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Difficulty Level: Easy
Step 1: Support Local, Invest International
Step 2: Optimize your bond allocation
Step 3: Stay in the game!
How to LEVEL UP at once?
For Robo-advisors, we prefer Endowus!
During this trying time for Singapore’s economy, it’s crucial for us to support local businesses – hawkers, restaurants, home-bakers, bars, retail, and other businesses that may be struggling. No explanation is needed here.
However, when it comes to your investments, we believe it is prudent to diversify at least part of your portfolio to foreign markets. Here are key reasons why:
Reason 1: Your job/property is probably already tied to Singapore’s economic health. The country risk is very high if your entire wealth and livelihood is dependent on just Singapore’s performance. While it is impractical for most of us to extend our career or property investments away from our home country, it’s significantly easier to diversify our stock and bond investments.
Reason 2: The Straits Times Index hasn’t had stellar returns. It’s possible for this to continue. Singapore’s STI Index has returned +20% over the last 10 years, compared to +150% for the MSCI World Index (a globally-diversified developed market stock index).
Reason 3: The Straits Times Index doesn’t offer exposure to certain key sectors. Banks make up the bulk of the index, with 40% of the index weight comprising DBS, OCBC, UOB. There is a notable absence of Information Technology and Healthcare-related stocks, which are commonly considered to be higher growth industries.
Besides reducing concentration risks arising from home bias, investing globally will potentially give investors exposure to higher growth markets and sectors.
The SGD Bond market isn’t the friendliest to investors. A majority of bonds trade in minimum denominations of S$250k! As an alternative, many Singapore investors have turned to Bond ETFs, which is a sub-optimal investment vehicle in our view.
On average, Bond ETFs have underperformed Bond Mutual Funds over the past decade, even after accounting for fees (see this article for details). The reason for the underperformance lies in the Bond ETF’s passive replication of its underlying index. Even when a bond default is imminent, a Bond ETF has to hold onto the bond, if that bond is part of the Bond Index. Meanwhile, a Mutual Fund manager can manage risk proactively, e.g. by selling off bonds issued by companies that have an increasing likelihood of default. Generally an active investing strategy for bond funds works better than passive investing.
For example, we have seen an annual outperformance of between 0.4% to 0.6% for some of the most widely-held SGD-denominated Bond Funds (Pimco Income Fund and Eastspring Singapore Select Bond Fund), relative to their respective benchmarks.
The above outperformance is net of fees. Generally, one needs to be mindful of mutual fund fees, which are typically higher than ETF fees. Mutual funds with high fees are less likely to outperform. For example, the Nikko AM Shenton Income Fund has a relatively high total expense ratio of 1.13%. While this fund does not have a benchmark index, it aims to return 4% per annum over the medium to long term to investors. So far, the high fees have hindered its goal – the annualized return since the start of 2015 has been 2.9%.
As such, fund selection is incredibly important. Our own decision has been to choose cost-efficient Mutual Funds for Corporate Bond exposure. Meanwhile, we would opt for Government Bond ETFs (such as the SGD-denominated ABF Singapore Bond Index Fund) for high-grade Government Bond exposure.
Let’s say you’re great at timing the market. If you’d invested $10,000 yearly into the MSCI World Index on the best possible date (the market low) – over a 20-year period ending 2019 – you would have enjoyed an average annual return of 9.0%.
Now let’s say you’re really bad. If you’d invested $10,000 yearly into the MSCI World Index on the worst possible date (the market high) – over a 20-year period ending 2019 – you would have enjoyed an average annual return of 6.6%!
Surprise! Was that return better than you thought? For the “worst market timer”, at the end of 20 years, the cumulative investment of $200,000 would have grown in value to $403,022!
In short, staying invested in the market is much more important than timing the market.
Let’s say you agree with us on all three points – 1) getting geographical diversification, 2) optimizing your bond allocation, 3) staying invested.
What’s the best way to get them done? There are three obvious options.
- You could Do-It-Yourself (DIY). In our view, this option is best suited for investment-savvy individuals who can commit the time and effort to proactively manage their portfolio.
- You could use a Robo-Advisor. In our view, this option caters to time-constrained individuals with heavy personal and career goals, who prefer a relatively low-cost and holistic solution.
- You could rely on a Financial Advisor. In our view, this option can add value for individuals who prefer more handholding for their portfolios, as well as for high net worth individuals who have more complex portfolio considerations or needs.
In the table below, we elaborate on the pros and cons of each.
There are two main categories that Singapore-based Robo-advisors fall under based on the investment vehicles used.
- Platforms that invest via ETFs. These include Stashaway, Syfe, Kristal.AI, Utrade Robo (UOB Kay Hian) and Autowealth. We’ll call these “ETF Robos”. Currently, many of them use US-listed ETFs.
- Platforms that invest via Mutual Funds. These include Endowus and MoneyOwl. We’ll refer to them as “Mutual Fund Robos.”
Below, we will look specifically at how Endowus fares against the ETF Robos.
We prefer Endowus given our views regarding the current investment environment, after considering the investment vehicles used, investment style and forex hedging policy.
Note 2: ETF Robos may express a preference for a specific investment style via their choice and weightings to the specific ETFs chosen. For example, Syfe’s Equity100 portfolio has a tilt towards growth, large-cap and low-volatility factors. Stashaway’s portfolio asset allocation is dynamically optimized around economic data, risk management and valuations.
We mentioned previously that Corporate Bond Mutual Funds generally outperform ETFs. In particular, we highlighted Pimco Income Fund and Eastspring Singapore Select Bond Fund. Endowus currently invests in both of these mutual funds.
Both ETF Robos and Endowus are cost-competitive. However, the portfolio for ETF Robos is easily replicable and can be further cost-optimized using a DIY approach.
Most ETF Robos in Singapore currently use US-listed ETFs. Singapore investors need to pay a higher withholding tax rate on dividends from US-listed ETFs, versus those from Irish-domiciled stock ETFs. There are also US Estate Duty implications for US-listed ETFs held by investors in Singapore.
Note 2: Do note that the above assumes an Endowus account that is funded using cash. Endowus portfolios invested via CPF and SRS will have a flat platform fee of 0.4% and 0.40%-0.63% fund expense ratio (depending on the chosen asset allocation).
Note 3: Please see Appendix for how we estimated effective withholding taxes.
Earlier on, we mentioned that cost-efficiency matters a lot when it comes to selecting mutual funds.
Endowus has access to lower fees as it qualifies for the “institutional share class” of several mutual funds. Fees are significantly lower for the “institutional share class” versus the “retail share class”. Note that fund platforms like Fundsupermart or Dollardex typically only provide access to the “retail share class”.
E.g. for the Pimco Income Fund, the fees are 0.55% per annum for “institutional share class” fees VERSUS 1.45% per annum for the “retail share class” even though the portfolio is the same!
In addition, Endowus rebates you on any recurring commission fees received from the fund managers. These are known as trailer fees.
We looked at counterparty risk, size of the Robo-advisors and US Estate Duty implications. We feel more comfortable with Endowus given that client assets are custodized in their own name, instead of custodizing it in the Robo-advisor’s entity.
In addition, Endowus appears to be the 2nd largest Robo-advisor platform in Singapore by assets under management (AUM). In our opinion, this favourable market positioning makes it more likely to survive in the long-run. This matters for consumers who are long-term investors.
Furthermore, most ETF Robos in Singapore use US-listed ETFs, which have US Estate Duty implications for investors in Singapore. A tax of up to 40% may apply for holdings of certain US assets (including US-listed ETFs) that are in excess of US$60k.
Note 2: US estate duty of up to 40% may apply to assets (which includes US stocks, US-listed ETFs, US real estate and some types of US debt instruments) that are in excess of a US$60k tax exemption. More details may be found on the US IRS website.
Endowus provides the option to use CPF savings, as well as two different cash management options catered to separate risk profiles. This is on top of the option to use SRS Savings, which Stashaway also provides.
To summarize, the three options – 1. Doing-It-Yourself, 2. using a Robo-Advisor, or 3. employing a Financial Advisor – all have their distinct advantages when it comes to getting foreign investment exposure, bond exposure, and staying invested.
For those who are more time-constrained, Robo-advisors provide a hassle-free approach at a reasonably low cost.
For our Robo-advisors in Singapore, we prefer Endowus. After considering the investment approach, cost-efficiency, risk management and other factors, we see it as a superior option to ETF Robos.
For more information on Endowus, do visit their website or drop us a comment!
Appendix (i.e. Totally Optional to Read)
1) How we estimated dividend withholding tax costs for ETF Robos
For a detailed explanation of what withholding taxes are, do read this article first.
When we looked at the ETF Robos vs Endowus, we assumed a balanced risk asset allocation has 60% in stocks, of which half will be invested in the US markets. The remaining 40% of the portfolio is in bonds.
ETF Robos that invest via US-listed ETFs will be subject to a 30% withholding tax on dividend distributions made from these ETFs.
The dividend yield on global equities is approximately 2%, using the iShares MSCI ACWI ETF (that tracks MSCI All Country World Index) as a reference.
The estimated withholding tax that US-ETF Robos will incur will be 0.36% per annum (60% stock allocation * 2% dividend yield * 30% withholding tax) to US authorities.
The estimated withholding tax that UCITS-Funds Robos will incur will be around 0.18% per annum (30% US stock allocation * 2% dividend yield * 30% withholding tax) to US authorities.
In reality, the effective withholding tax for the US-ETF Robos’ stock portfolio will be more than 30%, since some Non-US countries tax authorities do withhold stock dividends when it is paid to the US-listed ETF and the US-listed stock ETF withholds an additional 30% of its dividends paid to the Singapore investor. Using a US-listed ETF that invests in a China stock for example (Scenario 2 in the chart below), 37% of dividends is actually “lost” by the Singapore Investor.
2) Using Robo-advisors to invest CPF OA and SRS savings make sense
For CPF. There are multiple restrictions when it comes to investing monies in the CPF OA account (see this page for details). For example, you can only use up to 35% of the OA investible balance to buy individual stocks (and they must fall within the list of eligible SGX-listed stocks). Given the long-term nature of CPF savings, an alternative is to invest CPF OA savings using Endowus, which is currently the only Robo-advisor licensed to invest CPF monies. This provides you with a more diversified and global exposure, and you can use the full 100% of the OA investable balance. Long-run returns will also have a high probability of exceeding the 2.5% OA interest rate.
For SRS. Given that uninvested SRS savings only earns a paltry 0.05% interest rate and is illiquid, it makes sense to fully invest your SRS savings (even before using your cash savings).
Is there a comparison chart on the AUM of each robo advisor? I couldn’t find updated info or none at all for some robo advisors.
Hi JW, apologies for the laggy reply. The platform had incorrectly categorized your comment as spam.
As far as I know, I don’t believe that the AUM info is publicly available. If it provides any comfort, I can say that the AUM for Stashaway and Endowus are over the hundreds of millions at the moment.
Amazing stuff! I’m just getting started on bond investing with a timeframe of 3-5 years. So far have been simply putting it into Singapore Savings Bonds just simply because I have been too short on time to actively manage. This might be the wrong place for the question, but I’m wondering how to think about the current economic climate and its relation to macroeconomic climate.
With all the bad news that we’ve come through so far in 2020, and assuming that the rest of the year and on is going to be much more positive (US elections, Brexit correction, hopefully a vaccine!), this current period would be the lowest interest rate environment we would see for a while.
If that were the case, wouldn’t this be the worst time to invest into the bond market? (of course not including the fact that platforms like Endowus would recalibrate as the environment changes)
Hi Nigel,
Thank you for your kind comment.
Personally, both stocks and bonds are on the expensive side to me. So I would be cautious on borrowing too aggressively for now.
1a) On stocks, I think there’s more opportunities on value stocks vs growth stocks, given a decade of underperformance for the former. For example, I would rather buy a China Construction Bank or a HK Land, victims in a recession but trading at relatively cheap valuations of 0.6x and 0.3x Price-to-Book respectively, than buy a e-commerce company like Shopify that trades at 320x 2022 earnings.
1b) Separately, the rebound since March has been driven by a small number of stocks. I would have been more comforted if the rally was more broad-based. Another thought is that a lot of stocks that did well recently (tech stocks, delivery stocks like UPS & Fedex, grocers like Walmart & Costco) are those tied to a lockdown scenario. If a vaccine launches successfully, we might see a rotation out of these names to the value stocks that are doing really poorly now (banks, hospitality and energy).
1c) Stock volatility is still elevated relative to recent years, so if you don’t want to chase the market, you could always SELL put options to receive some option premiums. For example, the S&P 500 is now around 3,400. You could sell 3-mth put options on the S&P 500 ETF with a strike at around 3,000 (12% below current levels), and receive option premiums that work up to around 6% per annum.
2a) On bonds (between govt bonds, investment-grade bonds and high yield), investment-grade type corporate bonds make the most sense to me (relative to fixed deposits or short-term endowments which currently yield ~1-2% per annum), especially for your investment timeframe of 3-5 years. I happen to be working on a SGD bond article on Singapore REITs, and the below seem most attractive to me at the moment (you will have to pay broker commissions, so the yield will be slightly lower than what I indicated below). The limitation is that SGD-bonds trade in lot sizes of S$250k.
• Keppel REIT 1.9% 10-Apr-2024 bond (puttable 10-Apr-2022), which has a yield-to-put of 3.6%. KREIT is 45% owned by Keppel Corp, which in turn is 21% owned by Temasek Holdings.
• ESR REIT 3.95% 9-May-2023 bond, which has a yield-to-maturity of 3.5%.
• Suntec REIT 1.75% 5-Sep-2021 bond, which has a yield-to-maturity of 3.1%.
• Mapletree Industrial Trust 3.02% 11-May-2023 bond, which has a yield-to-maturity of 2.3%. Mapletree Industrial Trust is 26% owned by Temasek Holdings.
2b) I think govt bond yields are pretty risky at the low levels they are at. 10-year SG Government bonds yield 0.91% now. You just need yields to move up by 0.1% (to 1%) to wipe out your entire year’s yield return. Global High Yield bonds currently yield 5.6% above government bond yields on average. I think this is relatively low when banks/rating agencies are projecting High Yield default rates to hit the high single digits this year. Which is why I think Investment-grade bonds remain the sweet spot for now.
3a) For the events you mentioned, the outcome on markets could go either way. If Biden is elected and he raises corporate taxes to 28% (Trump had previously lowered it from 35% to 21% when he took office), that’s going to be a huge dent on future US corporate earnings (which are not yet factored into bottom-up analyst valuation models but Goldman thinks that this will result in S&P 500 EPS falling from their estimated 170 to 150 in 2021 if it does happen).
3b) If a vaccine is successfully rolled out, as mentioned previously, we might see a rotation out of the recent winners (tech, grocers, delivery services) into the laggards (banks, energy, hospitality and industrials), so the overall market might still be flattish.
Long story short, I think there is virtue in taking the time to slowly phase in your portfolio, regardless the environment. Trickling in perhaps 10-15% of intended final portfolio size every two months and you will be fully invested within the 1-1.5 years. If the market is still crap by then, perhaps it’s time to think about taking some modest leverage (I think $20-30 borrowing on a $100 portfolio is alright, especially if you are able to borrow at a low cost).
Hope this helps!
Very useful – thanks for taking the time and the detailed walkthrough of how you’re thinking about it 🙌🏻
Interesting article, thanks for the detailed analysis! I’d like to hear your thoughts on an international Corp bond ETF – aside from currency risk, are there any other risks I should be considering too? Was considering investing in VDPA.
Cheers!
Hi Sam,
The ETF you mentioned invests in USD-denominated Investment Grade Corporate Bonds. Currency aside, there are two main risks to bonds in general.
1) Firstly would be changes in the interest rate environment. This factor tends to have a bigger impact on the safest Government Bonds and Investment Grade Bonds (compared to High Yield Bonds). If you think that interest rates are going to head drastically higher in the next 1-2 years, you would be better off buying bonds that are going to mature soon (i.e. bonds that have low duration, which implies a low sensitivity to general interest rate movements).
The VDPA ETF that you mentioned has relatively high duration at 8.2 years currently. This means that a 1% increase in interest rates (i.e. having 10-year US Treasury yields rising from 0.7% currently to 1.7%) will lead to about a 8.2% decline in the ETF’s price. Of course, the inverse will be true as well but then you are taking the view that 10-year US Treasury yields are going to 0% or negative.
The Yield-to-Worse on the ETF is 1.9% at the moment. This means that all things equal, if 10-year US Treasury yields rise by approx 0.23% to ~0.95% by next year, your 1-year total return would be effectively zero (0.23% rate rise * 8.2 years duration = 1.9% ETF price fall).
2) Secondly would be credit risk. The way to see if a corporate bond is cheap is to see how much extra yield it is giving compared to a risk-free government bond. Right now the average Investment Grade Bond is giving about 1.3% extra yield compared to a risk-free government bond, versus the 15-year historical average of about 1.6%. If you go to the following link “https://theinvestquest.com/macro/asset-watchlist/” and scroll down to the chart titled “US Investment Grade Corporate Bond Credit Spreads”, you will see the movement in credit spreads since 2005 to get an idea of whether you are getting a good deal now.
You will be getting in at fair to slightly expensive valuations now, historically speaking.
3) The below factors are risks that pertain to Bond ETFs specifically, and why they may underperform relative to Mutual Funds.
3a) A bond index’s construction methodology might not be optimal. This is because many bond indices are market value weighted, which means a company with more debt will feature more heavily in the index and the corresponding ETF that tracks it. As a bond investor, all things equal, my preference would be to invest in companies that are less indebted.
3b) Active mutual funds have the ability to manage risk proactively. If a bond’s credit fundamentals is deteriorating but still held within the bond index, the ETF will likewise have to keep holding onto the bond. An active manager who sees such risk may sell off the bond preemptively.
3c) Active mutual funds can participate in bond IPOs, which are often underpriced to attract sufficient investor demand. As a bond Index is usually rebalanced only at specific timing intervals, a newly issued bond will not feature on the Index immediately and hence the ETF will likely not be able to participate in underpriced bond IPOs.
Apologies for the lengthy answer but I wanted to be as thorough as possible. I’m also happy to take any follow up queries.
Wow obviously I have much to learn. Thanks for the reply!
Is Endowus the only Robo-Advisor that rebates trailer fees? What about Stashaway, Sfye, DBS?
I noticed most companies only publish the management fees? How much are trailer fees per year?
Thanks.
Hi K,
Trailer fees are applicable for unit trusts, and are paid from the fund house (i.e. Pimco, Blackrock) to the fund distribution platform (i.e. banks, robo-advisors, brokers). It’s a rate that is negotiated between both parties and will not be disclosed. However, it’s not uncommon to see trailers comprising ~50% of the fund’s management fee (for the retail share classes), so it can be quite a significant cost-saving if you can get it back as a rebate.
For Stashaway and Syfe, outside of their cash management accounts, their core offerings don’t use unit trusts, so the trailers are irrelevant here.
For DBS, I’m less familiar with their robo-advisor unit trust offering, but I do not believe that they rebate trailer fees. However, if you are referring to buying individual unit trusts from DBS directly, then for sure the trailers are not rebated to you.