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Why have bonds in our portfolio and which ones?

Tuesday, October 27, 2015

I had a lengthy conversation with a friend on bonds. He bought into Aspial's 5 year bond that carries a coupon of 5.25% a few months ago at the recommendation of his father. 

When I asked him why did his father recommend the bond to him, he said his father felt good about it.

It boggles my mind, really, to be able to plonk down $XXX,XXX based on feeling good.

Actually, many people in this (still) rather low interest rate environment are taking more risks to get higher returns on their money. 

There is nothing wrong with this but they seem to be taking risks they don't understand or they might understand but have underestimated.

Well, it could be a case of ignorance is bliss if nothing goes wrong and they get their regular interest payments in the next few years and also their capital at maturity.

Why AK so kaypoh?

Bad AK! Bad AK!

Recently, I got this message:

Hi Ak, disturb u again
Saw on your recent post, you have purchase the perrenial bond.

I am first time in bond, what is the risk of bond?

Does the bond rate fixed?

If the company does not go bankrupt, mean I can get promised rate end of years?

Alamak. I think that it is time for another blog post.

I hear people saying that they put some of their money in bonds for diversification. 

They don't want all their money in equities. This is actually quite prudent.

However, for many, the prudence ends there because they think that as long as they have a good percentage of their portfolio in bonds, they have done a good job of diversification.

For example, my friend who plonked down $XXX,XXX in Aspial's recent bond offering told me he has maxed out his allocation to bonds in his portfolio with that one bond! 

Has my friend done a good job of diversification for his portfolio?

When we talk about diversification, it is to reduce the volatility of a portfolio. 

In the long run, all assets in our portfolio should ideally produce positive returns but do not move up and down together.

The idea about having bonds in our portfolio is that prices of bonds and equities move in opposite directions. 

However, this is only true if we are talking about certain types of bonds.

A sovereign bond that is issued by AAA rated country like Singapore or a high quality investment grade corporate bond add stability to an investment portfolio. 

They are less volatile in price.

When we park our money in bonds which are of questionable quality, we are not reducing risk nor volatility in our portfolio.

Do you wonder why is this so?

Lately, we have been talking about interest rate risk. 

We have been talking about how rising interest rates would put a downward pressure on bond prices. This is especially the case for long term bonds and perpetual bonds.

So, if we value peace of mind, avoid long term bonds and perpetual bonds. 

Also, avoid bond funds as they have no maturity dates and are like perpetual bonds.

Now, it stands to reason that when the economy does badly and the stock market plunges, investors seek safe harbours for their money. 

High quality, investment grade bonds are one of the things they would go for.

In a bear market, stocks of weaker companies or businesses of the more speculative kind get sold down more aggressively and, together with them, the bonds which they issued. 

Mr. Market is not worried about interest rate risk in such an instance. 

Mr. Market is worried about the risk of default.

Where is the supposed stability that comes from diversifying into bonds then? 

Bought the wrong bonds. So, no stability lah.

So, if you have bought some bonds and because of that, you think you have added stability to your portfolio, think again.

What are the bonds you have in your portfolio?

Related post:
1. Singapore Savings Bond.
2. Lost money in a bond fund.
3. Perennial's 3 year bond.
4. CPF as a AAA rated sovereign bond.
5. Perpetual bonds.


Betta man said...

What's your take on the latest Oxley holdings 5% p.a bond ?

AK71 said...

Hi betta man,

Like Aspial's bond, Oxley's bond is high risk.

Oxley's net debt to equity is about 3x. I believe that Aspial's number is similar or higher. Highly indebted, these companies have very little room for error.

Having said this, Oxley's interest cover ratio is healthier than Aspial's.

High risk but possibly lower when compared to Aspial.

The fact that the maturity period is 4 years instead of 5 makes it slightly more attractive.


- Minimum of S$2,000 per application under the Public Offer, and S$100,000 per application under the Placement
- Offer opens from 9.00 a.m. on October 27, 2015, to 12 noon on November 3, 2015


Singapore Man of Leisure said...


Maybe I'll put some fear into the hearts of those who believe all durians are "bao jiak"!

2009 not so long ago. Bond investor wannebes may want to goggle whether Celestial Nutrifoods Ltd and Sino-Environment Technology Group Ltd bondholders got their money back ;)

Want fresh, want cheap, want big big papayas - wait long long will have!

This reminds me of Shipping Trusts deliberately offering yields 2-3% higher than REITs when they were IPOed. I guess some shipping trust yield hogs found out how "expensive" these 2-3% of extra yield cost them in the end...

Unknown said...

Hi, AK

You mentioned in your post to avoid bond funds completely. But would there be an exception in this case for A35, the ABF Singapore bond ETF ?

As it seems like a lot of well known financial bloggers like it too.

Sillyinvestor said...

Hi AK,

I also kaypo a bit ok. I think we need to understand counterparty risk. I have also heard ETF cannot bankrupt ..
It's true, but the issuer can go kaput and bring the ETF together. At least that is the theoretical

Understand the following ratio .

Beside debt to equity ratio
Current ratio should be above 1.5
FCF should be positive for more years than negative

I am not sure about Aspial, but I know that have a retail business too, but oxley is pure developer and I read its properties are pledge to get loans. If things go wrong, I think things will unravel rather quickly

starlight said...

With the hype of retail bonds, I wonder if we are heading to a minibond saga...

AK71 said...


Thanks for jogging our memories.

Now, some of us might have trouble sleeping tonight. -.-"

AK71 said...

Hi Janson,

The ABF Singapore Bond ETF you mentioned tracks Singapore government bonds and bonds issued by statutory boards, for example. While there is little, if any, risk of default. Interest rate risk would still apply here.

So, when interest rates rise which they will quite soon, long term government bond prices will fall because Mr. Market will demand a higher yield for these. The ETF's unit price, on average, will fall too.

Unless ABF Singapore Bond ETF is tracking only short term Singapore government bonds, realistically, a decline in price should be expected. With a return of about 3% per annum, I doubt that the ETF is tracking exclusively short term bonds.

AK71 said...

Hi Mike,

Both Aspial and Oxley are highly leveraged entities. I gave Aspial's bond a miss and I will probably give Oxley's bond a miss too.

I could be wrong but I rather not lend money to someone who owes a lot more money to other people. Cash flow could improve in future? Maybe but I am not sure.

I did get some of FCL and Perennials' bonds though. Net debt to equity for these entities was less than 1.0x. The fact that I got all that I applied for in the case of FCL's bond and had 50% of my application money refunded for Perennial's bond shows how a shorter term bond is more in demand by Mr. Market. Makes sense. :)

AK71 said...

Hi Starlight,

We might also want to remind ourselves that the mini bonds tragedy was in no way mini. -.-"

Siew Mun said...

Party over. OCBC will be redeeming preferential shares OCBC 4.2% by 2 Dec. I had OCBC 4.2% for 6 years using my CPF OA for dummy like me. I need to hunt again :-(

AK71 said...

Hi Siew Mun,

That is a good use of your CPF-OA money. ;)

I had DBS NCPS 6% for 10 years in the past too. Rock solid. :)

AK71 said...

"Between 2010 and today, companies across the region, whether it's Malaysia, Indonesia, or even Singapore, have taken the opportunity to raise so much debt, because it was so cheap. When things slow down, as a result, they have to service bigger debt amounts."

Many Sing dollar corporate bond issues - like Trikomsel's debt - are not rated by major ratings agencies. As a result, analysts said investors will need to do their own homework before. One will have to carefully study the business model, as well as how the debt is structured.

However, there are risks involved when investing in corporate bonds. Earlier this week, Indonesian phone retailer PT Trikomsel Oke warned that it will likely default on its S$215 million bonds - a first for the Singapore bond market in six years.


AK71 said...

ASPIAL Corp's second retail bond offering of four-year 5.30 per cent bonds due 2020 to institutional and other investors has been oversubscribed within the first day of its launch.

In an announcement to the Singapore Exchange, the conglomerate said that its placement portion to private banking, institutional and other investors received valid applications of over S$25 million in aggregate principal amount of bonds and accordingly, has closed at a size of S$25 million.

Applications for up to S$50 million in aggregate principal amount of bonds under the public offer remain open until 12 noon on March 30.

Although the placement portion has closed, the company said its wholly-owned Aspial Treasury, the issuer of the bonds, may have the absolute discretion to re-open the placement.

The bonds are expected to be issued on April 1 and are expected to commence trading on the main board on April 4.


AK71 said...

Example of a junk bond (with a 6.5% coupon) in Singapore:

Swiber Holdings is unable to pay the upcoming coupon payment for the series 001 Trust Certificates due on Aug 2, 2016, its provisional liquidator Cameron Duncan, said on Monday (Aug 1).

The S$150 million 6.50 per cent certificates due 2018 were issued by subsidiary Swiber Capital Pte Ltd.

(PUBLISHED AUG 1, 2016, 8:36 AM SGT)

AK71 said...

When Elaine Tham signed an “accredited investor” form with her bank in Singapore two years ago, she took a fateful step toward losing all the money she had set aside for her children’s education.

Based on her financial profile and investment priorities -- her need for S$150,000 ($110,000) to pay university fees -- a local branch of HSBC Holdings Plc had initially categorized her as a “medium risk” investor. But because the value of her property and car entitled her to “accredited” status, a category reserved for wealthy investors, Tham says she was persuaded to take a riskier path. She agreed to invest S$250,000 in the bonds of a small Singapore energy-services company, Swiber Holdings Ltd., which said in August that it won’t be able to repay its bondholders.

Tham is one of many Singaporeans who lost money by investing in Swiber, which sold an unusually high proportion of its bonds to the wealthy clients of banks in Singapore.

“It’s time for Singapore’s regulators to rethink how they define the accredited-investor regime,” said Christopher Chen, an assistant law professor at Singapore Management University.

“Here, if someone happens to own a landed property, likely that person will become an accredited investor. If investors are really rich, it’s not a problem. But some people are semi-rich, or look rich on paper.”


Kevin said...

Hi AK,

After what you posted, I am quite perturbed to know that HSBC puts the value of her car for valuation when handing out "accredited" status. It makes me wonder what car she owns.

AK71 said...

Hi Kevin,

It makes me wonder why she asked a barber if she needs a haircut...

Nobody cares more about our money than we do.

AK71 said...

Mr Keith Kueh was expecting Pacific Andes Resources Development Ltd to pay back the company’s bonds last year so he could finance his son’s college bill and his own retirement. Now it’s 18 months after the Singapore-listed fishing company didn’t honour some obligations and he hasn’t gotten his money yet.

(Singapore) suffered an unprecedented S$1.35 billion of local note defaults since November 2015.

Falcon Energy Group Ltd. said earlier this month it intends to seek a three-year extension of the maturity date of its S$50 million notes.


AK71 said...

PK Jan says...
Is this bond a safe place to park some funds for passive income har?

Astrea IV private equity bonds' retail tranche interest rate set at 4.35% pa – Business Times

THE Azalea Group, a Temasek unit specialising in investments in private equity, has launched its first PE-backed bond for retail investors, with a smaller-than-expected retail tranche of S$121 million.

Dominic N S Teo says...
What would you think of the Astrea IV PE Bonds @ 4.35%p.a.?

AK says...
I dunno what they are investing in. If in doubt, I stay out.

Siew Mun Kwan says...
Is a Fund of Funds... in bonds. 2 layers of intermediaries

AK says...
Opaque. I scared of the dark. :p

AK71 said...

Reader says...
There is always a place in portfolios for bonds.
However, like all other investments, we need to be educated on the types of bonds.
There are government bonds (of different grades), corporate bonds, bonds of different durations, junk bonds (high yield bonds) and inflation indexed bonds.
They all serve some purpose in a well diversified portfolio ( personally, I would exclude junk bonds from this).

AK says...
Unfortunately, many bond funds are in junk bonds in order to offer higher returns (and to attract unquestioning investors). :p

AK71 said...

Reader says...
Yes, too many people get duped by the apparent high yields with realizing the risk associated with them.

IMHO, junk bond yields are not worth the risk at the moment not to mention that they correlate highly with equities especially during market crashes.

This makes them unsuitable as an instrument of diversification in most portfolios. 😅

AK71 said...

Shi Tah Wang says...
My personal suggestion: investment grade, short duration government bonds ( poor yields but good as a piggy bank for war chest and it keeps itchy fingers away) , emerging government bonds ( correlated more with commodities for people who wish to diversify), inflation index bonds ( as a hedge against inflation and also they react to different conditions from other traditional bonds).
I would avoid junk bonds by a mile.
Long duration government bonds, a small bite in the event that US and Europe economy follow the footsteps of the Japanese economy with a 20 year deflationary spiral.

AK says...
I like CPF. :p

Shi Tah Wang says...
Unfortunately cpf has got limits 😢

AK says...
I not so rich. CPF enough liao.

AK71 said...

Shi Tah Wang says...
haha, you are doing so well :)
My advice is not meant for you, rather more for readers of your blog who may be interested in buying bonds!

AK says...
Must be for readers who have lots of money sloshing around. haha.
AK didn't give advice. AK safe. :p

AK71 said...

Bruce says...
(Your CPF savings) a substantial sum in any measurement for a singaporean.

I do however have a question, i know you are more laid back now and prefer to have a piece of mind, nonetheless, it is still quite a number of years before you reach 55 or 65 for CPF withdraw, given your investment track record, why did you still top up CPF account when even if it gives you 2.5~4% return, why don't you do it yourself when the time horizon is still long?


AK says...
I treat my CPF savings as the risk free, volatility free investment bond component of my portfolio.

As I really do not have any exposure to this class of bond other than the CPF, I make voluntary contributions yearly in order to at least maintain its weight in my investment portfolio even as I grow older.

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