Friday, July 5, 2019

Q2 2019 Portfolio Update

How has everyone been? I hope everyone is doing well.

I've been MIA for quite some time. I had an exam paper to clear and have spent quite some time unwinding after my paper. I have recently become acquainted with Chinese Science Fiction (translated to English, thank you) and it has become my new love interest! lol

I digress, financial updates first before I wax lyrical about my readings.

Dividend Income

Q2 2019 SGD Dividend Income

After a few quarters of tweaking my portfolio, there is finally dividend growth in my SGD-denominated portfolio! Weaker counters have been pruned and, in their place, are stronger counters with more predictable cash flows. I don't think the dividend growth rate is sustainable yet. I have recently sold half of my stake in Singtel and, without a suitable income replacement, I expect dividend income to drop again.

Q2 2019 USD Dividend Income

In my USD-denominated portfolio, dividend growth hit a new high this quarter. A huge chunk of the increase came from the position I have been building in Hongkong Land since last year. Organic dividend growth from US dividend aristocrats are still too minuscule to be observed. The positions in BlackRock and Medtronic have also somewhat contributed to the increase. The increase is offsetted with Kraft Heinz's dividend cut. Meanwhile, Welltower REIT and General Mills broke their dividend growth streak, so I do not expect dividend growth from them for some time.

In this quarter, I initiated a new smallish position in Riverstone Holdings at a TTM PE of 17.02. I have been eyeing Riverstone for quite some time and the decline in prices allowed me to take a small nibble. From a financials standpoint, Riverstone has a good net profit margin (>10%), ROE (~20ish), and minimal debt. From a historical PE perspective, it remains quite richly valued still. Hence, I have kept this position small as part of my risk management plan. I intend to scale in slowly if the valuation multiple compresses further.

Next, I added to my OCBC position at a Price/NAV of 1.06 using leverage. Similar to my last quarter's purchase of OCBC, the rationale is to increase my exposure to the Singapore banking sector. OCBC was selected as it is undervalued relative to its peers.

As mentioned above, I sold half of my stake in Singtel following the run-up in price towards the end of June. A longer term outlook on their dividends seemed hazy. The intense competition between telcos does not inspire confidence in me. If I am wrong in my analysis, I still have half of my stake in Singtel.

I participated in the Preferential Offering for Frasers Centrepoint Trust and applied for excess units as well. I was allotted all the excess units I applied for. As a result, Frasers Centrepoint Trust now occupies one of the top 5 positions in my equity allocation.

I have also opted for scrip dividends for both OCBC and Raffles Medical Group.

Over at the US side, I exited my entire stake in Kimberly Clark at a TTM PE of 25.59. Kimberly Clark's top-line has been going nowhere, its dividend growth rate has been declining, and earnings are somewhat fueled by share buybacks. Its payout ratio is on the riskier side and I do not want to take any chances. Commentary by management has always been focused on cost-cutting and expense control, which is not something desirable. After holding Kimberly Clark for 2 years and 4 months, my annualized returns are 0.5% (attributed to my small stake and commissions eroding almost all of my returns).

I added to my position in Medtronic at a TTM PE of 24.85. I initiated a small position in Medtronic in Q1 2019. I intend to build this position up slowly.

I initiated a new position in the Tracker Fund of Hong Kong to gain exposure to the Hong Kong market. Initially, I wanted to hand-pick stocks in the HK market as well, but on second thoughts, I realize I do not have the strength nor the time to do so. The HK Tracker Fund should suffice.

I have also added to my silver position in this quarter.

It might come as a surprise to readers, but I've initiated a new position in Ethereum this quarter. In fact, I have been interested in cryptocurrencies even way before the crypto bubble. In one of my old blog posts from 2016, I shared about my readings on the subject. After mainstream consciousness drove the prices of various cryptocurrencies into the stratosphere, I had no choice but to sit on the sidelines. It was not until my friend Rolf's post on the subject made me realize that the crypto market has probably bottomed out and it may be a good time to buy. "Why Ethereum?" could be one of the posts I might consider doing up in the future.

Net Worth breakdown
Compared to Q1 2019, my cash allocation decreased from 41% to 34% mainly due to the purchase of equities in the market sell-off and the payment of my balance transfer debt. Equity allocation increased from 37% to 43%.

Net Worth Breakdown

As per before, "the pie chart depicts the breakdown in my net worth across the various asset classes in percentage (pie chart neither includes my CPF nor my emergency fund). To be conservative, I computed my precious metals allocation at spot price even though I am holding everything in physicals."

Current Holdings
After converting all my USD and HKD holdings to SGD at the end of the quarter, the following table shows the percentage of each stock from only the equities allocation of my net worth (arranged in descending order).

Stock Name
Hongkong Land
Frasers Centrepoint Trust
Parkway Life REIT
DBS Group Holdings Ltd
The Tracker Fund of Hong Kong
First REIT
Mapletree Industrial Trust
BlackRock Inc
Thai Beverage
Capitaland Mall Trust
ST Engineering
Raffles Medical Group
Capitaland Limited
Medtronic PLC
Mapletree Commercial Trust
Dairy Farm International Holdings
Japan Foods Holding Ltd
JM Smucker Co
Frasers Property Limited
Frasers Commercial Trust
ISEC Healthcare Ltd
Frasers Logistics & Industrial Trust
Welltower Inc
Sheng Siong Group Ltd
Riverstone Holdings Limited
Kraft Heinz Company
QAF Limited
General Mills Inc
Hormel Foods Corporation
Abbott Laboratories
There has been some changes in my top 5 holdings. Singtel has finally been kicked out of the top 5 (Yay!). DBS was kicked out of the top 5 after I subscribed to Frasers Centrepoint Trust's Preferential Offering, bringing the latter into my top 5. Close at 7th place is the Tracker Fund of Hong Kong. Medtronic's allocation increased from 0.75% from the last quarter to 1.99% this quarter.

REITs have been on a tear lately. Similar to my outlook from the previous quarter, I will still be holding on to them for income. 
Similarly, the market flow into consumer staples has made it difficult to add to my consumer staples counters. I totally missed out on selected utilities I have been eyeing when the market rebounded. 

Debt Levels
Since I've started dabbling in leverage, I have been paying closer attention to my debt levels. Currently, my modified "interest coverage ratio" and "debt-to-equity ratio" is as follows:

Interest Coverage Ratio: 29.67
Debt-to-Equity Ratio: 0.01

With the modified "Interest Coverage Ratio" representing the total amount of cash on hand (excluding emergency funds, interest income, and dividend income) divided by the total debt payable and "Debt-to-Equity Ratio" representing total debt payable divided by equity (what I own outright).

Compared to the previous quarter, my Interest Coverage Ratio has an insignificant drop from 30.35 to 29.67 while my Debt-to-Equity remained the same. Looks like I have been buying more using leverage lately.

Emergency Fund
Same thing month-in, month-out. Stacking cash to build a stronger financial buffer against recession and unemployment.

I have also signed up for a term insurance plan with a critical illness rider with Singapore Life. With this addition, I am covered with Hospitalisation & Surgical (H&S) insurance, Personal Accident insurance, and a term insurance plan with a critical illness rider. The underlying motivation to get the new plan is to obtain coverage for an area in which I am lacking - critical illness.

From a cost perspective, it would have been better for me to get a similar plan from Aviva. However, Aviva's customer service and responsiveness just plain sucks. After multiple phone call follow-ups and emails, things were still not moving. In the end, I gave up on them.

The way to get Aviva to move, a blogger friend shared with me, is to expose their inefficiencies on their social media page for all to see. That will definitely get them moving! LOL!

Anyway, I digress. The premium for Singapore Life's term insurance portion is fixed while the critical illness portion escalates with age.

Singapore Life is one of the newer kids on the block, so I did some digging. A cursory search on Google revealed that they acquired the portfolio of Zurich Life when the latter exited their business in Singapore. Singapore Life's shareholders include US Dividend Aristocrat Aflac Inc, which I have came across before.

My contract got renewed to end of Q3 2020. Hence, there is additional visibility in forecasting and allocating cash flow from employment.

Capital Allocation Thoughts
Same as per last quarter, I will be adopting a defensive stance in portfolio management.

I have also begun to think deeper into portfolio construction and the role that each constituent component play in the grand scheme of things:

1). Instead of the STI ETF, would I generate more returns if I invest into an ETF that tracks the Hang Seng Index (e.g. Tracker Fund of Hong Kong). I have come across quite a number of people who bemoaned the "dead-ness" of Singapore's market and the peak growth of Singapore's "bluechips". In contrast, the Chinese market seems to be still growing.

2). Should I convert my SG portfolio into a REIT and bank portfolio since Singapore is a REIT haven and have strong banks (relative to other nations)? With this secure base, I could use the income generated to invest in non-REIT and non-bank market leaders of the various sectors in their respective exchanges to balance things out (e.g. the US market and its dividend aristocrat consumer staples sector, the Malaysian market and its glove industry, Canadian market and its energy sector, etc).

3). Conceptualizing my portfolio as a container of multiple sector ETFs. For example, my nano financials ETF currently consists of DBS, OCBC, SGX, and BlackRock. Should they be equal-weighted? What should be the weight for each component in each nano ETF be? Currently, I'm thinking of overweighting large-cap stocks relative to mid-cap and small-cap stocks for their "apparent safety" (this is not foolproof). What is the maximum cap for each component within a nano ETF and what is the maximum cap for each nano ETF in my overall portfolio?

4). Drawbacks from such an approach include commission fees and complacency pertaining to the destruction of small positions.

5). Now with cryptocurrency in my portfolio, what is the hard cap for it? If there is a mass adoption of cryptocurrencies in the future, what is the middle ground I could take today?

For now, I have some provisional answers to the above questions. As my thoughts have not been fully fleshed out yet, I will refrain from elaborating at this juncture.

In the interim, the focus is on maintaining a healthy level of cash to make occasional purchases when valuation permits. The focus is on sustainable dividends, which could either be used to build my cash position further, pare down debts, or to add to dividend stocks. Once net worth increases, the absolute cap of my allocation towards cryptocurrencies would naturally increase. Setting a cap prevents me from over-investing into cryptocurrencies at any point in time.

I think I broke my reading record in this quarter, lol. I never was that hungry with investing literature, so you know where my priorities lie, lol.

Books completed:
- The Paper Menagerie and Other Stories by Ken Liu
- Broken Stars, edited and translated by Ken Liu
- The Garden of Evening Mists by Tan Twan Eng
- The Three Body Problem by Liu Cixin (1st book in the Remembrance of Earth's Past Trilogy)
- The Dark Forest by Liu Cixin (2nd book in the Remembrance of Earth's Past Trilogy)

Currently reading:
- Death's End by Liu Cixin (Final book in the Remembrance of Earth's Past Trilogy)

Bought, but haven't read yet:
- Grace of Kings by Ken Liu (1st book in the Dandelion Dynasty Trilogy)
- Wall of Storms by Ken Liu (2nd book in the Dandelion Dynasty Trilogy)
- Ball Lightning by Liu Cixin
- Invisible Planets, edited and translated by Ken Liu
- Waste Tide by Stanley Chan/Chen Qiufan

Man, the reading is damn enjoyable!

Thanks for reading! Time for me to head back to reading! =P