Matthew Seah answers questions on SPDR STI ETF.

Dear AK,

I am SH, one of your many blog readers. I am currently 21 years old and i am planning to make my first investment through a STI ETF. (Still deciding between spdr and nikko). However i have quite a number of questions regarding SPDR STI ETF; especially after reading its annual report, which i hope you can help to clarify.

These are the questions:

Unitholders’ contributions/(withdrawals)

Creation of units:

2015: 31,366,855

2014: 59,145,817

Cancellation of units:

2015: (149,927,298)

2014: (6,664,213)

Change in net assets attributable to unitholders resulting from net creation and cancellation of units:

2015: (118,560,443)

2014: 52,481,604

Distributions NOTE4

2015: (12,106,500)

2014: (10,726,000)

Total (decrease)/increase in net assets attributable to unitholders:

2015: (109,105,696)
2014: 69,068,372

QN: I found the above information in the annual report but I couldn’t understand what it means. Can you explain?

Matthew Seah: "Each unit of STI ETF is a share of STI ETF. Units are created or cancelled due to the injection of fresh funds or the withdrawal of money from the fund respectively."

Qn: 1 What is net asset attributable to unit holder? Does it just mean net asset value?

Matthew Seah: "Net asset attributable to unit holder is the net asset value, after fees are deducted for selling all the stocks and derivatives (if any) that the fund owns to convert everything into cash."

2 What is collective investment scheme?

Matthew Seah: "A collective investment scheme is a scheme which pools moneys from many people for the sole purpose of investing the pooled funds.

"Mutual funds, unit trusts, endowments and ETFs are examples of collective investment scheme."

3 Quoted derivatives in the form of nil paid rights from Jardine C&C on 15/07/15. What does this mean? I heard that spdr etf uses derivatives to try and minimise tracking error. Is this a significant proportion? What are the risk of it?

Matthew Seah: "Jardine C&C has made a rights offer of 1 for 9 shares.

Click to enlarge.

"STI ETF owns 112,541 shares of Jardine C&C.

"That equates to 12,504 rights that you see on the annual report."

4 If they pay dividends from cash, it seems that they are paying out more than what they have. They only have S$5M+ of cash but paid out 12M+ for 2015?!

Matthew Seah: "It is wrong to say that they paid $12M when they had $5M in cash. What you see as cash is only a snap shot “at 30 June 2015”. What has been paid out is cash they had previously from dividends collected over the six months prior, less management fees.

"Likewise, suppose your bank account has $5,000. It would be erroneous to say the $12,000 you have already spent is more than what you originally had, which was $17,000."

5 Does portfolio turnover ratio have different meaning if the calculation is based on purchases instead of sales? Is lower ratio better?

Matthew Seah: "For a turnover to happen, $1 in stock A have to be sold to purchase $1 in stock B. The portfolio turnover ratio will be the same regardless of purchase or sales.

"A higher purchase happens when there is a net investment inflow, i.e. more investors buying STI ETF units. Alternatively, a higher sales happens when there is a net investment outflow when investors liquidate their holdings. However, these higher purchases/sales numbers are not turnover as no portfolio rebalancing occurs.

"A lower ratio is better."

6 There is a significant increase in portfolio turnover ratio from 31Dec 2014-2015. It jumped from 0.94% to 9.77%! Do you have any idea why it is so? Is it due to the replacement of 3 of sti constituents in 2015? It is considered a one-off kind of thing right?

Matthew Seah: "It is indeed caused primarily by the replacements of STI constituents. It would be one-off when FTSE does not change the constituents on a regular basis. Generally, investors would consider such rebalancing to be one-off."

7 There is a significant increase in payables in 31 DEC 2015 compared to 30 JUN 2015. Is it due to the losses incurred due to the changing of constituents in STI?

Matthew Seah: "Payables in the ETF comes in 2 forms:

"‘Accruals for expenses’ and ‘Amount due to the Manager’. It just meant the fund owes money to to the Manager and third parties. These have nothing to do with losses incurred."

8 Is there a chance/under what circumstances the sti etf will close down?

Matthew Seah: "STI ETF is unlikely to close down."

9. If you are the one considering to buy the sti etf, other than the tracking error, expense ratio, portfolio turnover ratio, p/e, what else would you look at when analysing this etf? Would you read into the past years’ annual report?

Matthew Seah: "Nothing else, really. You should read past annual reports to compare all the parameters you have mentioned to ensure that the Manager has kept tracking error, expense ratio and turnover ratios low, or lower (better) over the years."

10. Where can I get past few years of annual report? I can only find annual report for 2015 and the semi-annual report for 31DEC 2015 on the official website
Matthew Seah:"You can contact them at http://www.spdrs.com.sg/contact/index.html"

Read another blog post on ETFs by Matthew Seah: HERE.

He did CPF top ups but is denied lump sum payment.

Reader:

Hi AK, I'm one of your readers.

With respect to the Retirement Sum Top Up Scheme, I checked with CPF and they mentioned that all funds made under this scheme cannot be withdrawn in lump sum. That is to say that all funds under this scheme and the associated interest earned will be ring-fenced into the RA upon reaching 55.

Neither can such funds be used to meet the FRS /BRS requirement.

If a person wants to withdraw lump sum upon reaching 55, he would need to have at least the BRS sum solely from his Mandatory contributions, then the amount over this sum can be considered for withdrawal as lump sum. (Assuming property pledge)


AK:

That is not what I understand.

When we discussed this with Christopher Tan from Providend who is on the CPF Advisory Committee, we were told that any amount above the FRS is available for withdrawal (except for money from MS Top Ups and the interest earned).


Reader:

Right, so the point here is that the funds from the MS TopUps are not allowed to be considered as part of the BRS or FRS.

My dad wanted to do a withdrawal but they told him that he needed to clear the BRS threshold and funds under the MS top ups are not considered in this regard.


AK:

It doesn't make sense because we are not allowed to have more than the ERS in our CPF-RA. If the MS Top Ups to SA is ring fenced for the CPF-RA, we could end up having much more in our CPF-RA.

This is especially if the person does this regularly and hits the FRS early on in life and continues to contribute to his CPF whether mandatory or voluntary.

If a person does MS Top Up to the max of $161K by 30 years old, for example, he would have $440K by 55 years old (at 4% p.a.) without any further mandatory or voluntary contribution.

If he must set aside a FRS from mandatory contributions alone by age 55, plus this $440K, it would be far higher than the prevailing ERS allowed at that time, I am willing to bet.

They allow MS Top Up to the prevailing MS (FRS) and nothing more. This stays in the CPF-RA. This makes sense.

But in addition to this, FRS must be from mandatory contributions only? That does not make sense.


Reader:

Thanks. But based on the letter which I received from CPF, it seems that they don't allow such withdrawals. My dad made significant topups under MS topup scheme but because his mandatory contributions are not much, they do not allow him any withdrawals, on the basis that the BRS needs to be from mandatory contributions.

He has more than $175k in his RA now but most of it is from MS Topups Do u think it makes a difference if the person is above 55 when they started doing their MS topups ?


AK:

When did he start doing the MS Top Ups?


Reader:

He started topups after age 55.


AK:

Mystery solved :)

The $40+K would have gone into his CPF-RA when he turned 55.

Then, his MS Top Ups after age 55 would go into the CPF-RA too.

It is all locked up for CPF Life.

If he had $175K when he turned 55, then, he would have been eligible for a lump sum withdrawal and the MS goes into his CPF-RA.


Reader:

Ok. Then that probably explains it.
In any case, I'll write in to CPF to confirm this point.

Source: CPF Allocation Rates

What I did to monetise my free time and why?

Reader says...

I have been an avid reader of your blog and have also been to your meetup session last week.

Thank you for what you have doing and helping people in providing financial literacy.

I read that you used to work 3 jobs when you were starting out, for 7 days a week.

May i know what jobs were you doing at that time?

I have been working in a mid sized firm for a few years but my income is still not where i would like it to be and would like to take more jobs to supplement my income.

Spending wise i am disciplined but there's only so much i can save with a small income base.

Thank you.

Cheers,

-------------------------------------------------------

AK says...

Welcome to my blog. :)

I had a full time job but my evenings and weekends were free.

So, I found jobs that occupied me on some evenings and on weekends.

I was teaching students taking enrichment classes at night and I was also a private tutor on weekends.

These paid more on a per hour basis than my full time job. ;)





If we have free time, we can either think of monetising it or using it for enjoyment.

When we choose to monetise it, not only do we make more money but we also have less time to spend money.

It brings making money and saving money to another level. ;p

Gambatte! :)






----------------------
When we monetise our free time, to be quite pragmatic, it should be doing something that pays more on a per hour basis. 

Of course, this is not a hard and fast rule.

For some, they might do something they enjoy and yet be paid to do it in their free time even if it doesn't pay well. 






Being paid to do something we enjoy doing doesn't sound like a bad thing, does it?

Want to achieve financial freedom sooner than later? 

Monetising our free time will definitely help.

Then, what is the next step?






That is another topic and here is a hint as to why it is important:

The best insurance in life.












Related posts:
1. A young father of two says money not enough.
2. How my student went from zero to hero?
3. Is it wrong to be idealistic and live the good life?

An exchange of emails with AK on REITs.

Hi Ak,

I've been a religious reader of your blog since 2015 and after doing some reading up to get myself more knowledge of investing for income, I'm ready to put some money to work.

As this is my first time, I'm limiting my self to $10,000 and split 50/50 between 2 REITs (AA REIT and MCT) for dividend income, and as I learn more I can invest more. I would welcome your thoughts on this. Appreciate it.


Regards,
E



Hi E,

I am not sure what to say but splitting your funds between 2 REITs avoids putting all your eggs in one basket. Seems like a prudent move. :)

Best wishes,
AK

Hi AK,

Thanks for taking time to reply. I'm sure you get a lot of emails like this.

One time I'm unclear is that how do you account for the increase/decrease in stock pricing over time to calculate your yield on your investment? Currently all yields are based on current market price.


Regards,
E




Hi E,

It depends on what we are trying to do.

If we are looking at REITs as fixed income, then, yield based on cost (i.e. like a FD) is OK.

If we look at REITs like real estate investments, then, we want to look at yield based on market prices. Then, we know when we might want to sell some.

Best wishes,
AK

Hi AK,

So deciding when to enter the market will determine your costs. I've read on the subject of on buying and sell ex-dividend dates. So correct me if I'm wrong, if you trust in the business, the best time to enter would be right after ex-dividend date as normally stock price will drop by the same amount as the dividend?

Thank you for your insight.

Regards,
E




Hi E,

I don't do that.
If an investment is a good long term income generator and if I am holding for the long term for income, as long as I pay what I feel is a fair price or better than fair price, it is good enough for me.

Best wishes,
AK


Related post:
A chit chat session with AK on REITs.

A wealth building strategy that has worked for AK.

Investors must have the temperament to be philosophical about market fluctuations.




This blog post is in reply to a reader's long and thoughtful comment on AK's wealth building strategy which a screen capture could only snap partially:

Read the full comment: here.

My reply to the reader as follows:

Hi Millionfaith,

Thank you for the very insightful comment. :)

Here are my thoughts:


1. I agree with you, generally. 

However, if we invest in a business for income, if it has good income generating ability and if we entered at a good enough price, it could be a case of simply sitting back and not doing very much after that. 

An example in my case could be ST Engineering which I started buying at $1.55 a share donkey years ago. 

There are probably a few other examples in my portfolio.





2. For most of us, it is about working hard and smart while being financially prudent to accumulate wealth. 

Then, the next step is investing in fairly good income producing assets to grow our wealth, taking care not to do something foolish (too often). 

If we did not overpay, there might also be a chance of capital gains which should give us a leg up. 

I am only human and I was very greedy during the GFC and my war chest was emptied. 

Being pragmatic has helped me on my journey.





3. I always say that I have been mostly lucky and I truly believe this. 

I have been able to capitalise on opportunities to buy at lower prices offered by Mr. Market when he felt depressed. 

GFC aside, I deployed almost $100K into the stock market last August. 

More recently in February this year, I bought more DBS shares at $13+ a piece. 

These were times when Mr. Market felt depressed.




Was there any way I could tell when Mr. Market would feel that way? Nope.

I could not predict but I was prepared.


The journey towards financial freedom needs preparation. 

It is not just about gaining knowledge in FA and TA. 

It is also about having the right temperament.






Of course, temperament is not the easiest thing to acquire, unlike knowledge of FA and TA. 

This is why self knowledge is so important.


Know ourselves and know that there are many ways to build wealth and find the way that is best for us. 

What has worked for me might or might not work for another person.






Related posts:
1. The mystical art of wealth accumulation.
2. Financial prudence at any age.
3. The "secret" to AK's success as an investor.
4. Journey to financial freedom needs preparation.
5. To be richer, be comfortable with being invested.

AK anyhow picks 5 stocks for income investors.

UPDATE (January 2017):
"...with CRT no longer having an external trustee-manager, we believe this may remove a hurdle to a potential takeover by a J-REIT as speculated by some market participants due to CRT’s persistent high yield and discount to its NAV. " DBS Research.
Is Croesus Retail Trust an asset play that pays a good dividend while we wait? Sounds like Saizen REIT? Another Saizen REIT?
-----------------------------
Hi AK,
Thanks for your reply. :)
Rest assured I'm not trying to dig your portfolio value, rather, I have an planned/budgeted for a 5% yield on my portfolio returns and am not sure if this is something that is achievable or I might even be too conservative and should be aiming for something in the 7-8% range?


Hi,

7 to 8% yield is not unrealistic if we are invested in AIMS AMP Capital Industrial REIT, for example. ;)

Something higher? I-REIT and Croesus Retail Trust should do it.

If you don't like REITs and Biz Trusts, you can still get close to 4% yield (e.g. DBS) and 5% yield (e.g. SPH).

Best wishes,
AK

Note: 
AK is just throwing some ideas in the air. If they fall and hit your head, don't scold me. DYODD.

Related post:
1. AIMS AMP Capital Industrial REIT.
2. 1H 2016 income from S-REITs.
3. 1H 2016 income from non-REITs.

A lazy and fool proof way to investing for income?

Reader says...

I attended your AK with friends on Friday (15 July) and came away a bit disappointed. 

Not because you did badly (in fact you were the most impressive of the 3 presenters), just that I went into the session with certain expectations of what I could potentially learn from you which was met only partially. 

I didn't expect it to be a Q&A forum (this is my first AK session) and a session about specific stock/REIT question after question. I was hoping that there was a more in-depth discussion about underlying concepts or a mindset to approaching investments/income investing. Yes there were sprinkles of that but it's probably safe to say the session was dominated by the "what is your view of Centurion, or Sembawang, or Soilbuilt REITs....". You get the drift.

My goal is, like a lot of people, comfortable retirement and maintenance of my current lifestyle with a predictable stream of income. 

Objective - As I have a day job, and I suck at investing, I want to achieve my goal above by having a dummies methodology to invest in REITs or other income generating investments without a lot of decision-making (I'm lazier than you). I'm not looking at super returns, around 5-6% or so would do as long as they are predictable (more or less). 

Seriously, I am not suited to do investments and I have made a lot of investor mistakes (loss aversion, recency bias etc). What is in my favor is a fairly solid investment foundation and from there, I want to build on it by making a reasonable amount of return with reasonable predictablity, and without needing to make a lot of decisions.

That's why REIT investing appeals to me. My sense is the analysis for REITs is lesser than that of a stock such as DBS (which you mentioned quite extensively on Friday). I was hoping to narrow down the time and effort to do analysis on REITs.

I will continue to focus on your REITs related blog posts (especially those on the right hand side bar) but have already benefited from your advice on CPF (I'm going to top up my mum's CPF RA to earn a blended 4.45% returns and maintain some liquidity by drawing a monthly sum from her account over 5 years.) 

AK says...

Oops. Yes, "Evening with AK and friends" is Q&A. I assume that the audience are all my readers and that they know my approach to achieving financial freedom. "Evening with AK and friends" is for further interaction, face to (masked) face. ;p

If you are a lazy guy like me, yes, make good use of the CPF which you have started doing. That is as good as it gets when it comes to fixed income instruments. It is really a AAA rated sovereign bond with an annuity thrown in.

REITs? Well, it isn't as simple as you think. Investing in REITs looks simple now because conditions are relatively benign for REITs. Of course, for the income investor, REITs are still relevant instruments. 





Keep reading. Keep learning. 

I am still learning too. :)

You might want to consider regularly socking away some money in an ETF that tracks the STI. ASSI guest blogger, Matthew Seah, blogged about this strategy before and you will find his name in the left side bar of my blog. Click on his name and you will see all his blog posts.

Investing for income, focus on the business and its ability to generate income and willingness to share that income with you. Try not to be (too) emotionally affected by price volatility.

Start investing but keep a war chest ready to buy more if Mr. Market goes into a depression. Do this and, given enough time, you will do well enough. :)





Related posts:
1. Risk averse? STI ETF, REITs or stocks?

2. Create another stream of income with $500K?

3. Retire with an investment grade bond and annuity.

4. How younger members can get 6% interest from CPF?

5. Reader's insights into AK the investor.

3 questions on investment strategy.

Omg! You actually reply! Thanks a lot really appreciate it!

Ok sorry but i have more questions!

1.       I read an article on facebook (sponsored article), that says if you are 30 years old you need to saveabout $700 per month on a 6% yield in order to hit i think 1m by age 65.

a.       What I want to know is, does the funds like CPF or anything other things that provides that so call xx% calculated on an annual basis? What i mean is that is there a difference if i were to save and invest lets say $1000 every month into something or at the end of the year i just invest $12000? Will i get the same returns?

b.       Next part of the question is Would it be better to have regular buy ins of a stock or REITs compared to 1 lum sum? The question mark that i have is the effect of compounding effect which you mentioned many times on your blog especially with CPF.

                                                               i.      My thoughts are that if i have an emergency fund already saved up and stashed away, calculated my monthly expenses and know how much i can spare per month in excess to invest and already have a war chest in your terms. I should first put this war chest to use to obtain dividends in terms of cash flow now at the rate of perhaps 5,7,9% whicever. And then coupled with the monthly excess that I have build up another war chest to buy in regularly? There are definitely pros and cons such as if i use everything in the war chest and have no cash upfront, then I wouldnt be able to make use of events such as the GFC to stash on more cheap buys. But just would like to know your thoughts on my thinking process and any advice on that?

2.       If i have investments in unit trusts currently, should i sell them off so that I can go into stocks and reits?

a.       I basically went into them for their historical dividends based on the information given on fundsupermart. Of course for some there were capital gains and some losses. So no read up on company fundementals, no fa or ta and just went in.

3.       I am a self employed so there is no employer contribution for cpf. Shd i then make a monthly contribution or wait till before dec ends then make a lum sum? How is the interest calculate in that case?

a.       Since that i am self employed, which option shd i go for, using the sum of money i have to top up cpf? Or use that same sum of money to buy into reits or stocks?

Thanks alot!
W

Hi W,

1 a. There will be a difference. See this:
http://singaporeanstocksinvestor.blogspot.sg/2015/01/cpf-minimum-sum-top-up-and-interest.html

1 b. Investing a fixed sum regularly or dollar cost averaging is a tried and tested approach. You become less concerned with volatility. However, having a war chest ready to buy more when Mr. Market feels depressed is a good idea. Nibble most of the time and gobble sometimes.
See this:
http://singaporeanstocksinvestor.blogspot.sg/2013/08/are-you-ready-to-come-out-on-top-from_22.html

2. I won't tell you what to do but I have given unit trusts a wide berth for many years.

3. See answer to 1a above.
I treat the CPF as a long term investment grade bond which pays an attractive coupon. Whether we believe in having an instrument like this in our portfolio will shape our decision to top up our CPF accounts or to put everything in the equities market.

Best wishes,
AK

Related post:
Building a cornerstone in retirement funding.