Why have bonds in our portfolio and which ones?

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.

Frasers Centrepoint's 7 year 3.65% bonds: Who should buy?

Some readers alerted me to a bond that is being issued by Frasers Centrepoint and asked me what I thought of it. After all, investing for income, bonds are relevant instruments.

The bonds in question are 7 year bonds and have a fixed interest rate of 3.65% per annum. So, unlike the perpetual bonds issued earlier in the year by the same entity, there is a maturity date for these bonds.

Bond holders will get back their capital (as long as the entity doesn't default) at the end of the 7 year period. So, they are safer than the perpetuals which, like bond funds, I keep saying, we should avoid.

Of course, I also said that we should avoid long term bonds because as interest rates rise, bond prices will fall as Mr. Market expects higher returns for lending money. Yes, when we buy bonds, we are more lenders than investors.

There is no reason for Mr. Market to buy older bonds at their issue prices when the coupons or yields are higher for newer issues. So, prices of affected bonds will have to decline to give a comparable or more attractive yield.

Then, is a 7 year bond a long term bond? Well, conventionally, long term bonds are 20 year or 30 year bonds. However, I feel that a period of 10 years is also considerably long. What about a period of 7 years? I think it is pretty long.

In the next 7 years, is it likely for interest rates offered by the banks for money in fixed deposits to go to 3% or more per annum? When we consider how they have gone from about 1% per annum to as high as 1.6% per annum in the last one year, it is possible that they could go much higher in the next 7 years. So, we have to be prepared that the price of these bonds could decline in the next 7 years.

So, who should buy these bonds?

Those who are not only happy with a 3.65% coupon but are buying with money they are sure they do not need in the next 7 years and are prepared to hold for the full 7 years.

Read more about the bond in question: here.

Related post:
Frasers Centrepoint's Perpetual Bonds.

Perpetual bonds: Good or bad? (Read comments too.)

With interest rates so low these days, one would not be wrong to wonder why are companies and even a REIT issuing perpetual bonds to raise funds with coupons of up to 7%. To a layman like me with very rudimentary understanding of economics, it could be one of two reasons:

1. The business or REIT concerned is not able to get loans because its business is too risky.

2. The amount of liquidity available in the banking system is drying up.

I do not have the necessary knowledge to do an in depth analysis on the reasons why. Indeed, I do not have the inclination as well. I am more interested in how these bonds might benefit me as an investor.

Generally, investors want to be correctly compensated for the risks they are asked to undertake. So, the riskier the investment, the higher the expected compensation. Otherwise, it is a no go.

However, with imperfect knowledge, investors sometimes get the shorter end of the stick. There are examples aplenty of investments gone sour. With the benefit of hindsight, investors learn to avoid similar experience in future or we hope to anyway.

When something new comes along, relying on past experience becomes impossible. Indeed, investors are sometimes misled through creative labelling. Remember the "mini bonds"? The resulting losses were in no way mini.

Now we have "perpetual bonds". What are these?

Perpetual bonds are bonds with no maturity date and investors are not allowed redemption. A glaring disadvantage of such an instrument is the lack of liquidity. Therefore, people with very deep pockets who would never be in an urgent need of cash are more suitable investors.

No matter the depth of one's pockets, however, there is a universal problem of inflation. With inflation in Singapore at more than 5%, if one should park one's money in a perpetual bond that yields 5% or less, it does not make much sense. Add this to the lack of liquidity of such an instrument, more or less, it amounts to an almost complete loss of control over one's dwindling wealth. Ouch.

Perpetual bonds are a no go for me. However, if the companies and REITs I am vested in should issue perpetual bonds to fund activities which would grow EPS or DPU, I would raise both hands in support.

Like anything in life, whether something is good or bad depends on where one stands.


UPDATES:

The absence of a maturity date means perpetuals usually offer higher yields than bonds with one. Companies are taking advantage of Singapore accounting rules that count the notes as equity and a tax law that exempts interest payments.

The lack of a perpetual's maturity date, in spite of the incentive to redeem at the first call, allows issuers to treat that debt as equity in their books. That reduces the companies' leverage even as interest payments increase.

"The impact on the market is hard to judge" if any issuers choose not to repay, said Dilip Parameswaran, the Hong Kong-based head of Asia Investment Advisors Ltd. "The Singapore dollar market is small and dominated by domestic institutional and retail investors. They may have invested based on an expectation of call, and may be disappointed if the bonds are not called."

As companies consider the cost of refinancing, he said, "if the secondary yields are higher than the step-up coupon, then it makes no sense for the company to call the perpetual."

Source: http://www.businesstimes.com.sg/banking-finance/singapore-perpetual-bond-investors-hope-never-means-three-years


AK says:

What we want to be wary of is also what rising interest rates would do to bond prices. As interest rates rise, bond prices fall. That is the relationship.

For bonds with maturity dates, we just have to hold to maturity and hope that the issuer does not default. We would get back our capital at maturity. With perpetual bonds, there is no maturity date.


Related posts:
1.  Dr Marc Faber: How not to lose money?
2.  To protect our wealth, we have to take risk.

Investing in high yield Asian bonds.

Reader says...
I am in my early 40s, and do active investing on my own.

Recently I was contacted by an agent, who shared about investing in high yield Asian bonds.




I was initially sceptical but it seems that these are very different from mini bonds, and the failure rate has been historically low.

I am thinking of investing about 10% of what I usually invest in the stock market in these bonds.

The main catch is that the investment commitment is over 10 years (i.e. cannot sell for the first 10 years), which seems fine to me, and after that, I am able to decide whether to continue investing or not.

Would you be so kind to share your thoughts please? 

Many thanks.

AK says...
High yield bonds are a nice way of saying junk bonds.

They are junk bonds for a reason and you should be wary of the financial strength of the issuers.

It depends on how much risk you are comfortable with taking and if you think the potential returns justify the risk.




I wouldn't buy these myself and also because there is a strange thing here about not being able to get out of this for 10 years.

Whether regular bonds or bond funds, we are allowed to get out whenever we want, accepting whatever price Mr. Market should offer at that point in time.

10 years is a very long time and with no escape clause, it is either we swim or sink with the issuer.




Another thing is that with interest rates rising, if the issuer does not default, these bonds could be worth much less 10 years later assuming that interest rates become elevated then.

So, in such a scenario, if you do decide to sell the bonds, you might get back less than your initial investment.

Of course, the decision is yours.





You might want to read the blogs listed below and I hope they are helpful to you:
1. Why have bonds in our portfolio?
2. Nobody cares more about our money.

Buy a bond fund that pays 7% a year?

UPDATED (December 2016):

In the last few years, I have been saying that we should avoid long term bonds and bond funds. Read comment dated 16 Dec 16 in the comments section at the end of the blog.
---------------------------------------

A banker has advised a reader, K, that he buys into a bond fund. This was what K wrote in his email to me:

Hi AK,

i read your post and i like your advise on bonds. im currently unemployed and i need a steady form of income for my family.

A citi banker suggested that i buy a fund that is comprised of bonds that pays abt 7 percent an annum. 

please give me your opinion on such investment comparing to shares.  since its little fluctuation and it gives me income

thanks
K

My reply:

Hi K,

Too little information for me to make an informed decision, unfortunately.

However, if I were to hazard a guess, for a basket of bonds to pay you 7% per annum, I guess these bonds are not of investment grade. They could be "junk" bonds. Risk level must be higher which explains a higher return.

A 10 year bond issued by the Singapore government has a coupon of 2.75%. Singapore has a AAA credit rating, of course. More recently, CapitaMalls Trust issued a 7 year bond that has a coupon of 3.08%. Of course, lending money to CapitaMalls Trust is riskier than lending money to the Singapore government. So, although the period is shorter, the coupon is higher.

I would suggest that you ask for more information and not just look at the 7% yield which the banker says you will get.

When we buy bonds, we are lenders, not investors.

So, when we lend money to a business, what should we do? 

We want to study the business and the reason why they need to borrow money. Is the business strong and stable enough to pay the coupons and to redeem the bonds when the time comes?

So, what are the bonds which make up the bond fund? You should find out.

Best wishes,
AK

" If you are going to buy a bond mutual fund, you have to be very careful because if interest rates go up, the value of that bond mutual fund will go down. And, in a mutual fund, there is absolutely not maturity date.


"So, what are you thinking? The worst thing you could do with your money right now is put it into a bond mutual fund." - Suze Orman (Read related post no. 1 below)

Related posts:
1. Nobody cares more about our money than we do.
2. A banker's advice on retirement income strategy.
3. CapitaMalls Trust: Buy the retail bond or the REIT?

Frasers Centrepoint's Perpetual Bonds.

A reader sent me a note in FB today, asking me what I thought of this:

FRASERS Centrepoint on Monday is selling Singapore dollar perpetual bonds, the first perpetual deal in 2015. A term sheet seen said that the SGD subordinated Perp NC 5 has an initial price guidance in the low 5 per cent. NC 5 means that the perpetual bonds will not be recalled before year 5.

Source: The Business Times.

Well, I would generally avoid long term bonds especially since I believe that interest rates are more likely to go up than not from here on. With perpetual bonds, there isn't any maturity date. So, they are more long term than long term bonds. There isn't a date when the bond matures and when the principal is returned to the bond holder. Having a maturity date when the principal is returned to the bond holder is a feature that makes bonds safer.

Reader:
What do you think about this, as compared to CPF minimum sum?

So, can we compare this with the CPF which locks up some of our money for a very long time? The expected coupon of 5% is similar to what is being paid on our funds in the CPF-SA, isn't it?

Well, it isn't an apple with apple comparison, actually. One is a bond backed by a business entity while the other has a built in annuity and is backed by a AAA rated sovereign bond. Definitely, they are quite different animals.

As always, whether something is good or not depends on where we stand. Generally, I think this is a good thing for Frasers Centrepoint's shareholders as the company diversify their sources of funding and a 5% coupon might appear quite cheap several years from now (and they only have to keep paying the coupon and not worry about paying the principal).

However, for the bond holders, they could find themselves holding the shorter end of the stick and it could become more apparent as time goes by.

Related posts:
1. Perpetual bonds: Good or bad?
2. Nobody cares more about our money than we do.
3. Bonds, REITs and the instant gratification of yield.

Teh Tarik Peng (AKA Iced Tea) With Elvin Hayden Liang: Laddering The War-Chest Of Certainty.

I have not met Elvin before but that shouldn't surprise anyone. However, through our rather lengthy chats online from time to time, I know that he has a rather brilliant mind. When he mentioned bond laddering during one of our chats, I said it would make a great guest blog and, well, here it is.

I have read about bond laddering before but I did not know anyone who was actually doing it. Well, now, I do. Thanks for sharing, Elvin.

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

Hi AK,

Thanks for allowing me to share a post on your blog. It is indeed my honour! :D

Actually I'm glad I've found good natured people too!

Here's the post:

"Laddering The War-Chest Of Certainty"

As it is right now, we've been swimming in a low-interest rate environment (below 1%) for quite a while since the last spike in 2004 which was the onset of the SARS outbreak which shook our economy.

To illustrate the point of low interest rates, for your viewing pleasure:

Recent news reported that interest rates have gone up a fair bit above 0.9%. However, deposit rates are still low ( < 2%) nonetheless.

Ever since, many who are vested in the capital markets have seen much higher returns than bank savings rates and fixed deposits. However, I would believe there would be a group out there who have a distaste for risky investments such as equities and even corporate bonds.

Question they would throw to the floor: Where can I put my money, say for 1 year to maybe 5 years, and, at the same time enjoy a better than the Bank's savings account rate without risk?

Risk-free Assets

1. CPF - guaranteed interest with the lowest at 2.5% and now the highest at 6%! (more details at www.cpf.gov.sg)

2. Fixed deposits - low interest rates of between 1 - 2%

3. SGS Bonds - Though they are in the bond family, which is typically an investment, SGS bonds are government backed, hence with Singapore having a good credit standing, risk of default is extremely low.

Interest rates vary between 0 - 2% for 2 years and 2 - 2.5% for about 10 years and 2.5% - 3% for about 20 years.

4. Local bank account - mainly kept active for transactions and intended spending / liquidity.

Well, lately, for people who are storing up a war-chest for investments in future, especially when trying to time the market, this is one strategy we could use, to ensure we have steady cash coming out at different time intervals to plant the seeds in opportune market failures. While aiding our cash flow, this is also good for dollar-cost averaging purchases. It is mechanical, routine, and keeps out fear using a sound strategy.

Why should we break up our war-chest to different time intervals? This is because, like in investing, it is difficult to time the market, hence every 5 years would be a good time-frame to capture the market at sweet spots to ride any uptrends. Similar to dollar-cost averaging, we can also use the same strategy to dollar-cost buying into SGS bonds (which have been made really easy to do).

Here is a rough sketch of what I have done using a Bond Ladder and how it looks like:

So the 5 year plan goes like this:

1. From this year to the end of next year (2015 - 2016) or Year 1, I'd budget out about S$1,000/month to buy the First Tranche of the SGS Bonds which will mature in 2020 (capital guaranteed and with semi-annual payouts) be utilised in future, when opportunity arises to buy in blue chips when they are at huge discounts (i.e. during financial crisis, shocks, failure)

2. In Year 2, I'll do the same, but will purchase SGS Bonds in Tranche 2, which matures in 2024.

3. In Year 3, ... Tranche 3, matures in 2029.

4. In Year 4, ... Tranche 4, matures in 2033.

5. In Year 5, ... which is 2020, I'll have my Tranche 1 maturing, which will then have the bond ladder revisited again.

Sounds good?

Well this actually makes sense to me, with an effective yield (weighted average) of about 2.51% for the entire ladder (18 years, net of purchase charges etc.). So other than preserving cash value for opportunities in future, what can we use it for? For those who are very conservative, this could be used to hedge against low housing loan interest rates conservatively since housing loans usually range from 15 -  30 years.

As purchasing a property is an investment decision, with risky leverage, one may decide to reduce risk by hedging it against an instrument which gives more guarantee and security. Similar when we decide to use cash for investments. Remember, the bond ladder is risk-free, well, except if the person who is constructing it runs out of cash. So it does help one cultivate a good disciplined savings habit! What's more, you could also sell off the bonds (may incur some price difference, but usually small ~1%) if you need urgent liquidity too.

What do you think of a bond ladder? Would you think it wise to put all your cash into property or the capital markets rain or shine?

Visit Elvin's blog: here.

Read more blogs regarding bonds: here.

CapitaMalls Asia: Borrowing on the cheap.

On 6 Jan, this was reported on Channel News Asia:

"...CMA will issue $200 million worth of retail bonds.

It aims to raise $100 million by selling one-year bonds, which will pay 1 per cent interest.

The remainder will be raised by issuing 3-year bonds, which carry an annual interest rate of 2.15 percent.

The minimum sum that a retail investor needs to invest is $2,000.

...... Experts say bonds of highly rated corporates are an attractive investment, compared with government bonds.

One-year Singapore government bonds currently yield 0.4 percent annually.

Wilson Liew, an investment analyst, said the bond issuance should have little influence on CMA's performance.

"If you look at the quantum of the bonds, it is not large compared to the total size of the business," said Mr Liew.

CMA has retail properties worth $21.6 billion in its portfolio.

"They are making use of low interest rate environment to raise some money but they are lowly geared anyway so raising money isn't so difficult," added Mr Liew."

On 21 Jan, it was reported that the offer was approximately 1.82 times subscribed. Read report here.

Cheap debt is a good thing for a growing business. I am sure the management of CapitaMalls Asia will put the money to good use. Fundamentally, this company is in a net cash position and has predictable cash flow from its management business while divesting mature shopping malls to the REITs it manages could result in attractive gains periodically. I am looking forward to stronger numbers in the future.

Technically, I have not looked at the weekly chart for this counter before. Let's take a look:

The candlesticks are detaching from the lower Bollinger and we could see price moving towards the 20wMA which is currently at $2.06. There is still a downward bias but I like the higher lows on the MFI and RSI. Both momentum oscillators are still in oversold territories and this situation could be corrected sooner than later. 

We cannot say that we are surely seeing a reversal at this stage but a rebound to the 20wMA is not unattainable and could result in some decent gains for anyone buying at the trendline support which approximates $1.90 currently. I am, of course, vested.

A Chinese government think tank has forecast the nation's economy will grow around 9.8 per cent this year, with inflation likely to come in at 3.7 per cent, state media reported Sunday. Experts at the Chinese Academy of Sciences also predicted that gross domestic product would rev up in the latter part of the year, and would be driven largely by domestic consumption, the official China News Service said. Read article here.

Related post:
CapitaMalls Asia: Pulling back on low volume.

A banker's advice on retirement income strategy.

This is from the blog of a reputable bank providing advice to retirees:

... Start by figuring out how much spending money you will need from your portfolio over the next five years. Let's say you are using a 4% portfolio withdrawal rate, which means you plan to spend a sum equal to roughly 20% of your portfolio's current value over the next five years.

You might take that 20% and stash it in conservative holdings like savings accounts, certificates of deposit and short-term bonds, so you know that you have the next five years of anticipated spending covered, no matter what happens to the rest of your portfolio.

You can then invest the other 80% of your nest egg for total return using an appropriate mix of riskier bonds, U.S. stocks and foreign shares. You will want to consider carefully what combination of stocks, bonds and other asset classes to buy, because each has its own unique benefits and risks, and also how to diversify within each of these asset classes.

In years when the markets are kind, you might cash in some of your gains and use it to replenish your pot of spending money, so it once again holds enough to cover five years' worth of portfolio withdrawals. What if the markets aren't so kind? You could sit tight and see if the markets recover. Thanks to your five years of spending money in more conservative holdings, you should be able to go that length of time without touching the 80% of your portfolio that's invested for total return.



AK71 says,
"Sailing into the sunset should not be sailing into the dark."

Basically, it is advising retirees to take out what they need in spending money over the next five years and invest the rest in a mix of riskier bonds (junk bonds?) and equities. In case Mr. Market is not kind over the next five years, these retirees are still OK because they would have already put aside enough spending money for that period of time.

I want to draw attention to the words I have underlined. These are basically the ideas I have problems with.

Is securing five years of spending money without taking into account average inflation enough to provide a peace of mind for retirees? What is an appropriate mix of riskier bonds etc. and are riskier bonds even appropriate? Sit tight and see if the markets recover if things don't go well? That sounds like plenty of hope analysis to me.

I am most uncomfortable that retirees should be mostly invested and 80% in this case. What if the markets should go into a protracted downturn? Being retirees, these people are less likely to have the ability to fill up another war chest with earned income. Shouldn't they have a war chest ready just in case Mr. Market suffers from a bout of manic depression?

I don't have a Degree in banking or wealth management. I am just another retail investor sharing his concerns using what he feels is common sense.

Please forgive my ignorance.

Related posts:
1. Be cautious even as we accept higher risk.
2. A letter from a 66 year old retiree.
3. If we want peace, be prepared for war!

Bonds, REITs and the instant gratification of yield.

The message that inflation is eroding our wealth because the banks here offer such measly interest rates for our savings has become quite pervasive. 

I am sure that the message has been good for sales in some industries too as many more people are worried now. 

I know my parents talk about it a lot more these days.




So, what do people do? They go hunting for higher yields. One of the easier things to do is to go to the banks and invest in products which promise yields which are much higher than the said interest rates. 

Many also go to the stock market to look for stocks, bonds or preference shares which offer yields that beat inflation.

In the hunt for higher yields, we might want to keep this in mind:

"Always remind yourself that investing is a long term activity. So, avoid the instant gratification of yield... think carefully about how you are getting that yield... But there is a tendency in this environment for everybody to feel like 'I've got too much cash rotting in the bank, earning nothing, and I have to do something with it.' ... Don't just buy the highest yielding investment out there. Historically, that's how people get themselves into trouble."  - Tad Rivelle, CIO, fixed income, TCW.

Is the low interest rate environment we see the new normal? Won't interest rates go up again? Pause and ruminate on this for a bit.

When we are offered a high yielding investment, we should ask how the investment is delivering the promised yield and if it is sustainable. If sustainable, for how long is it sustainable? What is the likelihood of a capital loss at various entry prices?

I like how Tad said we should avoid "the instant gratification of yield". 

It sounds similar to how we should try delaying gratification in consumption as we try to build wealth.

By saying that we should avoid "the instant gratification of yield", Tad is probably suggesting that we could possibly get in at a lower price in future and get a higher yield then, everything else remaining equal. 

The suggestion that people who get in now could lose money as prices fall in future is there as well.

I don't know if Tad had a working crystal ball when he said what he said but I know I don't. Could the low interest rate environment persist? 

It could but with experts saying that interest rates could rise sometime next year, shouldn't people in long term and perpetual bonds be worried? 

What about people in interest rate sensitive investments like REITs?

If interest rates should rise, yes, these investors should be worried. However, the bond holders should have more to worry. Why? 

Well, if interest rates rise, it is probably because higher inflation demands it. 

Bonds are not businesses. They are IOUs issued by businesses. They only have to pay the agreed coupon and nothing more. 

Bonds tend to do badly in an inflationary environment as interest rates rise.

For REITs, we can reasonably expect their asking rents to increase in an inflationary environment. There will be constant adjustments made as cost of new debt becomes higher but as long as rents are lifted higher in tandem, there is really no issue, everything else remaining equal. 




So, when investing in a REIT, one of the things to look at is the possibility of higher asking rents in future which involves a whole gamut of considerations which mostly can be neatly sorted under two headings, "supply" and "demand".

When the Fed finally decides to raise interest rates, I am sure that market prices of yield instruments will take a hit just like they did middle of last year. 

How big a hit? 

I have no way of telling but I have an inkling that prices would in all likelihood overcompensate to the downside.

Depending on what our existing investments are, some will suffer more than others but chances of any investor escaping unscathed would be slim. 

So, now, do we liquidate all our investments and do a Chicken Little which is what some people have done?

Well, we could but knowing that I don't really know, my preferred method has always been to stay invested while maintaining a high level of liquidity. 

So, doing what I do means being able to continue receiving income from my investments which increases the level of liquidity that I have.

After all, what is the best way to ride out volatility? Having plenty of cash.




So, bonds or REITs, before we plonk in any money now, we might want to temper our expectations by reminding ourselves of the risk that comes with the instant gratification of yield.

Related posts:
1. Get paid more waiting for opportunities.
2. How to earn 6.3% interest after 4 years?
3. Nobody cares more about our money.
4. Never lose money in REITs or real estate?
5. Perpetual bonds: Good or bad?

Dumping all my investments in REITs.

Reader says...
I recently started buying REITs and following online blogs online.

I do my own diligence which I think is sound but cannot help but be worried when I see negative things about REITs being posted.

Classic consumer economics behaviour from me cos scared Liao lol.







Anyway, I know there is a difference between Traders and investors.

There is one particular trader that says REITs and dividend stocks will suffer soon.

Should I be concerned? Because my investment strategy is buy and hold.

AK says...
It depends on what you are looking for and if your investments can deliver.

In an inflationary environment, (interest rates should go up and, naturally,) bonds will suffer but we should not mix up bonds and REITs. They are not the same thing.

Bond holders get paid a coupon and that is fixed. 

As interest rates rise, bond prices will fall (as Mr. Market expects a higher yield to buy those bonds and as the coupons are fixed, the bond prices must fall to give a higher yield).







Businesses and REITs have the ability to raise prices and that is what they usually do in an inflationary environment.

Invest in what we understand and disregard the noise.

When we buy bonds, we are money lenders. We charge interest for lending money.

When we invest in a business, we are partners and we share the ups and downs.








REITs remain a relevant tool for income investors but, to be fair, not all REITs are good investments.

Regular readers know that I have reduced my exposure to REITs but it is not for as simplistic a reason as interest rates are rising.


Rising interest rates alone is not strong enough a reason for me to sell down REITs.

Try not to be overly pessimistic nor overly optimistic. Try to be pragmatic.








Related posts:
1. Why bonds and which ones?
2. Largest investments updated.

AIMS AMP Capital Industrial REIT levels up.

UPDATED JULY 2018

DPU of 2.5c declared for quarter ending June 2018 to be paid on 20 Sep 18.

Refinancing in July 2018, weighted average debt maturity lengthened to 3.1 year, with interest savings of about $0.7 million per annum.

88.1% of interest rate fixed with interest rate swaps and fixed rate notes.

Overall blended funding cost of 3.8%





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AIMS AMP Capital Industrial REIT (AA REIT) is probably one of the better run REITs in Singapore, creating value for unit holders in a sustainable manner and their recent action reaffirms my view.





Most REITs are leveraged to some degree. Although leverage could magnify gains, in an environment of lacklustre growth and rising interest rates, too much leverage could spell trouble.


I remember putting forth my concern on rising interest rate to AA REIT's CEO when I was invited to tour some of the REIT's properties. 

I wondered if it was possible to issue longer term bonds to lock in lower interest rates.






Mr. Koh Wee Lih told me that issuing longer term bonds could mean paying a higher coupon which made perfect sense, of course. 

So, if AA REIT should be able to issue bonds without shortening their tenors and enjoy paying lower coupons, what does that tell us?





AIMS AMP Capital Industrial REIT (AA REIT) announced it will be issuing S$50 million Fixed Rate Notes as part of its Medium Term Notes (MTN) Programme.

The 5-year Notes will bear interest at a fixed rate of 3.60 per cent per annum payable semi-annually in arrear, until maturity on 22 March 2022. The Notes are expected to be issued on 22 March 2017.

“The net proceeds from the issue will be used to partially repay the revolving credit facility due in November 2017 which was used to fund ongoing developments. This also enables us to diversify our funding sources and free up more undrawn available facilities for potential further growth.”

This is the fourth time the Manager has used its MTN programme to raise debt. 

AA REIT raised S$100 million with the four-year 4.90 per cent Fixed Rate Notes issue in August 2012 , S$30 million with the seven-year 4.35 per cent Fixed Rate Notes issue in December 2012 and S$50 million with the five-year 3.80 per cent Fixed Notes bond issue in May 2014. 

Mr. Market demands higher returns for junk bonds but accepts lower returns from investment grade bonds. 

I like the direction AA REIT is heading. Good job!





Related post:
A tour of AA REIT's properties.

AIMS APAC REIT and perpetual bonds.

This very short blog is in reply to a reader's comment on a topic which other readers might find interesting. 

AIMS APAC REIT is well run and it has been very rewarding as an investment for income. 

A perpetual bond is a good thing for the REIT because it does not add to the REIT's gearing while giving it more funds. 

A coupon of above 5% is also pretty attractive to anyone interested in lending money which is what we are doing when we buy bonds. 

Personally, I rather be invested in AIMS APAC REIT than to lend money to them because I think it is more rewarding to invest in the REIT. 

I would suggest that readers interested in the perpetual bonds read these blogs: 

1. Why have bonds in our portfolio and which ones? 

2. Bonds, REITs and the instant gratification of yield.

When to BUY, HOLD or SELL? (Part 2)

Now, a question that people sometimes ask me with regards to selling is if they should cut loss? 

Well, from a valuation perspective, if we got into a stock which we thought is worth $10 a share at, say, $8 a share, and if the price should fall to $6 a share, should we sell?

OK, let us push this a little and let us say we thought the stock is worth $10 a share but for some reason, we bought it at $12. At $6 a share, should we sell? 

I think you know the answer.

Well, if we need the money urgently because there is an emergency at home, then, we don't really have a choice, do we? 

This is also why we must always use money we can afford to lose for investing. 

If we don't need the money, everything remaining equal, should we not be thinking of buying more if prices fall? 

This is why we must always have a war chest ready!

What we have to remember is that we want to buy at a price we would not sell at and sell at a price we would not buy at. This is a general mantra we should chant to ourselves and embrace its spirit.

Although we might think that $10 for a certain stock is cheap, it does not mean that it would not become $8 or $5 or even $2. 

Of course, if we are sure that our facts are correct and our reasoning is right, we should be buying more as prices fall.

Isn't it risky to buy more as prices fall? Of course, there is risk involved. Cheap could get cheaper. This is why I feel that some knowledge of technical analysis (TA) is useful. 





Purists in fundamental analysis (FA) will pooh pooh at this idea, of course, but unless we have very deep pockets, I think a bit of TA is useful. Anyway, I will talk a bit more about TA later.

Now, since we are on the topic of risk, some would argue that the level of risk associated with an investment should be considered when we talk about valuations. 

So, in the case of a business trust, for example, if it is perceived to be more high risk in nature, we would need a higher distribution yield before we invest in it, wouldn't we? 

I blogged about how this was the case for me when I invested in Perennial China Retail Trust: here.

The same goes with bonds although in the case with bonds, the holders are more lenders than investors and I blogged about bonds before: here and here.

Now, with interest rates rising and we are seeing higher coupons from 10 year bonds, the risks associated with REITs have risen. 

This is why their unit prices have fallen because Mr. Market is now demanding higher distribution yields for investing in a riskier instrument compared to 10 year government bonds. I am not saying anything new, of course.

As anyone can see, there is no one size fits all valuation technique.





So, some have thrown up their hands in despair and decided that they would only use charts to help them decide when to buy and sell. TA gives us a peek into Mr. Market's psychology. 

We then buy and sell based on technical signals which tell us the sentiments in the market. 

Of course, TA is about probability and never certainty. 

TA is about managing probabilities!

There is no exactitude, no matter which approach we choose to use. There are only approximates. 

As long as we are approximately right, we are better off than being exactly wrong. This is good enough. 

This is what Warren Buffett would say. If you have yet to watch the video on why he is the world's greatest money maker, watch the video: here.

Make money using the tools available to every person.

Valuation is a subjective exercise and often, whether to BUY, HOLD or SELL, we have to rely on experience too. 

If there was a magic formula that worked all the time, Warren Buffett and any investment guru for that matter would never have made bad investment decisions in their careers. 

So, it is important to remember this and not become narrow minded when we think of valuations.

Related posts:
1. When to BUY, HOLD or SELL? (Part 1)
2. Recommended books for FA and TA.