary tool for price update?

On the other hand, during the planning phase of my portfolio, there was always the urge to tweak the portfolio. Slice and dice, value tilt, small-cap tilt, collateralized commodity futures… The Internet has too many ideas and too much information that it can do more harm than good. Do you share the same experience?

Well, my experience here is also shared by others. In the thread Simplicity! posted by Taylor Larimore, he quoted experience of investors who were paralyzed and overwhelmed by constant flow of information, and those who were addicted to constant tweaking of portfolio. Following this, Mr Larimore quoted from many famous investors on the simplicity in investing. One of my favourite is:

Richard Young, writer of The Intelligence Report: “If you can’t run your portfolio taking 60 minutes a month, it’s too complicated.”

Oh, also check out the links in the second post of the above thread.

Towards passivity and simplicity. Cheers!