Batch 11 can be said to be the unluckiest batch of Early Retirement Masterclass (ERM) graduates so far with the class conducted on 11 January 2020, about two weeks before the COVID-19 virus struck. As most other trainers do not like to speak about underperforming portfolios, a study of Batch 11 presents a unique opportunity to review how a decent process to invest money can still lead to small investment losses.
If you review the overall performance of the portfolio relative to the STI ETF, the performance is actually quite reasonable.
The portfolio lived up to its defensive expectations as it lost only 1.58% compared to the 3.51% losses of the STI ETF.
Strategically, the creation of the portfolio had one flaw which I need to be very honest with.
On 11 January 2020, the initial idea was to go “risk on” and go for a slightly higher risk so that the upside to any market gains can be captured by the portfolio. There was also a key change in student behaviour this time round – previous batches chose REIT portfolios with lower returns to achieve an even lower volatility. This batch actually voted for higher quality REIT counters with much lower average yields to capture more capital gains. Overall the portfolio design echoed the optimism of the markets during the New Year.
Let’s observe the three worst performing counters in the portfolio:
The batch chose Hong Kong Land with their eyes wide open, being widely interested in this cheap counter as it presents the safest way to ride on Hong Kong’s recovery. Ascott Trust and OUE Commercial Trust would have made decent investments if not for the virus outbreak.
The portfolio is not without its core defensive strengths and here are the three best performing counters:
Clearly the virus did not affect all REITs evenly. Frasers Centrepoint Trust did well because footfall was hardly affected at heartland malls. NetLink Trust was a big winner this virus season and had been a regularly injected counter since Batch 3.
What is of interest is the counter PropNex. When the class chose PropNex, it was not based on a quantitative model at all. It was injected based on unanimously positive brokerage reports on this counter and was a growth play in 2020. This stock was not expected to perform during a virus outbreak, but it turned out to be a saviour from underperformance.
$17,000, leveraged to $34,000, was invested in the Batch 11 portfolio. As the overriding policy of the ERM program is for the trainer to have skin the game (or even soul in the game), an additional $5,000 was injected into the portfolio with the ERM community selecting NetLink Trust, Mapletree North Asia Commercial Trust, Cromwell REIT, OCBA and Hong Kong Land for injections. The portfolio is now about $44,000 in size.
With the COVID-19 virus infecting European and Middle-Eastern countries, the situation is going to get worse before it gets even better. Batch 11 should brace itself for further losses. Nevertheless, as with the defensive nature of all ERM portfolios built by its students, I expect the portfolio to develop a defensive cushion of dividends over time.
This will almost guarantee its performance relative to the market benchmark of the STI index.
Related Read: How Defensive Portfolios Weather the Covid-19 virus
Discover how to retire early with a defensive dividend portfolio in this session.
It’s just bad luck. A world class portfolio of stocks & REITs initiated in July 2008 would also have been CRUSHED by March 2009 LOL!
This is where the mental aspect comes in, as well as the other aspects of personal finance e.g. career/job/company management, emergency funds, proportion of safe low beta assets, lifestyle & expenditures, low cost insurance etc.