What should I do after losing money in a bond fund? (UPDATED JULY 2018)

UPDATED JULY 2018

In an environment of rising interest rates, bonds especially longer term ones are unlikely to do well.

Bond funds without any maturity date are probably in the same boat or worse.

Hold for another 2 or 3 years and wait for market to bounce back?

That is a salesperson talking.

Never ask a barber if we need a haircut.

No one cares more about our money than we do.

Not interested in reading up and have no idea about investments?

Be interested and ask pertinent questions or you will be doing yourself a great disservice.





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


Earlier this year, when I delivered a talk one evening to a group of investors, one lady told me she just got into a bond fund then and after listening to me, she asked if she should get out of it.

I told her I couldn't make the decision for her.

It was her call.





I was reminded of that encounter because of this recent email from a reader:

Hi AK,

I have invested my SRS money with XXX fund beginning of this year, at that time I am not interested in reading up and have not much idea about investment.

I was told the fund has a loss of 3K out of my invested 10K now.

The agent told me I need to give him 2 -3 years and wait for the market to bounce back.

The fund consist of bonds and I just concern with the increase of interest rate may make the situation worst. 

What will you do if you were in my shoes ? 

I have ran the figure on excel, to make back 3K of lost based on 7K capital with 4% return a year , I need 11 years :(

Please start to talk to yourself already and I know your disclaimer by heart :p

Many thanks, J. 
 

My reply:

Hi J,

The XXX fund you got into earlier this year sounds like a bond fund.

It is one of those things that I said I wouldn't touch with a five feet pole in anticipation of rising interest rates.

Unlike equities which can recover because of improving fundamentals even when interest rates are higher, bond prices move in the opposite direction of interest rates.

Ask your agent what made him tell you that the bond fund will recover in another 2 or 3 years?

Is he merely speculating? We want to give him a chance to explain himself.

We are reasonable people, I am sure. ;)

Best wishes,
AK


Unless we have very good reasons, don't be bonded.





Related posts:
1. Buy a bond fund?
2. SRS: A brief analysis.

Sabana REIT: What is a fair price and what could they do?

The last time I blogged about Sabana REIT was in February this year.

I suggested that we might want to view some assertions in cyberspace that Sabana REIT offered great value for money because of its relatively high yield and rather big discount to NAV with a dose of scepticism.

What I was most concerned about was the matter of expiring master leases, 11 in all.

Subsequent to the end of 3Q 2015, the Manager converted one building, namely 23 Serangoon North Avenue 5, from master lease to multi tenanted.

The Manager is in the final stage of negotiations for remaining 10 master leases slated to expire in 4Q 2015.

Source: Press Release.

 What is the occupancy of 23 Serangoon North Ave 5? I very much doubt that it is 100%. DPU is already lower in Q3 and it is likely to take another hit in Q4 as property income reduces and operational cost goes up because of this development.


Also, the language lacks transparency. When we hear "final stage of negotiations", we get the impression that negotiations are likely to be successful.

However, realistically, we should be prepared that more properties would be converted from having a master lease to being multi tenanted.

A lack of transparency makes it difficult for anyone to estimate what is truly a fair price to pay for Sabana REIT. Annualising Q3's DPU of 1.77c is a mistake but let's do it anyway. 7.08c. With a unit price of 78c, we are looking at a 9.07% distribution yield.

If Mr. Market is willing to pay 78c a unit, my interpretation is that Mr. Market is probably expecting quarterly DPU to decline to 1.56c or a 12% decline from 1.77c in due course. This would give an eventual 8% yield at 78c a unit.

Now, is Mr. Market right?

Well, we know the saying that Mr. Market is always right but if the DPU should decline by much more, what then?

We should be able to make a more accurate guess by end of the year and be dead sure by end of 1Q 2016.


So, if we are buying Sabana REIT with the understanding that DPU would probably reduce quite significantly and are comfortable with it, then, 78c a unit might be a fair price to pay for us.

However, if we feel that an entry price of 78c a unit with an estimated 8% yield a few months down the road would not sufficiently address some other risks such as:

1. Rising risk free rates means Mr. Market might demand a higher distribution yield. All else being equal, unit price would have to decline.

2. Rising interest rates also means a higher debt burden which would weigh down DPU. Maturing debt in 2016. $138 million. Would cost of debt increase?

3. Expiring leases in 2016. About 11.4% of NLA is expiring in 2016 and that includes another master lease.

4. Declining interest cover ratio. It has dipped below 4x and is now lower at 3.8x.

5. Possible decline in value of properties. This would impact gearing level.

We won't be wrong to ask to what degree has a unit price of 78c a unit taken all these in?

If Sabana REIT is confident that its NAV/unit of $1.04 or so is realistic, then, I would like for them to sell some of their properties. That is probably the best way to see if the valuations are realistic. 

Of course, the reason for this suggestion is really to unlock value for the shareholders and strengthen the REIT's balance sheet.


Related post:What is the right price to buy into Sabana REIT?

Sabana REIT's Presentation in September 2015 for investors: here.