Thursday, September 19, 2013

Update for 19 Sep 2013


Wow, the last's night FOMC announcement was crazy. I totally called it though, and I had open positions for AUD/USD long and USD/JPY short. It's a shame that I closed out early and only locked in $500 of profits. It's a bigger shame (and a stupid rookie mistake) that I started to chase the run up on the AUD/USD without waiting for a good entry position. A $400 dollar mistake that I WILL NOT make again.

At the moment, I'm up $800 using 10% of my investable money in my Las Vegas account. A very decent return so far this month. If I can keep it up, I can actually avoid being in the market and still make a nice 6% at the year of the year.

Even with the general positive outlook of the market, I still remain very skeptical. I think I read too much news on ZH and I'm a pessimist. I need to keep reminding myself NOT to step into the equities market until the US blows out. Statistically, it has to happen soon. I have time on my side, I can wait for it.

With the yields dropping and forecasted to stay low in the at least the forthcoming weeks, I have finally decided to go into some short duration bonds. Here's their info:

Templeton Global Total Return Fund A (mdis) SGD - H1
TER: 1.4%
Sales Charge: 0.75%
Duration: 2.35
YTM: 5.18

Templeton Global Bond Fund A (mdis) SGD - H1
TER: 1.4%
Sales Charge: 0.75%
Duration: 1.53
YTM: 3.96

UOB United SGD Fund CL A
TER: 0.6%
Sales Charge: 0%
Duration: 1.7
YTM: 3.5

So their weighted average duration is 1.86 years and their YTM is 4.21%, which I don't think is that shabby considering that they are short term bond funds.

Now, let me explain my rationale to you (and also to myself) about why I am deciding to go into these now, and why these particular funds.

Firstly, bonds. Bonds have been doing badly this year because rates have been taking a hike. With the Fed announcement, we saw yields plummet, and I think it's quite likely for for 10 year rates to be bumped down to sub 2.5 yields and stay there until the next scare (mid 2014?).

Bonds have a maximum drawdown with I am more comfortable with. For the above bonds, their historical max drawdowns are 11.3 / 11.3 / 3.4. Those aren't too bad drawdowns, considering that bonds don't usually drawdown, plus I don't foresee any near term situations that are going to case a significant drawdown. Anyway, to be safe, for both the Templeton funds, they are already 6% drawn down, which means realistically they can only draw down another 5% max, and that is a very suitable considering that I'm going for 4.57% yield from them each. It's about 1:1 risk reward, but with much more probability of upside, haha.

Bond funds VS. Bond ETFs. Though I like active management, I have come to the conclusion that bond funds are more suitable and better in the long run. Funds are not subject to short selling or speculation, short term funds are have more long-term oriented investors who will not cause a mad outflow (I hope I would be the one causing this problem, if I was running), prevented in low mark-to-market devaluations to finance redeemers. Active funds allows for better diversification, purposely sidestepping possible grey areas and focusing on what they know, rather than having blanket uncertainty. Of course, bond funds also have smaller initial capital outlay, which is of course a wonderful thing for beginner investors like me.

Now, why these particular 3 funds?

Firsty, all 3 funds are in the low duration category of less than 3 years. Although the TR fund has a slightly higher duration, I think the fact that it has a higher YTM gives that risk / reward.

All these funds are well geographically diversified. I personally do not like the USD and the EUR, so even though that this is a SGD hedged fund, I would like to limit my exposure to those areas. As such, an equal weight in these 3 funds allows me to only have just 5% exposure to the USD! For the EUR exposure, I have not delved deep into the financial statements, but it is definitely under 20%. I wouldn't be surprised that it would be under 10%, or even lower! I will try to provide an update about this.

Being actively managed, these 3 funds have quite loose restrictions, and I am quite a fan of tactical allocation. If you know a storm is looming somewhere, you can yank your stuff out and look somewhere else for opportunities.

The freedom to move around and look for the best returns according to the climate makes me believe that these 3 funds will be well suited for the weird ass environment that we have playing out in front of us.

Lastly, they all have a low sales charge, and 2 of them have monthly distributions. In line with my long term goals on passively earning income and being able to use value averaging to maximize investments in the long run!

Personally, I would love to get into the high yield bond market. However, my main gripe is that the duration compared to YTM are not very attractive to me, with all of them not being able to survive more than a 1.5% interest rate hike, which of course, happened this year when rates spiked 86%. They are also a lot less geographically diverse, with lots of them concentrated in the US. Those that are more spread out also have less yield, which really hurts their ability to shield them for interest rates.

Tomorrow or the day after I'll be updating the full details of my bond purchases once they are updated in my POEMs account. Heh, the idea of passive income gets me happy!

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