Every year, I’ll spend some time reflecting on the ERM portfolio, here’s my take on the 2022 markets.
The unique selling proposition of the Early Retirement Masterclass (ERM) is that it strives to minimise the conflict of interest between the trainer and the student. In this programme, students study the stocks flagged by factor models and decide what goes into a class portfolio. To align the interests between student and instructor, the instructor will invest a minimum of $10,000 of the course fee profits into a leveraged portfolio that mirrors that built by the class.
While this arrangement may not avoid the loss of money for students, it guarantees that the instructor will lose more money when bad decisions are made, ensuring that the instructor will have to impart practical investing skills that can be applied successfully in the most current markets.
Between August 2018 and 1 January 2022, twenty-three classes were conducted translating to a minimum investment amount of $230,000. The invested capital after accounting for leverage was about $506,233.03, which means that certain classes saw more than $10,000 invested since August 2018. The internal rate of return is humble at 6.95%, with profits running at $65,370.
Structuring the course that directs fees into student-built portfolios have been profitable. Investing in my students’ portfolio would have earned an equivalent of about three extra classes of 20 pax today.
This is, overall, a very conservative program that focuses on dividend yields, with the average portfolio yielding about 5% every year. My students lean on the conservative side, constructing betas of 0.8.
We take risks that are lower than the rest of the Singapore markets.
Comparing the portfolio against the STI ETF, this is where the outperformance was the most obvious. In 2021, the ERM portfolio gained 13.52%, with STI ETF 12.92%. The portfolio has outperformed the STI ETF for three years, with 2021 being the hardest-fought battle.
The factor models missed out on restructuring opportunities and STI improved its performance by introducing more REIT counters. Factoring my aggressive use of x2 leverage, we should be getting about 24% returns assuming 3% margin financing expenses.
Like in any investment portfolio that has been constructed and slowly built with new cash monies over three years, it is littered with investment mistakes. The portfolio has made terrible moves in Eagle Hospitality Trust, Comfort Delgro and First REIT. Losses from investment mistakes are offset by solid gains from counters like Propnex, CapitaLandInvest and the Hourglass.
In 2022, the portfolio will be likely be affected by two major trends:
- Pandemic Recovery
The first trend is the recovery from the pandemic, which should gather momentum for hospitality, office and travel stocks. An aggressive recovery should take place when Singapore gets to deploy the COVID-19 pill from Pfizer.
- Rising Interest Rates
The second major trend is rising interest rates which may impact REITs that cannot transfer rental increases to tenants. In such a case, banks are known to outperform when interest rates go up.
That said, I’m confident that the portfolio will continue to outperform the STI if we were to build and manage our ERM portfolios thoughtfully, keeping in mind the two major trends. If you’d like to learn how you can build a dividend portfolio that pays you while growing in the current markets, join me at the next live webinar, free.