SINGAPORE (Oct 15): In the relentless hunt for yield, local retail investors sometimes veer towards risky stocks, says Jeffrey Lee, managing director and chief investment officer (CIO) of Phillip Capital Management. Stocks may appear to have generous yields only because they are trading at depressed prices, which in turn result from poor fundamentals. “The common man’s problem is that very often, [he] looks for juicy yield and ends up with a dud,” remarks Lee at a recent media briefing.
Phillip Capital is looking to avoid the “dividend trap” with a new equity exchange-traded fund (ETF). The Phillip SING Income ETF will be listed on the Mainboard of the Singapore Exchange on Oct 29. It fully replicates the Morningstar Singapore Yield Focus Index (MSYFI), which comprises 30 stocks listed on SGX selected for high yield and sustainable earnings. The management fee is set at 0.4% a year, with the total expense ratio capped at 0.7%.
Lee says the MSYFI has had a steady track record. Since 2005, it has generated an annualised return of 9.6%, with a capital gain of 5.2% and dividend returns of 4.4%. This outperforms the Straits Times Index’s annualised return of 5.9% in the same period. The MSYFI also has a higher Sharpe ratio of 0.59, versus the STI’s 0.31, suggesting better reward for risk. The MSYFI and STI have 12-month yields of 5% and 4.4% respectively.
“The factors to keep in mind are [not just] dividend yield, but also the track record of earnings growth, which immunises against capital loss. Actually, that is key, because when people invest for income, they focus too much on that without regard for the financial health and quality [of companies]. You get the many pitfalls that we read about in the newspapers every day,” Lee says.
Fundamentals first
In addition to yield, the MSYFI screens for stocks based on two other factors: economic moat and distance to default. The former refers to the sustainability of a company’s future earnings. Profits are measured as returns on invested capital over and above the estimated cost of capital. Companies with a wider economic moat generally have a competitive advantage that is difficult for their rivals to replicate. In the US, companies with wide economic moats have also been found to be less likely to cut dividends, notes Tan Teck Leng, senior fund manager at Phillip Capital.
The distance to default, meanwhile, indicates the probability of financial distress. This is important to weed out companies that are highly leveraged and at risk of collapse during a downturn. Tan cites the example of the oil and gas sector: From 2014 to 2015, some players such as vessel charterers had yields exceeding 5%, while the industry suffered from falling oil prices. “What you are seeing now is that some of them have problems even surviving,” Tan notes.
The MSYFI comprises many familiar names, with more than half linked to the government or sovereign wealth fund Temasek Holdings. The largest constituent is Singapore Telecommunications, with a weight of 10.2%. Other major constituents include local banks DBS Bank, Oversea-Chinese Banking Corp and United Overseas Bank, and the SGX. Collectively, financials make up 31% of the index, while telecommunication companies — Singtel, StarHub and M1 — and fibre network provider Netlink NBN Trust comprise 17%.
The index is also significantly exposed to the property sector, with real estate investment trusts (REITs) such as CapitaLand Mall Trust, Mapletree Commercial Trust and Parkway Life REIT comprising 24%. Real estate companies include Hongkong Land Holdings and United Engineers. Industrials make up 13%, which includes companies such as Singapore Technologies Engineering and SATS. Beyond blue chips, the index also comprises some companies often not included in market cap-weighted indices, such as supermarket operator Sheng Siong Group, Tan adds. Collectively, the index constituents trade at 16.3 times earnings.
More ETFs to come
The Phillip SING Income ETF is the third ETF Phillip Capital has come up with, after the Phillip SGX APAC Dividend Leaders REIT ETF and the Lion-Phillip S-REIT ETF (for which Lion Global Investors is manager and Phillip is sub-manager). Asked what Phillip Capital’s next ETF might be, Lee says there are “many in the pipeline”. The ETF market is still relatively nascent in Singapore, leaving the door open for more opportunities, adds Linus Lim, co-CIO and director of Phillip Capital.
Ultimately, Phillip Capital hopes to provide practical solutions for retirees suffering the effects of common investment pitfalls, Lee says. He cites his experiences with annual general meetings, saying: “Very often, you see the retirees — people coming in wheelchairs — they ask: ‘I bought your stock, or bond, but I have suffered a huge capital loss. Can we please cut your salaries?’... You know they will be outvoted; they have no say. But the key thing is I’ve seen this too many times. That’s why we have recognised the problem, studied this rigorously and come up with this [ETF],” he says.
The initial offer period for the Phillip SING Income ETF will close on Oct 19. Investors can subscribe through dealers Phillip Securities, UOB Kay Hian, Commerzbank and ABN AMRO Clearing Bank. The issue price is $1 a unit. The minimum subscription amount is 50,000 units, although dealers may set a lower threshold for retail investors.
