Sunday, 17 June 2018

Some ETFs to Ride on China A Share MSCI Inclusion

Amidst all the buzz about Trump Kim Summit and US vs Rest-of-World trade war, an important financial event is taking place, that is the inclusion of China A Shares into MSCI Emerging Market Index.

Let's understand some background first.

MSCI and Emerging Market Index
MSCI stands for Morgan Stanley Capital International. It compiles key indices that represent the targeted equity market according to themes, industries or geographical sectors. These indices are often used as benchmark to measure investment funds' performance.

One of the most popular MSCI indices is the MSCI Emerging Market (EM) Index that tracks equity performance from 23 emerging, rapidly growing economy, that includes Brazil, China, India, Indonesia, Russia, South Africa and others.

A Shares Absence from the EM Index
China, although as the world's second largest economy and boasting the second largest equity market, its A shares (stocks listed domestically on the Shanghai and Shenzhen bourses traded in RMB), are not represented on the MSCI EM Index. Only those traded on the Hong Kong exchange, the H Shares, are part of the Index. But not all China big companies list in HK.

There are a few reasons for this. China's equity market has limited accessibility to the global investors, with restrictions on capital flow. MSCI is also probably worried about the corporate governance among these domestically listed entities, authority's excessive market interference (a host of stocks were suspended for trading during early-2015 China market crash), and maturity of domestic market participants given that China's equity market is not as developed as those in the Western world.

China's Economic Reform and Opening Up of Capital Market
But China is gradually opening up its equity market to the global capital via several measures such as increasing the quota of foreign ownership of A shares, relaxing rules on funds flow and implementing the HK-Shanghai/Shenzhen stock connect that allow foreigners' purchase of A shares via Hong Kong.

China has pledge to further open up its capital market as part of the broad efforts to elevate its economic standing to a level that matches its position as the world second largest economy. Its Belt Road Initiative (BRI) entails that its economy and local companies would have more interaction and integration internationally. China can't afford to remain shut from the outside world much longer. This has been stated in the Boao Forum for Asia earlier this year.

MSCI Nod to A Shares Inclusion
So all these developments plus the macro backdrop of China gaining importance globally as an economic power house eventually gained MSCI's agreement to include A shares in its EM index. The fact is that MSCI also can't exclude China any much longer as it is such a heavyweight among the EM - leaving them out would be akin to serving a plate of chicken rice without chicken, its key ingredient.

Details of MSCI Inclusion of A Shares have been widely reported. Just google it.

According to South China Morning Post, The MSCI EM index has funds with around $1.6 trillion assets under management benchmarked to it. A shares inclusion would force unit trust, Exchange Traded Funds (ETFs), pension funds and asset managers all over the world to add A shares into their portfolio.

Analysts estimate that this would result in an initial inflow of $20 billion into Chinese stocks, and eventually $300 billion upon full inclusion. So these funds inflow are expected to fuel the growth of A shares stock price.

Words of Caution
While the macro picture seems conducive, it does not mean that China domestic market's outlook suddenly turns all rosy now.

MSCI has only announced concrete plan of including up to 5% of the free float market share of 230 China traded big caps to be implemented by Sept this year. While analysts expect subsequent inclusion in future, this largely depends on China's progress opening up and de-regulating its capital market. There are many other economic and financial factors to consider too. For example another financial crisis in the near future could throw such plans into disarray.

And China's equity market is largely dominated by retail investors who often treat the stock market as a giant casino. With these largely in-experienced players as the dominant force, the market is more susceptible to volatile movement in face of negative news. A shares are simply not for the faint-hearted.

Plus, index inclusion would not bear fruits over night. Some research shows that previous inclusion of Korea stocks into the EM index saw its equity market rise significantly as late as 2 years after the inclusion.

Some ETFs to Participate in This Development
While the 5% inclusion factor is merely a drop in the vast ocean of A shares, I believe that such move marks the beginning of China equity market joining the mainstream global market. It is a milestone event.

China opening up its domestic economy has just been set in motion and will be a mega trend going forward. I am inclined to think that over one decade or so, its economy will surely be an integral part of, and playing a more active and important role in, the global system. Given this macro backdrop, the A shares will likely see much higher valuation more comparable with the western world, with greater international ownership.

I was researching for some China ETFs to participate in this long term growth. Sharing what I found below, mainly ETFs that track major China indices with relatively low expense ratio.

Please note that these are just some examples of ETFs with exposure to China major companies. They are not recommendation to buy/sell. At this moment I do not hold any position in these ETFs.

iShares MSCI China Index ETF (2801)
Traded on HKEX, this ETF tracks the MSCI China Index that comprises large and mid-cap China companies listed in China, Hong Kong, and overseas.

iShares Core CSI 300 Index ETF (2846)
This ETF gives investors pure exposure to A shares, as it mirrors performance of CSI 300 Index that consists of 300 of the largest and most liquid A shares listed in Shanghai or Shenzhen.

iShares FTSE A50 China Index ETF (2823)
This fund also provides pure exposure to A shares, but a smaller group of companies covered under the FTSE A50 Index - 50 largest stocks listed on Shanghai or Shenzhen bourses.

Hang Seng China Enterprises Index ETF (2828)
Should you be uncomfortable investing in unfamiliar A shares, consider the H shares via this ETF, that tracks the Hang Seng China Enterprises Index covering Mainland securities listed in HK.

Wednesday, 6 June 2018

Parted Ways with Tai Sin Electric

Examples and stocks quoted in this article do not constitute financial advice and/or buy/sell recommendation. Opinions expressed are personal view and do not take into account your investment objective, financial situation and particular needs. 

I sold Tai Sin Electric after some un-inspiring results. This is one of my longest holding so I decided to pen down this short article as a record.

I first bought Tai Sin in Sept 2012. It is the leader in the field of manufacturing and supplying of cables to the construction players. I expected the demand for electric wires and cables, being a necessity in buildings and infrastructures, would grow with the increasing infrastructure spending by the government. In worst case i would expect it to remain constant.

The good dividends played a part too in prompting my purchase. Based on dividend of $0.0225 and a purchase price of 25.5 cts, its dividend yield was a juicy 8.8%.

Subsequently I added another batch of Tai Sin in Dec 2014.

Reasons for Selling
Tai Sin's FY17 results did not match up to my expectation and it alerted me. I wrote a piece about its FY17 earnings here, and decided to monitor its quarterly reports closely since.

The subsequent 3 quarters of earnings up till 31 Mar 2018 were not satisfactory. I summarise its key figures extracted from quarterly announcements in table below.

Source: Tai Sin Q1, Q2, Q3 quarter reports, 6 Jun 2018

Year on year, its revenue has increased. But the gross and operating margin have been compressed. I deem this worrying as it seems that the company, in order to compete, has to sell at a lower price with thinner margin. It is most likely subjected to rising costs base too, most probably cost of raw material, selling distribution expenses, and admin expense.

The management did not have a positive take on industry prospect too. Looking at past 3 quarters commentary, it has been the same narrative that is cost pressure and challenging business environment.
Source: Tai Sin Q1 FY18 Quarterly Report

Source: Tai Sin Q2 FY18 Quarterly Report

Source: Tai Sin Q3 FY18 Quarterly Report

Sell Transactions
My first partial sale actually took place last year at $0.42. Reason for the cash out back then was more to re-balance my portfolio as Tai Sin's price has ran up quite a bit. 

More recently from end May till early June, I have sold all my shares due to the fundamental reasons shared above. 

Due to Tai Sin's low trading volume, I queued for $0.39 for a few days and managed to sell the remaining shares over three transactions.

I am happy with the returns. Taking into account the total dividends received , my Xirr turns out to be 15.05%.

Xirr of Tai Sin and dividend records over holding period

As one of the oldest member in my portfolio, I appreciate its service and dedication in dishing out stable dividends twice yearly. So the cashing out gave me a tinge of sadness yet concurrently I am satisfied with the returns.

So now its back to drawing board to identify the next investment candidate. But I think it will be much harder given that market is now much higher and there are way less cheap and good companies compared to 2012.

Would you like to learn about how I select good quality shares? How can bonds, such as the recent Astrea IV Private Equity Bond by Temasek, help build a resilient portfolio?

Sign up for my upcoming talk here!

Monday, 4 June 2018

Make Sense of Your Insurance Plan Bonus Statement

I will be having a talk covering various instruments available for retail investors, how to determine quickly the quality of selected stock, and ways to safeguard your profit and protect your assets. 

Sign up for the session here

If you have an Participating Life Insurance policy, you would receive an annual bonus statement that provides an update on bonus declared for this year and the total accrued bonus so far.

In this article I highlight what are the important segments to zoom into and the key info to be gleaned from a bonus statement, using my own Tokio Marine policy.

But firstly, lets understand what is a participating policy and what it entails.

Participating Life Policy
A participating life policy has an investment element that offers policy owners potential of higher returns through investment, besides standard protection.

This is done by 'participating' in the growth (hence 'participating policy') of an investment fund  (par fund) pooled together from other life policy owners, that invests into various assets such as funds, ETF, stocks and bonds.

The returns are then distributed to the policy holders annually in the form of bonus, called reversionary bonus. These bonuses are irreversible (ie insurance company can't suka suka take back your bonus). They form the non-guaranteed benefit payout in event of claim, which the amount depends on investment returns.

So what should we take note of in the Bonus Statement?

 1 - Bonus Rate
Bonus Rate is based on Sum Assured (SA). In this case, for every $1,000 SA, bonus rate is $10. So for my $80k SA, it's $800.

There is another portion of bonus on the previous bonus that has been declared and accrued into the policy - 1% of accrued bonus. With my accrued bonus of $4,080.80 before the latest round, i get $40.81 for this portion.

2-Total Accrued Bonus
The latest accrued bonus after this round is $4,921.

Take out your thick policy contract statement and refer to the Benefit Illustration. Compare the total bonus to the non-guaranteed portion of sum assured, for basic benefit (usually Death) of the corresponding year, gives you an idea of the insurer's ability to generate returns close to its initial projected rate.

Note that there are two columns for the non-guaranteed portion - a higher and a lower returns projection. See which one is closest to the total bonus.

3-Past Bonuses
The bonus for the past 3 years have been the same. This is common, as insurers sometimes withhold bonuses during years with good investment returns, to top up to years with sub-par returns, in a bid to smoothen the bonus declaration.

4-Size of the Par Fund
The par fund for my plan is almost $5.9b. This is quite a big size, as it needs to cater to claims payout from entire pool of policy owners.

Can have a sense of the size of par fund compared to some common Unit Trust in the market.

5-Investment Performance
Here shows performance of par fund in the past 3 years. This should largely follow general market trend.

6-Asset Mix
Understand how aggressive the par fund is by the percentage of equities and fixed income.

At end of 2017, the fund had 27% in equities, a higher portion than 2016's 25%. Its top 5 holdings are the S&P 500 ETF and local 3 banks. Given the good run of these stocks last year, this explain the 10.55% investment returns.

Insurance plan bonus statement contains valuable info about the investment return of par funds, and gives a clue on how has the plan's performance match up to the initially projected rates.

Your insurer's bonus statement may have different format or different terminologies, but they should not sound too different from mine.

Some ETFs to Ride on China A Share MSCI Inclusion

Amidst all the buzz about Trump Kim Summit and US vs Rest-of-World trade war, an important financial event is taking place, that is the incl...