Author: Jeremy Chia

Should You Invest With Robo Advisors?

Robo advisors have grown in popularity in recent years. But before hopping on the bandwagon, here are some things to note about them.

With the improvement in artificial intelligence, it was only a matter of time before robots started managing money. Today, robo advisors are becoming commonplace among retail investors. Even traditional banks such as DBS are beginning to embrace the power of artificial intelligence as a wealth management platform.

But should you trust a “robot” to manage your hard-earned money? With that in mind, I map some of the advantages and downsides of using a robot-assisted wealth management tool.

What really are robo advisors?

Robo advisors are digital platforms that personalise the investor’s portfolio using an algorithmic-driven approach with little human supervision. 

The process is really quite simple. Investors register for an account on the robo advisor’s platform. They then answer a few questions that help the robo advisor understand the individual’s financial goals and risk tolerance. 

Using an algorithm, the robo advisor then advises the clients on a suitable portfolio for them.

Usually, robo advisors have a fixed list of Exchange Traded Funds (ETFs) or funds that it can choose from to build the client’s portfolio. These funds, in turn, invest in a variety of assets, such as stocks, bonds, or real estate. One thing to note, these funds are actually mostly managed by humans! So robo advisors simply help to allocate your wealth to the funds that it thinks suits your needs and goals.

What are the fees involved?

Robo advisors usually charge just a basic annual advisory fee that is a small percentage of the total assets under management.

For instance, Morgan Stanley’s Access Investing charges a fee of 0.35% per annum, while DBS digiPortfolio charges an annual fee of between 0.75% and 0.85%.

But to be clear, this does not include the fees related to owning shares of mutual funds and exchange-traded funds. I will explain more on this later.

The table below shows the fees charged by the prominent robo advisors in Singapore.

Source: blog.MoneySmart.sg

Why invest with robo advisors?

The beauty of robo advisors is that it removes emotional misjudgments and other possible conflicts of interest from the decision-making process.

The robo advisors use a methodological process that is immune to emotion and is not influenced by commission-related fees.

They are also really simple to use. The set up is usually a seamless process and the minimum outlay to invest can be fairly small.

They also offer regular statements that will give investors up-to-date information on how their investments are performing and keep track of all additional cash flows.

In addition, robo advisors can automate the rebalancing of the portfolio for the client. This removes the hassle of actively managing your portfolio and reallocating it manually every few quarters. Importantly, there is also no additional transaction cost for rebalancing, unlike a do-it-yourself portfolio.

Potential pain points

But as with any product, there are also things not to like about robo advisors. 

Robo advisors only offer a few different fixed portfolios. It is not possible to deviate from these fixed portfolios. After answering a few questions, the robo advisor will recommend one of the fixed portfolios that they have built. Investors cannot deviate from these fixed portfolios and are not able to access funds that are not offered on the platform.

On top of that, the robo advisor’s advisory fee is an additional cost. As mentioned earlier, investors have to pay the advisory fee, on top of the total expense ratio of the funds that they invest in through the robo advisor.

Although the robo advisory fee is usually less than a percentage point, it quickly adds up over the years.

Is it right for you?

Ultimately, the fewer potential conflicts of interest and the fee-based structures make robo advisors a robust wealth management tool that has the client’s interest at the forefront.

However, they still have their limitations. If you want a more personalised portfolio, the limited number of portfolio constructions in a robo advisor platform may not be sufficient.

Many of the robo advisors also only offer ETFs on their platform. As a result, it may not be useful for investors who want exposure to more aggressively-managed active funds, which have the potential for higher returns.

All things considered, I believe investors who want a simple stress-free passive investment strategy can consider using robo advisors. More savvy investors who are willing to do some research on funds should have a more hands-on approach to save costs and gain access to better-performing funds in the market.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Why I Invest Only in Stocks

Most Financial advisors prescribe diversifying into multiple asset classes. However, I invest solely in stocks. Here’s why.

Professional financial advisors prescribe diversifying one’s investment portfolio across multiple asset classes. This means spreading your investments into each of the four major asset classes- stocks, bonds, real estate, and commodities. In theory, this helps to smoothen returns and reduces the “risk” in the portfolio.

So having a portfolio that is composed entirely of stocks is unconventional, to say the least. However, before you close this article and call me a nut job, let me explain the reasoning behind my asset-allocation strategy.

Stocks: the best-performing asset class

Stocks are unlike any asset class. Eddy Elfenbein, portfolio manager of the AdvisorShares Focused Equity ETF, explains in his blog:

“All other assets are things. They just sit there. If you buy some gold and leave it alone, in 50 years it will still be there, just sitting there. There are income-producing assets like bonds and real estate, which makes them a little better than commodities. But still, they’re just things. They can neither think nor create.

Equity, on the other hand, is wholly different. It’s a legal entity by which people can come together and employ said assets to make goods and services for people… The business works to make a profit, and it keeps investing those profits in the business to make still more profits.”

When you invest in stocks, you are really investing in the power of human ingenuity.

It is, therefore, not surprising to note that over the long term, stocks are by far the top-performing asset class. In fact, according to data from the University of Chicago, in the 100 years from 1915 to 2014, stocks had an average real return (after removing inflation) of 8.3% per year, while bonds returned just 1.1% per year. A $1000 investment in bonds in 1915 would have a “real worth” of $2,992 in 2014, while $1000 invested in stocks would have been worth $2,301,134.

Other studies also consistently show that over the long-term stocks always come up on top, followed by bonds, real estate, and commodities.

The power of time

But performance alone is not the only reason to invest solely in stocks. I also need to be able to ride out the inevitable market swings in the stock market. Thankfully, I have time on my side. As a young investor, I have the holding power to see out the downturns of the market. I do not foresee needing the money from my investments anytime soon, nor do I depend on cash flow from my investments. 

On top of that, my investment objective is really to grow my retirement fund as fast as possible, rather than simply preserving wealth. This makes stocks the ideal investment asset for me.

I can also still be sufficiently-diversified even if I solely invest in stocks. Investing in a range of different companies that operate in different geographies and sectors help to diversify my risk. I can even gain exposure to real estate, by investing in real estate investment trusts (REITs), which are also traded on stock markets.

Building your portfolio

Legendary investor, Peter Lynch, once said, “Gentlemen who prefer bonds don’t know what they’re missing.”

If you are a young investor and have a long investment horizon like I do, having a more aggressive investment portfolio might be the right way to go. However, investing solely in stocks does come with caveats. Investors need to be able to stomach inevitable market swings and steep drawdowns. Having a disciplined long-term approach and sticking to your principles is key to success in the market.

Over the long-term, I take heart that despite the volatile nature of stocks, if history is anything to go by, my stock-heavy portfolio will likely provide better returns than if I diversify across multiple other asset classes.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Can Factor-Based Investing Outperform The Market?

Factor-based investing is an approach that involves investing in stocks that exhibit a few or just one particular characteristic.

These characteristics could be value, quality, or size “factors” to name a few. For example, an investment approach based on the value factor will involve investing in stocks that trade at a relative discount to their peers, be it on a low price-to-earnings (PE) or price-to-book (PB) ratio.

Does factor-investing work?

The idea behind factor-based investing is that the factors that shape the investing approach should be highly correlated with positive investment returns. For instance, back-testing has shown that stocks that exhibit a low PE ratio have over the long-run outperformed the broader market.

Therefore, exposing your portfolio to stocks that exhibit these characteristics will, in theory, reward you over time.

Sieving the wheat from the chaff

But not all factor-based investing works. Choosing the right factor to invest in plays a huge part in your success.

Andrew Ang, BlackRock’s head of Factor Investing Strategies, explained in a recent article that investors need to be able to distinguish between factors that are simply “passing fads” and those that are “fundamentally-based.” He explained two criteria he uses to make the distinction:

  • Economic rationale

The factor should have an economic rationale for its return premium. In the world of Big data, it is easy to find coincidental correlations between a factor and returns. However, many of these correlations are due to chance.

By focusing on factors that have economic rationale which drives their outperformance, we can be certain that there is a legitimate and very real reason behind the correlation between performance and the factor.

  • Decades of data

For the retail investor, it is difficult to gather enough information to backtest a particular factor over decades or even longer. However, funds with access to big data, are able to use the information to see if a factor has a long-term correlation with performance.

Using factor-based investing

If you are thinking of using a factor-based approach for your investment portfolio, there are a few things to take note of.

First, define your investment goal and identify factors that can help you achieve your goals.

Second, not all stocks that exhibit a particular factor will produce similar returns. The correlation between factors and returns is based on a large amount of data comprising thousands of companies. As such, your portfolio needs to be heavily diversified in many companies that exhibit that factor.

Combining factors into a solid investing framework

There is good evidence that factor-based investing has worked well in the past.

However, investors need to identify the factors that are the most correlated with positive returns. It may also be useful to combine certain “style” factors together into a more robust investment framework. An investment framework can help you focus your portfolio on stocks that are even more likely to do well over the long-term.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Timeless Investing Lessons From UK’s Best-Performing Fund

Established in 2010, Fundsmith is the largest mutual fund in the United Kingdom with £18bn assets under management.

Led by its founder, Terry Smith, the fund has more than doubled the market since its inception nine years ago. Investors who invested with Fundsmith from the get-go have earned a total return of 353.2%, or an annualised return of 18.3%, as of 31 October 2019. Comparatively, global equities in general “only” returned a cumulative total of 171.1% over the same time frame, or 11.7% annualised.

Its impressive performance makes FundSmith the number one performing fund in the UK. From its inception to the end of 2018, Fundsmith had a cumulative margin of 13% over the second-best fund and 188% over the average for the sector, which delivered a market-lagging 81.9% cumulative return.

Although I am not invested in the fund, I am extremely impressed by the way Fundsmith is managed. Terry Smith’s annual letter to shareholders is also filled with insightful comments and timeless lessons that we can apply in our own investing. With that, here are some of the key takeaways from Fund Smith’s latest annual report.

Stop trying to time the market!

We are all too familiar with market commentators warning of an impending bear market. Smith says:

“I can now trace back six years of market commentary that has warned that shares of the sort we invest in, our strategy and our Fund would underperform.

During that time the Fund has risen in value by over 185%. The fact that you would have forgone this gain if you had followed their advice will, of course, be forgotten by them if, or when, their predictions pay off for a period. I suggest you don’t forget it.”

Legendary investor Peter Lynch once said that “far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

If you find yourself worried that the bull market has run its course, it will be wise to remember these words of advice.

Growth versus Value

Fundsmith’s investment strategy involves buying and holding fast-growing companies. This strategy has outperformed value investing over the last decade. However, with growth stocks reaching rich valuations, some market commentators believe that value investing may come back in favour.

In his annual shareholder letter, Smith outlines two main handicaps he sees in the value investing strategy:

“One is that whilst the value investor waits for the event(s) which will crystallise a rise in the share price to the intrinsic value that has been identified, the company is unlikely to be compounding in value in the same way as the stocks we seek. In fact, it is quite likely to be destroying value.

Moreover, it is a much more active strategy. Even when the value investor succeeds in reaping gains from a rise in the share price to reflect the intrinsic value he identified, he or she needs to find a replacement value stock, and as events of the past few years have demonstrated, this is far from easy. Moreover, this activity has a transaction cost.”

Let time work its magic

FundSmith has a simple three-step investment strategy: (1) Buy good companies, (2) Don’t overpay, and (3) Do nothing.

While some actively managed fund managers may scoff at the idea of the third point, it is actually one of the key reasons why Fundsmith has done so well since its inception. Smith explains:

“Minimising portfolio turnover remains one of our objectives and this was again achieved with a portfolio turnover of 13.4% during the period. This is the highest level of annual turnover which we have undertaken to date, but it is still tiny in comparison with most funds.”

He adds:

“Why is this important? It helps to minimise costs and minimising the costs of investment is a vital contribution to achieving a satisfactory outcome as an investor.”

The low portfolio turnover ratio resulted in FundSmith having by far the lowest transaction costs among the 15 largest active equity funds in the UK.

In fact, Smith attached a table of the returns of the 15 funds over a 3-year and 5-year period and compared them to their transaction costs. There was, unsurprisingly, a strong correlation between funds with lower transaction costs and higher returns (With FundSmith sitting at the top of the pile).

Final Thoughts

Terry Smith has become one of the most successful fund managers of his generation. He has even been compared to the legendary Warren Buffett. From his investing principles above, it is easy to see why Smith has found so much success in an industry that has traditionally underperformed low-cost index funds. His guiding investment principals can also help retail investors invest better. If you want to read more of Terry Smith’s letters to shareholders, you can head here.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

REITs With Overseas Properties: Yay or Nay?

Mapletree North Asia Commercial Trust and Eagle Hospitality Trust, two REITs that are listed in Singapore with overseas assets, have been in the news for all the wrong reasons. 

If you are not familiar, Festival Walk, one of Mapletree North Asia Commercial Trust’s key assets in Hong Kong, was vandalised by protesters earlier this week. Meanwhile Eagle Hospitality Trust is at risk of losing one of its key assets, The Queen Mary, due to actions from its sponsor. 

Both REITs have seen their unit prices fall considerably when the respective news broke.

The predicament that the two REITs are in has shone some light on the risks involved with investing in REITs with overseas properties. As such, I thought it is an opportune time to discuss some of the advantages and risks of investing in this asset sub-class.

The Positives

Let’s start with the main reasons why investors may want to invest in these REITs. 

Diversification

The most important advantage is REITs with overseas portfolios give investors the chance to gain exposure to a different geographical market. This gives investors the opportunity to participate in economies that could be faster-growing than Singapore’s. It also helps to diversify your portfolio away from Singapore.

Higher yields

REITs with overseas portfolios tend to trade at a discount to REITs with predominantly local portfolios. It is common to find that REITs with overseas properties have much higher yields, offering the potential for better returns.

The downside

While there is the possibility of higher returns, investors also need to be familiar with the downsides and risks.

Withholding taxes

Certain countries have a withholding tax law. This means that cash sent back to shareholders in Singapore end up being taxed, which reduces the REIT’s distributable income.

EC World REIT, for instance, has had to pay a withholding tax to authorities when they repatriated income to Singapore.

Currency fluctuations

If you want to receive your distribution in Singapore dollars, you may have to contend with currency fluctuations. REITs with overseas properties tend to collect rent in the local currency. As such, if the currency depreciates against the Singapore dollar, you may be left with a lower distribution.

Ascendas India Trust is a good example. The steep depreciation of the Indian Rupee has had a big impact on the REIT’s Singapore-dollar-denominated distributions.

Political environment

Singapore enjoys a relatively stable political climate. We tend to take the peace of our country for granted. However, this may not be the case for other countries.

Right now, Hong Kong is facing a major political crisis with protests stretching for more than six months.

As mentioned, earlier this week, Mapletree North Asia Commercial Trust saw its share price stumble after protestors vandalised Festival Walk and set fire to the Christmas tree in the mall. As Festival Walk contributed more than 60% of the REIT’s revenue in 2018, the REIT’s rental income could drop.

Difficulty assessing the quality of the properties

It is easy to visit a shopping mall in Singapore to assess the crowd and the tenants. However, assessing the quality of overseas properties is much more challenging. 

Investors who are unwilling to go down to physically examine a REIT’s portfolio will have to rely on annual reports and the details of the property in the company’s quarterly filings.

REITs with overseas properties: Yay?

Knowing both the pros and risks, the question now is whether it is still worth investing in REITs with overseas portfolios? 

I think the answer is yes!

Despite the recent mishap at Mapletree North Asia Commercial Trust and Eagle Hospitality Trust, the potential for a higher return is too good to ignore. The market is currently very apprehensive of such REITs and has generally priced them at a large discount to their peers. The price mismatch has created an opportunity for more yield-hungry investors.

Don’t let the two recent sagas deter you. I believe many REITs with overseas properties, despite the risks, are likely to continue dishing out stable dividends and will continue to provide investors with great long-term returns.

We can also reduce risk by choosing the REITs within this sub-class that have more favourable characteristics. If we do our research and diversify sufficiently, I think it is still a good idea to have REITs with overseas properties in your investment portfolio.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Can We Really Do Good While Investing?

Here’s how investors can make the world a better place through good investing decisions.

Are we really able to do good while investing?

This question irked me at the time I was thinking of making a career switch to investing. I wanted a career that was both fulfilling and enabled me to make a difference to the world at the same time.

Thankfully, through further reading, I can say the answer to that question is an emphatic yes.

As investors, we are a small cog in the financial markets that help make the world a better place. 

Every drop counts

So how do we do good when we invest?  Well, let’s start at the very beginning. 

When a start-up that is looking to improve the world develops an idea, it needs funding. Venture capitalists help to fund these ideas.

In turn, these venture capitalists invest because they know that there is a stable public market system behind them.

Along the way, these startups enrich the lives of numerous stakeholders, including employees, customers, and shareholders.

At its initial public offering, the company then raises more funds through a public offering of shares.

Those who invest in initial public offerings do so because of the assurances of the liquidity of the public market and the ability to sell shares at a future date, which is when we (stock market investors, or public market investors) usually come in.

The final piece of the jigsaw

All of which means that we, public market investors, are a small but important piece of the jigsaw that helps drive innovation and the improvement of society through capitalism.

As you can see, by participating in the stock market as investors, we are indirectly part of the reason why startups are able to raise much-needed funds in the first place.

Impact investing

Besides simply being part of the financial markets, we can also choose to invest in companies that are actively improving the world.

One way is to invest in companies that are building a better future for tomorrow through innovative technologies such as Google. We can also invest in companies that uphold a high standard of corporate social responsibility by giving back to society or through actions that help reverse climate change.

The more investors embrace Impact investing, the more firms are likely to embrace the need for a strong corporate social responsibility to enrich the lives of other stakeholders and the world.

Recently, the Singapore government set aside US$2 billion in funds to participate in public market investment strategies that have a strong green focus. Singapore Education Minister, Ong Ye Kuang, described how investments help to shape the world saying, “Finance fuels the economy and business. It determines investment decision and it drives action.”

Enriching others

As you can see, investing is certainly not a zero-sum game. The injection of much-needed capital into companies that are improving the world aids numerous stakeholders along the way.

Even if we solely invest in the secondary market (the public stock market), we are still an important – albeit small – part of the financial markets that is essential in capitalism and the betterment of the world.

Further, by focusing our investing efforts on responsible companies that are not solely profit-driven but have a strong corporate social responsibility to do good, we can mold the way investment decisions are made and help to prod business towards socially responsible investment decisions.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

3 Portfolio Management Strategies To Adopt

These 3 portfolio management strategies can help you better manage the risk-reward profile of your investment portfolio.

Portfolio management is an important skill in investing. Take on too much risk and you may be left with sizeable losses. Take on too little risk and your returns will be mediocre. 

So how do we balance risk and returns? 

Given the uncertainty surrounding the market today, I thought it would be an opportune time to share some portfolio management tips that I believe investors can adopt.

Mind the size

Whatever you invest in, it is important to invest an amount that you are comfortable with. 

Of course, this can vary depending on the size of your portfolio, your investment strategy, investment horizon, and even your risk appetite.

For stock investors, I encourage you to invest no more than 5% of your entire portfolio capital in a single stock. This reduces the risk that a sudden drop in price in the stock will have a detrimental impact on your returns.

It is not uncommon to find stocks fall more than 30% and never recover. Sometimes it may not be the fault of the investor. Unforeseen circumstances can cause a sudden and irrecoverable disruption to a company’s previously sound business.

We can avoid potentially painful losses when we sufficiently diversify our investments.

Manage the risk

Adding to the first point, it is important to assess the risk-reward profile of a particular investment. For an investment such as a high-growth stock that has a high-risk but high-return possibility, it may be wise to size down your investment to reduce the chance that a permanent fall in the price of the stock will cause a large loss to your portfolio.

Keep cash in hand

Although not all portfolio managers may agree, I prefer to keep some cash in hand. The cash will come in handy when a bargain suddenly appears in the market.

To ensure that I have the means to take advantage of an investment opportunity, I hold 5% of my total investment capital as cash.

There are, however, exceptions to this rule. If stocks have seen a market-wide decline, presenting plenty of investment opportunities, it may be wise to be fully invested to make the most of these bargains.

Portfolio Management Simplified

Obviously there is no one-size-fits-all strategy to invest well. Investors need some investing experience to personalise their own portfolio management according to their goals and needs. However, these three strategies can act as a framework for how to manage an investment portfolio.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

5 Things To Look For in REITs

Here are 5 essential characteristics you want your REITs to have.

Investing in Real Estate Investment Trusts (REITs) can be hugely rewarding. Besides providing investors with exposure to a variety of real estate, REITs also enjoy tax benefits and pay out regular and stable dividends (technically REIT dividends are called distributions but let’s not split hairs here) each year.

But as with any asset class, not all REITs will perform equally. Investors need to be able to sieve the wheat from the chaff. With that said, here are five things to look out for that can help you choose the best REITs to invest in.

1. A strong existing portfolio

Investors should look for a REIT that has a good line-up of properties in its portfolio. As a guide, here are some qualities to look out for:

  • A diversified portfolio of properties, which ideally includes both Singapore and off-shore assets
  • Properties that have a long or free-hold land lease
  • Highly sought after sites that could appreciate in value over time
  • Properties that are located near to public transport or residential hubs (in the case for retail REITs)
  • Characteristics that suggests tenants are willing to continue renting the space such as a high tenant retention rate, history of positive rental reversions and a high occupancy rate

2. Capable and honest management

Managing a portfolio of properties is no easy task. Managers of the REIT need to maintain a good working relationship with tenants, upkeep the property and carry out strategic asset enhancements to keep the property desirable.

On top of that, managers also have to sell underperforming assets and recycle the proceeds into investments that can grow over time. REIT managers need to make use of low-interest rate environments to grow the portfolio, whilst maintaining a safe capital structure.

With that said, here are some qualities to look for:

  • A long track record of stable returns for unitholders
  • A track record of good capital-allocation decisions
  • A low frequency of private placement (sale of equity only to privileged investors) equity fundraising that dilutes minority unitholders

3. A safe capital structure that can be optimised further

Ideally, investors should look for REITs that still have room to grow in the future. One way that a REIT can grow is to take on more debt in the future to buy assets that can increase its dividend per unit.

In Singapore, REITs need to maintain a capital structure that has not more than 45% debt and 55% equity. Investors should look for REITs that have debt levels well below this regulatory ceiling. While there is no hard and fast rule here, I prefer REITs that have a debt-to-asset ratio of not more than 35%.

The interest expense should also be manageable. REITs will usually provide investors with a snapshot of how much interest they have to pay relative to their earnings. This is called the interest coverage ratio. The higher the interest coverage ratio the better as it suggests the REIT earns more than enough to cover interest payments.

4. A good an honest sponsor

The REIT sponsor is usually also one of its major shareholders. It is responsible for providing the REIT with a pipeline of properties and may also have a stake in the REIT managers.

With such a big say in how the REIT is run and the possibilities of conflict of interest, it is therefore absolutely vital that you trust that the sponsor will treat minority shareholders responsibly.

To determine if a REIT has a good sponsor, investors need to look at the sponsor’s track record in both sponsoring and managing REITs.

Mapletree Investments Pte Ltd in Singapore is one example of a good sponsor that has treated minority shareholders responsibly in the past.

5. A decent valuation

Last but certainly not least is a decent valuation. While some investors prescribe the use of the price-to-book ratio to determine value, I prefer the dividend yield. REITs are a buy-and-hold vehicle and usually do not rapidly recycle their assets. As such, REITs may trade below or above their book values for extended periods of time. For instance, REITs that own properties located in Hong Kong tend to trade at a discount to book value because of the relatively low rental yield of properties in Hong Kong.

On the other hand, the distribution yield gives investors a much clearer idea of how much returns they can actually expect to make.

An investment return in a REIT is the addition of the current yield plus any capital appreciation. As such, investors should look for REITs that have high yields rather than low book values.

The Final Takeaway

Of course, REITs that displays the first four characteristics listed above will likely not sport the highest yields in the market. Investors need to determine for themselves what’s a good price to pay for a REIT that exhibits these favourable characteristics. From experience, if a REIT fits all the characteristics above but trades at a slight premium to the market (ie lower distribution yields compared to the other REITs), they still tend to do much better than their peers over time.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

The Power of Compounding

Compounding works best the longer the investment timeframe.

Compounding is a well-publicised concept in investment. Essentially, it refers to the returns that an investor gets when he reinvests his earnings each year. 

Albert Einstein was said to have referred to compounding as the eighth wonder of the world. The power of compounding is also well illustrated by Warren Buffett’s own investment journey. Despite starting his investment journey at the ripe age of eleven, 99% of Buffett’s wealth was earned after his fiftieth birthday.

How you can compound your wealth

So how can the retail investors compound wealth over time?

Ser jing and I have formed a list of criteria that can help us find stocks that can compound meaningfully over the long term.

For instance, one of the characteristics we look out for is companies that operate in an industry that is growing. These companies tend to grow along with the industry. But that’s not all. We also want to pinpoint companies that can capitalise on the growing market, whilst increasing their market share at the same time.

Take Amazon.com for example. Well before the company reached its current size, shrewd investors could have identified Amazon as the next big thing. Jeff Bezos was a visionary entrepreneur who was focused on customer satisfaction. He realised the importance of a great customer experience, which enabled Amazon to dominate the growing e-commerce space. The signs back then were telling.

Even if you had bought in at the peak of the dot com boom, you would have made a 16% annualised return over 20 years. That’s a 2000% gain in just 20 years.

In addition, we also look for disruptors who can win market share in an already large industry or even create a whole new market on its own.

For instance, in the past customer relations management was not a big industry nor did companies truly identify it as a problem that needed solving. However, software such as salesforce has completed changed the way companies manage their customer relations. Nowadays, many companies cannot go a day without a customer relations tool. It has become an important software in some of the largest companies in the States.

Although much more prominent now, Salesforce is still small in relation to the potential addressable global market.

Time is your friend

Compounding is certainly a powerful investing concept. But, perhaps the biggest takeaway of all of this is that compounding works best the longer it is allowed to grow. Consider the example below.

If you have an investing life span of twenty years and are able to compound your wealth at 10% per year, your eventual returns will be 570% at the end of the investment cycle. Not too shabby. However, by adding just another five years to the investment time frame, you would have made a 980% return, 410% more in the extra five years. As you can see, time is indeed your friend when it comes to investing.

If you are thinking of investing but have not started yet, remember that the earlier you start, the more rewards you will reap in the future.

Hopefully, this post encourages readers to start their investment journey as soon as possible. With that, Happy compounding and invest on!

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.