Increase in BHS and FRS 2019

I am a big advocate of the 7k CPF top-up. In fact, I’ve been doing it myself for the last 4 years. The primary reason to do these top-up’s are mainly for their tax saving benefits and additional interest earned.

Though recently, I’ve been wondering if the 7k is indeed sufficient to hedge against the rise in CPF ceiling rates, or am I subject to some anchoring bias since only 7k transfer is tax deductible?

Increase in CPF ceiling rates was 7.7k in 2019 and 7.8k in 2020
Source: CPF website

A quick check on BHS and FRS ceiling changes shows that the overall quantum has been raised by more than 7k in the last 2 years. Which means without accounting for other contribution increases (mainly salary and interest received), if you only transferred 7k in the last 2 years you would be behind in achieving these CPF ceiling rates.

Therefore, starting this year I will be pegging my CPF contribution rates to these rising quantum’s rather than on the 7k baseline. Hope this post helps you to better frame your CPF retirement planning.

Shopping during the Mid-Autumn Festival

Wanted to pen down my thoughts, even as the broader STI makes its rise above the 3200 level. I was relatively active in the last 2 months given that the market took a nose dive due to trade uncertainties, HK protests as well as the shock from inverted yield curve.  

During this period I added the following counters,

Koufu – Averaged down at the resistance line of $0.7. I had initially added at the previous resistance of $0.75. But the bearish sentiments broke the counter further down. I am looking forward to its next quarterly report to see how well its expansion is doing.

CRCT – Subscribed to more than 10x my allocation and was given full allocation. To be honest, if I had known that the upper limit for allocation was higher I would have added more. Not looking to add more at the current valuation. Will wait till next quarter to see the impact of falling RMB on the Reit’s DPU.

OCBC – Added when the price dipped below $10.70. Small position given that I believe that it has the highest potential to run given its small dividend payout ratio and potential acquisitions.

HK land – Added this counter as the final laggard before the STI moved above 3100. I think the risk are overblown considering that it has a diversified portfolio and the fact that the HK protest would not go on indefinitely.

This period was also not without error.

Sembcorp Marine – Added after news broke of its involvement in the ongoing Brazillian corruption probe. Initial gap down was greeted by reversal in the following week, missed a clear sign to exit before the gloom. I guess I got emotional/greedy. While the 10% loss was painful, I still consider myself lucky to cycle out of the stock and rotate to other counters above.

Not looking to add anymore till the next downturn. Just adding to depleted war chest.

New HDB grants announced

The government just announced two new measures to make public housing more affordable and accessible to more Singaporeans. First, is the raising of income ceilings of eligible buyers for HDB and ECs, the second, is the merging of the Special Housing Grant (SHG) and Additional Housing Grant (AHG) into the new Enhanced Housing Grant (EHG).

The first measure of raising the income ceiling makes the newer HDB projects nearer the city more affordable. Which helps us connect the dots considering that the government has made a commitment to offer more units in mature estates including the much anticipated Greater Southern Waterfront (GSW) project in the near future.

I foresee that these units will increasingly be filled with the semi-affluent sections of the population. Also, it allows the government to raise prices in these areas thereby allowing the HDB to reap the full economic benefit of these plots as well as avoiding the issue of the ballot “windfall”, where lucky bidders were able to buy under priced properties in good locations.

The unintended consequence is that because of affordability issues, these areas will become enclaves of the higher middle income and encourage stratification of society. One could also argue that poorer households of these developments would sell their units anyway, leaving the base case unchanged.

For the second measure, given that the grant payout quantum are low compared to the overall cost of buying homes, I don’t expect it to have too much of an impact on the resale market.

But given that BTO prices are not expected to move upwards immediately especially in non-mature estates, I suspect the earliest beneficiary of the EHG would be the mature/resale estate market.

It remains to be seen how much more the prices in the RCR regions are able to appreciate given that so much of this would trickle down into the central area and already mature estates.

Affordable Housing

This month will mark the 2^nd year since I applied for my BTO. Having just visited the location and seeing the building at mid-stage of completion, I wanted to pen down some thoughts regarding my financial housing journey.

For us, our future home was in a mature estate with a good location and was thus “expensive” for a BTO. I remember being quite anxious about the overall quantum we had to pay, since we had only just started working.

I had calculated that based on our combined salary then, even after CPF deductions we would be facing a negative cash outflow when the house arrived. Yikes!

Desperate to avoid this, I formed a plan to rein in our mortgage by increasing our down payment. Our goal was to bring the monthly mortgage payable to under our monthly CPF-OA contribution.

During this time I read many commentaries online that advocated either paying down as much as possible or paying down as little as possible and investing the rest. There are well written pros and cons to both, but like any advice, you have to tailor it to your own situation and personal circumstances.

For me the second strategy made more sense, as a fully paid off home has no cash flow, and there are many ways to save on interest in the future including partial payments. Besides, the interest savings on a BTO is not as significant, especially if you intend to flip it at some point. Thus, I had to strike a balance between paying down and reducing the mortgage and keeping enough dry powder to constantly invest.

To do so, my rule was to treat only the asset price of the house as the investment component. Thus we paid for the option fee, stamp duty and optional components in cash. I remember at the time this meant a having to make difficult decisions for fund allocation.

Looking at our finances right now, our combined CPF-OA balances equate to about 13% of listed value of the home. Which should mean that we are on track to paying off close to 25% of the value of the house when it arrives (including 5% already paid). Based on this figure, it would also bring our monthly mortgage to below our CPF-OA contribution with some change to spare.

Along the way, it really did help that we experienced wage growth which allowed us to grow the CPF-OA contribution, but this does not detract from the fact that we had a plan and stuck to it.

While I always advocate for couples to buy homes within what they can afford, I think it’s also important to have game plan on how to afford something and looking at the value of the item rather than the absolute price.

Understanding the value of what you are buying is also very important. I know of couples who bought relatively cheaper flats but are dragging their feet moving in as the location is not as prime and with fewer amenities in the vicinity.

What are the most common money management problems?

I recently had 2 conversations about money, one was with a friend with 4 kids and one millennial who just started on his financial journey. Despite them being so different in so many ways, I realized that they both have very common perceptions when it comes to managing money.

Here are my thoughts on some of the common money management problems of beginner

1. No idea what is considered safe/reasonable return

Just because the bank savings interest rate is a pittance does not mean that your investment returns have to be so also. While I don’t advocate yield chasing, being too risk adverse is not helpful too.

I advocate having goals in mind and use time and effort to understand the risk and rewards of the various investment opportunities presented in life. Not everyone will be able to land a million dollar opportunity in life, but having educated yourself you will be able to identify the most risk adjusted investments to choose in any stage of life.

2. Saving and investments out of sync with life goals

Investing <$400 a month in an index fund might be great start. But in the grander scheme of things $5,000/year is really a drop in the financial whirlpool of expenses, especially so when its inflation adjusted. In order, to have any kind of meaningful investment income you need to recognize that investment is really like an iceberg, the passive income portion is really backed up by a large portfolio of invested funds.

This means that investment and insurance amounts need to vary with needs and life goals. They are not set in stone and left to be forgotten. One needs to be engaged in your wealth building journey.

3. Underestimating future expenses

Younger Singaporeans underestimate expenses inflation later in life. While most of the spending in your 20’s is discretionary and can be cut back on, spending in your later years are likely not to be, add in the aged parents and young children and you get a combustible stickybomb most can’t shake off.

The problem of the sandwich class is real in Singapore and needs to be taken more seriously. The friend with 4 kids is considering realizing the gains from his BTO home to buy a larger but older condo, I’m not sure how doing so will help him in his wealth building journey, but he says that when you have a family “you manage”. Well, I really hope he manages to en-bloc in the future, cuz that might be his retirement sum.

Sembcorp Marine Corruption Probe

The recent market rally has been a most unusual one. Overall, most investors are still tepid about the general economy. This means while many are likely to have sat out of the rally, those who took part are looking for indications of a change in sentiments to reduce their holdings.

I picked up Sembcorp marine during the recent market correction as its price fell by 10% after news that its office in Brazil was raided by anti-corruption officers. I found it strange that such corruption considered rampant in Brazil could have implicated Keppel Corp but left Sembcorp unscathed.

While nothing has been proven at this juncture. Semb Marine will likely be facing a fine probably on the same scale as that of Keppel Corp, given that the contracts awarded to the yards by Sete Brasil are about the same in number (article). While it is still early days yet for any conclusion to be reached on this.

However, there are always two sides to a coin and the present Semb Marine has had more breathing space given its recent deleveraging exercise, provided by parent Semb Industries and Temasek. I also like the fact that the soon to be in force IMO Sulphur 2020 cap has meant more Sulphur scrubber installations and the progressive change to D2 standard for BWMS would likely increase the amount of business with semb Marine for this year, as they are more exposed to this sector than Keppel. Though in most likelihood will only cushion any impact from the fine should it be implicated.

Similar to First Reit, this is a turnaround play for me, as the heavy volume selling is likely to taper off soon while I wait for the market to recognize Semb Marine’s value. While more bad news may follow, I believe that the income reports for the coming 2 quarters will vindicate my thesis.

In the long term, while they have their own niches. On their own Sembcorp and Keppel are still small players in a very large offshore market. That said, their technical know-how and execution ability are still considered top rate in this industry. With the ongoing global trend of mergers for shipbuilders it would not be difficult to see how synergies can be form through a merger, especially when some of their yards are located in close proximity with each other.

Turning back to the portfolio, the equities part of the portfolio crossed the 50k milestone this month. Including the bonds part of the portfolio and my warchest I believe we should be in good stead to capitalize on any opportunities offered by Mr. Market.

18Q4 Portfolio Updates

Just wanted to do a quick recap of my current portion my thoughts on the market for the next few months.

Initiated

No.	Counter	Mkt Price	Shares	Mkt Value
1	ESR-REIT	0.52	17666	9,186
2	SingTel	3.05	2000	6,100	Added
3	StarhillGbl Reit	0.71	7000	4,970	New
4	Straits Trading	2.06	2000	4,120
5	Wilmar Intl	3.32	1000	3,320
6	Mapletree NAC Tr	1.24	2600	3,224	New
7	Mapletree Ind Tr	2.01	1600	3,216	New
8	CapitaR China Tr	1.48	2067	3,059
9	Keppel Corp	6.01	500	3,005	New
10.	Raffles Medical	1.1	2060	2,266
Total			38,493	42,466

 

I sold off AIMS AMP CAP REIT when the sponsor bought the REIT manger and the price shot up. At a selling price of SGD 1.36, I broke even from my buy in price, though inclusive of dividends the return has been 11%.

I added several Reits during the last quarter’s bargain. On retrospect, the fed raising rates and backtracking in Jan was just what the market needed to get some perspective.

In Q4 2019, I added MNACT, MINT, Starhill and Keppel Corp.

MNACT had stated that rental reversions were double digit positive and I believe the location of Festival walk is strong. China’s tier 1 cities and Hong Kong are both ridiculously packed and malls generally do well. I wished I was gutsier to add more CRCT, but I thought I’d hedge my bets with MNACT.

MINT’s management has a very deep moat. I don’t think there are many industrial reit management teams that can do a full spectrum of AEI’s from warehouses to datacenters. I feel that this ability sets them apart from other small time industrial reits. The Taiseng acquisition is poised to become a gamechanger, especially with the nearby new town of Bidadari.

I was waiting for either Starhill or CDL-HT to fall further before acting, but it looks like prices have raced ahead for both. At a +6% yield and a lower PE and P/B ratio Starhill was the more conservative choice. I think most investors are feeling bullish on the upcoming Toshin rental. But I have not overlooked the positive announcements in Australia. This reit does not have a very strong moat in my opinion and I hope the price will appreciate enough before the Starhill gallery AEI.

Keppel Corp is an interesting story as the price tanked almost immediately after I bought on fears of low oil prices. I don’t think that Keppel like other pure property counter plays deserves to trade below NAV. I feel that LNG projects are the way forward for Keppel and I am optimistic that it would be able to snag a few deals in the next cycle. I think a consolidation of the Sembcorp and Keppel O&M would be a bonus, but it was not a consideration.

In the next 2 months, I am looking to add more Singtel and Raffles Medical, though I am keeping an eye out for further pricing erosion and China revenues respectively. I am also looking to divest some ESR as the balance sheet looks quite stretched. Let’s see if the market provides opportunities.

Lastly, let me end of with a reminder from Warren Buffet, try not to to listen to macroeconomic calls either when making individual stock decisions: “You cannot get rich with a weather vane.”

Bulls, Bears and SWANS

(SWAN stands for Sleep Well At Night, but it really alludes to a company that has strong underlying competitive advantages and financial metrics).

I realized that in 2018, I was too concerned with how the stock market was doing on a week-week, month-month basis. It didn’t help that I have a contrarian investing style and like to buy oversold stocks on trending bad news. Well 2018 was full of bad news.

It thus came as a good reminder when I read this article by Brad Thomas at Seeking Alpha about his SWAN stocks. He mentioned that in 2018, his selection of SWANS “beat ALL Seeking Alpha’s model portfolios as well as the DAVOS Index (+9.3% YTD).” It was no surprise that for last year the FTSE S-Reit index beat the STI too.

Brad also goes on to talk about how dividends forces management to be accountable to unit holders, you can read that here. While I never buy anything that doesn’t pay a dividend i realized that dividend investing forces me to look at the dividends received as part of my return. This also makes me more zen in the face of market volatility.

In 2018 other than hitting my savings and allocation target, It has otherwise been a flat year for me, especially in the areas of work and relationships. Thus, my hope is that in 2019 I would become positive which means worrying less and concentrating to achieve more at work.

One of the things that I wanted to do this year was to re balance my portfolio to include more SWAN stocks and REITs. Having said that I also know that it is possible to buy a SWAN at the wrong price!

For now my plan is just to continue to save and wait for the correction. Same as last year I am still looking to add more CRCT and MNACT at the right price. With Trump still at the helm, this looks to be a real possibility that chances might come again soon.

Final Year Thoughts

This is the second year into my financial investing journey and I think this blog has taken more of a financial planning tone rather than a purist investment blog. I also think that my blog can take on a more structured format, though I will be thinking about how to improve on this

Investment Income for 2018

• Portfolio dividend income: SGD 1,793
• Fixed income coupon: SGD 87

Savings Allocation

• Equities: SGD 14,578
• Bonds: SGD 5,500
• CPF-MA: SGD 7,000
• House: SGD 15,000

For this year, I decided to park a proportion of money into fixed income as a form of diversification. I subscribed to some Astrea IV bonds as well as SSB totaling about 5.5k with a blended yield of 3.86%. My intention for the SSB portfolio is to save towards a wedding and renovation related payments. My target for this fund is 30K come end 2020. Hopefully the government will come up with more similar volatility free instruments in 2019. 🙂

For fixed assets, I repaid part of the loan from the CPF board for the house. I still have another half remaining to be cleared. I am dragging my feet on this, as contributions to this fund is a diversion from the equity portfolio. At the same time, I have blogged about how we bought an expensive house and how I intend to reduce the mortgage to 80% of OA contribution. I guess this will be an ongoing work in progress.

Equities have had a rather lukewarm year. Other than Comfortdelgro which returned 30%, the other stocks were all caught in the minor bear that happened towards the end of the year. I took the opportunity during the dip to divest the smaller positions and focused on large cap contrarian plays such as Wilmar, Singtel and Keppel. I had intended to add more REITs during the dip, however none of the orders were fulfilled.

On the CPF side, For the first time I contributed 7k to CPF-MA instead of CPF-SA to reduce taxes payable. I decided to contribute to the MA instead as it has the same benefits of the SA (ie 4-5% interest and tax deductible) while having the added benefit of being used for medical emergencies.

I don’t think more could be done for this year, though I wished I could have increased my passive income streams. I had set out to increase my active income this year but 3 interviews later I am still at the same job. Sighs.

In the next year, I hope that I can increase my network and perhaps make a move in the right direction.

CPF Overview 2018

As someone who likes the idea of having multiple streams of income, I view the CPF system as the “bond” component of my portfolio with a 30-year maturity date.

The CPF system is my insurance should I choose to venture into business or early retirement. Knowing that the CPF funds are protected from creditors and continue to compound till the withdrawal age of 55 gives me priceless peace of mind.

For 2018, I am pleased to say that the CPF board has paid me a total of SGD 2,710 in interest payments across all 3 accounts. If not for the deductions made for housing, the curve would have been steeper.

CPF interest received since starting work.