From 24 January 2020, everything changed when it came to the Singapore Stock Market.
Local investors, recognising that the COVID-19 virus would have a serious negative impact on the global economy, started turning bearish with the STI index falling from 3,240 to 3,170. This signalled the beginning of gloomier market sentiments that has lasted right up till today.
The broad ERM portfolio is a complicated combination of stocks built over 11 batches of students and invested with real money from trainer’s fees and then leveraged to ensure that there is plenty of skin in the game.
Our general approach, very broadly, is to back-test a core REIT portfolio to optimise risk and returns, then supplement it with a satellite portfolio of business trusts and blue-chip equities.
The primary aim is to generate dividend income to supplement a working professional as he moves slowly but surely towards being able to offset his basic expenses after 5-8 years.
In the years after, the aim is to have dividend income be higher than a person’s take-home salary. Generally, our models show that this can be done in 10 years following a series of steps, including a very disciplined approach to leverage.
The ERM portfolio contains 46 counters with the three largest counters shown below:
We’ve always had a highly defensive stance when we invest because we have a stronger preference for dividend yields. While the portfolio benefits greatly from market bull runs like in 2019, its true strength shows in a bearish market like what we are going through right now.
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Overall, all 11 batches of student portfolios performed well even in 2020, generating positive returns for 2020 despite all the bad news in the stock markets.
The reason that the portfolio was able to keep afloat was likely to due to its low volatility and the incoming dividends that get typically paid out between February and March.
Nevertheless it may be instructive to look at the three worst investments in the ERM portfolio:
The worst investment by far was ComfortDelgro that was made in the second half of 2019 clearly demonstrating the limitations of quantitative back-tests. ComfortDelgro was already facing a lot of disruption from companies like Grab, the COVID-19 turned everything into a perfect storm for its investors. Our original investment thesis that transportation fares going up would benefit the counter was beaten down by higher expenses.
Our second worst investment was SATS where it was already suffering from lower cargo volumes even prior to the virus outbreak. It was amazing how silly and wrong our investment thesis was once we get the benefit of hindsight. We thought SATS was entrenched in Japan will benefit highly from the Japan Olympics.
The decision to invest in OUE Commercial REIT was not too blameworthy because it was made by the latest batch and largely a result of ridiculously bad market timing. Regardless, Batch 11 was able to receive a slight consolation prize in the form of dividends.
As the COVID-19 virus were to infect other countries, many playing a key role in the global supply chain, we have to be prepared for things to get worse before they get better. This means that I fully expect the ERM portfolio to dip into negative territory over the next few months. Still, there is reason for optimism – as Singapore is handling the virus crisis very well, this may well be a once in a lifetime opportunity for bargain hunting in the stock markets.
If you are unsure of what to do next, my suggestion is to simply Keep Calm and Collect Dividends.
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