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❓ Investment basics Q&A

At Thrive’s fireside chat at SGX last Thursday, we invited two investment experts to answer questions our audience had on investing for the first time 🌱.

Here are their answers to five questions that were submitted but not covered during the session due to the lack of time.

The speakers:

• Timothy John Phillips, head of investment advisory for wealth management solutions at CGS-CIMB Securities

• Emelia Tan, director of research and financial literacy at SGX Group

🔎 What’s a quick way to analyse or research a stock when using strategies such as value investing?

Timothy: I would suggest using Investopedia for the basic terminologies, what they mean, and how you can think about stock investing. In terms of free stock screeners, FinViz is a useful tool that can throw up a range of stock ideas based on particular metrics.

Meanwhile, value investing is traditionally based on what Warren Buffett espouses (buying stocks that are trading below their intrinsic value), but over the years value investing has evolved into more than just buying “cheap stocks”. 

The overall health of the business and its current and future cash flow generation are some of the key points that investors should be focused on.

Emelia: One way to go about this is having a read at the company’s website and company announcements. For companies listed in Singapore, they can be found on SGX’s website, which also has research reports from analysts and a free stock screener.

Try to be inquisitive and ask yourself questions: How does this business earn money? What are some crown jewels driving the business? What are some milestones or developments to look forward to?

🏢 How do you determine what’s a good Reit to invest in and what role do Reits play in a portfolio?

Emelia: There are several benefits of investing in a Reit such as allowing investors to gain exposure to real property assets without having to directly buy a property.

When analysing Reits, do take note of a few key areas: 

• What is the Reit manager’s track record and experience?

• Who are the sponsors?

• What markets and property sub-segments does the Reit have exposure in?

• How is it growing and managing its portfolio? 

• Can unitholders look forward to consistent and/or growing dividends per unit (DPU)? 

• What are its dividend yield and key metrics (e.g. price-to-book ratio, leverage ratio, occupancy rates)?

• What are some recent news and developments?

Timothy: First off, when looking at a Reit, you shouldn’t be too fixated on the dividend yield. What’s much more important to a Reit’s fortunes are threefold: dividend stability, dividend growth, and capital appreciation.

A Reit with a 10 per cent yield may look great but it’s probably a red flag – maybe its debt levels are too high and it can’t sustain its dividend, or its share price has fallen so much that its dividend yield looks attractive.

In terms of the actual fundamentals, some of the key things to look out for right now are geographic and tenant diversification, low gearing ratios (basically lower debt), lower average weighted cost of interest – especially in this high interest rate environment – and an ability to grow its distribution per unit (DPU) throughout cycles.

At the end of the day, as a shareholder, you want a consistently-growing DPU.

As for their role, Reits are really there to give you exposure to real estate without having to go out and buy a property.

In that respect, they’re more of an “alternative investment” as opposed to traditional stocks. While they are listed (functioning like stocks), their relatively low volatility means they’re solid buy-and-hold investments… provided you’re invested in quality Reits.

📈 How would you build a portfolio with S$10,000 for a beginner?

Timothy: As a beginner, I’d keep it simple. If you’re young and just starting, you should really have broad, global exposure to stocks.

In that respect, I’d invest 60 per cent of that sum in an exchange-traded fund (ETF) that invests in the US market (since it’s the largest stock market in the world) and the other 40 per cent in an ETF that invests in the rest of the world (excluding the US).

The likes of Vanguard and BlackRock (iShares) offer low-cost ETFs that cater to this.

📜 What are your views on investment-linked insurance policies (ILPs)? What should I do if I’ve already bought one?

Emelia: ILPs have both a life insurance and an investment component. Premiums are used to pay for units in one or more investment sub-funds, and in turn the value depends on the sub-fund’s performance. 

Therefore, returns are not guaranteed as the value of the ILP depends on how the sub-funds perform. Also, the cost of the insurance portion may increase with age and the units may not be enough to pay the charges. 

Timothy: I’m not generally a fan of ILPs as there are too many hidden fees and “gotcha” clauses in them. In terms of investment performance, I’ve not seen any evidence that they outperform simple ETFs over long time horizons.

It’s much more simple (and cost-efficient) to buy insurance and investments separately.

As for being already subscribed to one, the easiest thing would probably be to cancel it – although you would most likely have to take a hit in terms of penalty fees.

Over the longer term, though, it may work out if you buy straightforward term life/health insurance and place your investments in low-cost, diversified ETFs.

☀️ What sectors are worth investing in for the next three to five years, and what are your thoughts on investing in the US and in China?

Emelia: Some of the recent broader market themes that have been driving the markets include the reopening of global economies and the return to travel, slowing global growth, inflation and interest rates.

Taking a look at sectors, Technology has been the strongest sector in the global stock market. Another theme to look forward to is the transition to sustainability or sustainable solutions. 

Timothy: In terms of sectors, there are always the more defensive ones (like healthcare, utilities and consumer staples), which have been proven to perform better in bear markets.

Of course, if you have a longer time horizon, large sectors like technology have proven to be strong long-term performers.

When looking at thematic investing, be sure to focus on fees (if you’re using an ETF) and ensure what’s inside the ETF matches your risk appetite.

Big investment themes for this decade will include clean energy, artificial intelligence and cybersecurity.

The US is the world’s largest stock market – it makes up 60 per cent of all the value of global stocks – so investors must have some exposure to the market.

In China, investors can be more selective in their exposure to the stock market given the more uncertain geopolitical backdrop. Hong Kong’s stock market offers opportunities to invest in many well-run China technology companies, but if you do, you will need to closely monitor the regulatory and political landscape as it can have an outsized impact on investor sentiment.

*Disclaimer: Please do your own due diligence and consider your own individual circumstances before you make any investment decisions!

TL;DR

• Research on the health of a business and how it makes money when analysing it

• For Reits, look out for consistent and growing dividends rather than the yield

• Young investors need broad exposure to stocks so global ETFs are a good choice

• Take note of costs when buying ILPs because their performance ultimately depend on how well their sub-funds fare