Saturday, December 26, 2020

Portfolio Updates (December 2020)

It’s finally Christmas and it's the season I look forward to every year and the time for cold weather travel to ski on powder snow. Unfortunately, this time is different. I booked a few flights for travel this year and all got cancelled (including the travel bubble one). If there’s anything good in not being able to travel is that I managed to save more money. I continued investing in stocks and I am blessed that my portfolio has done well this year, particularly my Growth portfolio. Thanks to the circuit breaker, the times spent at home has allowed me to do more personal reflection, come out with an investment strategy and act on it.

Despite the US stock market hitting record highs, I believe next year will still be a good year for equities market. The past few months rally is fuelled by stimulus rolled out by Federal reserve and government. The next rally will be underpinned by reopening of business and economies as more people get vaccinated.

(1) Growth Portfolio

Missing from the photo: Zoom (NASDAQ: ZM)

My growth portfolio had a good run in December. Cybersecurity companies like Zscaler and Crowdstrike continued to hit new highs after the earnings report early December since their services are getting more in demand as cybersecurity concerns mount. Crowdstrike reported 81% year on year increase in annual recurring revenue. As long as public cloud revenue continues to grow, Crowdstrike is expected to see growing demand. It also owns a handful of patents: 41 patents in process, and 46 international patents.

Crowdstrike (NASDAQ: CRWD)
Crowdstrike's latest corporate overview (see link above) shows two patents: US Patent 9,798,882 (Real-Time Model of states monitored devices) and US Patent 9,043,903 (Kernel-Level Security Agent) which forms its key part of the company’s moat. As mentioned in my previous blog, see here: , Crowdstrike uses AI to scan all the data it gathers from every of its customers to efficiently search for treats. Once it detects a threat, it uploads that file to cloud and shutdown the treat, as well as for all its clients. Hence it truly benefits from network effect like Apple and social media companies. The more clients they have, the more signals it gets and hence a better threat graph.

For my growth portfolio, I have initiated new position in Palantir, Tesla and added back Zoom (after selling it too early for $200 in May. I plan to add Salesforce as I foresee that it will continue to be a leader in CRM. If Salesforce’s history shows us anything, is the fact that they have successfully acquired companies in the past and it has proven its ability to grow and continued to be a leader for CRM Customer Engagement Centre. Sometimes you just got to place your trust in the management that they can continue to bring Slack to its ecosystem and sell the services to their current clientele base.

Why I initiated a small position Tesla (NASDAQ: TSLA)

Investing in Tesla shares is definitely not for the faint-hearted. Despite astonishing share price rally over the past few months, I believe in its growth story in terms of its superior technology (electric motor and battery,) supercharger network and vertical integration are still in the early stages.

Superior Technology
Tesla’s permanent magnet synchronous reluctance motor (induction motors in the past) makes it more superior to its competitors, in terms of price and efficiency. Its battery has allowed Tesla to maintain a grip on EV market compared to its peers. Its current model 3 has 14% better energy density. To understand battery energy density, check out this link:,one%20watt%20for%20one%20hour.Currently Tesla’s North American Model S Long Range Plus promises 402 miles without stopping a charge and Tesla’s Model S can go on 370miles on a single charge.

SuperCharger Network
Secondly, Tesla, like Apple is building its own ecosystem, where several Mac devices and application are designed to work with each other in useful ways. Tesla builds its own network of proprietary supercharges that can fast charge and being proprietary means other EV cannot tap into Tesla’s network. So, once you own Tesla, everything is designed to work together. Like Mac, there are no compatibility issues and Tesla holds their owner’s hands throughout their journey.  

Vertical Integration
Tesla's vertical integration in terms of manufacturing also contributes to its superiority in technology. Most of the Tesla’s car parts are developed in house which means improving its supply chain coordination, better costs control (no middleman) and faster rate of innovation.

I read articles about Tesla and there are worries that it faces competition from other new EV players. I see this as a positive for Tesla, as these new EV rollouts by other companies will help to make electric vehicle the new mainstream. So when demand of EV starts picking up, consumers will start to compare and realize that Tesla is the best in class.

(2) Dividend Portfolio

Capitaland Integrated Commercial Trust (SGX: C38U)
I have closed all positions for Tracker Fund of HK 2800, and divested Capitaland Integrated Commercial Trust .However I am left with fewer than 100 shares as I didn’t manage to offload in the unit share market on the same day. The reason for divesting is that I already own a handful of retail Reits and any sort of diversification is not going to lower my risks. Secondly, it's because of its 6% exposure to hospitality sector, RC Hotels, which will face challenges in maintaining its occupancy rate in short and midterm. Lastly its commercial business which consists of mainly Grade A CBD office may see subdued demand due to prevalence of WFH measures, which I believe will not go away post-Covid 19. In the face of business uncertainty, tenants are also asking for shorter term renewals and considering downsizing their office space.

Ascendas REIT (SGX: A17U)
Unfortunately, I didn’t learn my lesson from FCT and subscribed for 2926 excess rights for Ascendas Reit. I was expecting that Ascendas Reit to perform better exrights than FCT as its rights dilution is much lesser compared to FCT. But I still see the acquisition as a positive move, especially it's DPU accretive and attractive dividend yield of 5% in such low interest rate environment.

I have also added Mapletree Logistic Trust too. In my view, Reits and Financials stocks that pays good dividend should continue to do well against the backdrop of interest rates staying low for some time. For 2021, will be a year to buildup my warchest and any weakness in Reits is an opportunity to add.

Stock Portfolio Net Worth

Stocks Portfolio= $442,120+$7,036= $449,156

$7,036 is the value of 2,400 shares of NikkoAM STI ETF. Indicative Value as of 126th Dec (divested 2,417 in Nov 2020, and will be divesting in batches)

Cash at hand= $50,600

Total Portfolio Value= $499,756

Time weighed Returns (2020)= 22.38%
XIRR (2020) = 20.27%

June 2022's goal- 85.59% achieved

June 2030's Goal- 12.78% achieved

Portfolio 1 Net worth (i.e. Growth Portfolio+ Dividends Portfolio) = $449,156
Portfolio 2 Net worth= $170,529
Cash at Hand= $50,600
Net worth (Equity and Cash)= $670,285 

Closing Remarks

Feel free to scan on the QR code :)

We are just two more days away to Phase III and hope that Singapore's local case will continue stay at zero or low single digits. While there's still long way to go before Covid 19 gets eradicated, here's wishing everyone a safe and blessed New Year and may 2021 be a better year for all of us! Take care and stay safe!

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Tuesday, December 1, 2020

Who buys a negative yield bond?

Last Thursday, I came across an article in Business Times about UOB issued negative EUR Bonds and it was 2.6X oversubscribed, with order book of 1 billion EURO.

It doesn’t make any sense to me in first glance. I always thought that negative bond yield is only something that’s theoretical, like negative oil prices, but didn’t expect that anyone could possibly be interested in buying a bond where the investor is guaranteed to receive lesser money the original price when bought and held through maturity. It generated strong demand and analysts predicted that there will be more to come for Singapore banks. Today, the total negative-yielding debt amounts to USD 17.05 trillion. It is almost equivalent to the total market cap of Nasdaq, which stand at USD 17.2 trillion as of Nov 2020!

So I was curious on why are there so much demand in negative bond yield? Hence, I did some research and discovered some of the reasons why investors would subscribe to such bonds.

As a means of currency hedging

A 7 year- bond yielding at-0.21% may not be attractive for Singaporean investors holding Sing Dollars. However, investors who are holding onto US dollars can benefit from a higher yield as compared to US treasuries. Here's how:

As of 27th Nov 2020, a 7 year Treasury rate yields 0.61%.

Under normal circumstances, one who invests in X US Dollars in US treasury at par value will receive USD 1.0435X in 7 years time.

If one converts X USD to EUR, at a rate of 1 USD = 0.835866 EUR

and then purchase UOB covered Bonds above par of  EUR 1.01553 and hold till maturity, he will receive EUR 0.835866X/1.01553.

After converting back to USD based on EURUSD 7-year forward rate of 1.3034, the final value would be 0.835866X * 1.3034/1.01553= 1.07280x.

The effective yield would be 1.01% can be calculated by annualizing and it seems more attractive compared to buying 7 Year Treasury yield which only gives an annualized return of 0.61%.

Capital Gain

In some cases, investors do not intend to hold the bond till maturity. During the course of their holding period, they may benefit from the sale of negative bond yield if interest rates continue its decline. This is because of the inversely proportional relationship between bond price and interest rate/bond yield.

The inverse relationship makes sense if we consider the example of a zero coupon bond of a treasury bill for simplicity sake. As its name suggests, zero coupon bond does not pay interest but is issued at a discount and redeemed at par value.

Suppose a zero coupon bond is yielding 5% and interest rates were to rise the following day, the newly issued bonds will be sold at a higher yield and rendering the 5% bond to be less attractive. Hence to attract demand, the 5% bond has to be sold at a lower price to match the same return yielded by current interest rates.

If the interest rate declines during the course of holding a negative yield bond, the investor can potentially sell the bond and achieve a positive returns. Hence, negative yield are not correlated to negative returns but do note that it cut both ways. A rising interest rates could erode the investment returns.

For instance, S&P Germany Soveriegn Bond Index.

Bond fund with negative Yield to maturity

Chart showing positive returns for a German Bond Fund

In most cases, newly issued bonds tend to have yield that exceeds or at least match the current national interest rates.

In UOB’s negative bond’s case, a similar comparison would be Germany’s Bund, due to the similarity in currency, both denominated in EURO and similar credit rating of AAA by S&P. 

-0.714% vs -0.21%

Looking at Germany's 7 years bond yield just goes to show why UOB's bond is so well received by investors. 

Hedge against deflation

During times of deflation, bonds retain its value well and investors could achieve a positive return by holding on a negative bond. This happens when the bond yield is higher than the rate of inflation

The formula for real rate of return is

(1+nominal rate)/(1+inflation rate) – 1 or a more simpler way to put it

is Nominal rate - Rate of Inflation

A deflation happens when price levels in the economy goes down as compared to inflation where too much money chasing too few goods.

If I earn a 3% nominal return and inflation stands at 2%, my money is only growing at 1%.

Instead if we have a deflation of 2%, then my wealth is growing at 5%

So investors who expect price of goods to fall may consider investing in a negative yield bonds. With a deflation of -2%, the UOB negative yielding bond may still bring about positive real return.

Based on, the inflation in Singapore has stayed low and experienced a deflation in 2015 and 2016 as compared to countries like Japan, which has struggled with deflation since 1990s and bonds has been a useful hedging tool against deflation. Also the nature of Japan’s yield curve allows investors to make capital gains through ‘roll down’ method, which essentially means buying and holding a bond and sell it to enjoy capital gain before it matures. The best time to take advantage of a roll down is during a low interest environment, yet with interest rate is expected to rise.

So here are the three reasons why it can be profitable to invest in negative yield bonds. Now if you are convinced, I am pleased to announce that I will be issuing SGD negative yield bond, called EOTS Bond. The initial subscription price is just $100,000, and at the end of the 5 years I will pay you back $90,000. Limited tranche available, and only on a first come first serve basis. Please drop me a comment below if you are interested to subscribe. 😊

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