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Portfolio Strategy: Play Defensive Leading to November 2020

By October 2, 2020 No Comments

Portfolio Strategy: Play Defensive Leading to November 2020

The US stock market’s plunge on 3 September 2020 was a vindication that the equities market in the US has gotten too frothy.  Despite economic fallout from the Covid-19 pandemic, valuations of US equities – particularly in the tech sector – had far been defying gravities to make record after record before the plunge. On the Thursday’s rout, tech-heavy Nasdaq Composite Index fell 5% from the peak of 12,056 to close at 11,458.

Still, selling pressures continue without any signs of abating and the Nasdaq Composite continued to drift lower. By 11 September, the Nasdaq Composite has failed to hold onto psychological support level at 11,000, closed around 10,853.

Since staging a V-shape recovery from March-low’s, the Nasdaq Composite had seen an extended rally and despite the recent tumble, the Nasdaq Composite was still up by about 20 per cent on a year-to-date basis. In our view, the latest tumble is foreboding a deeper correction, given how crowded the megatech trade had been.

US Market Frothy: Nasdaq Composite trend reversal – Expanding Bollinger Bands (elevated volatility), price action crossover Moving Average (“MA”) to downside.
Chart source: POEMS, Phillip Securities as at 18 September 2020.

Incidentally, we are foreseeing volatility to be elevated leading to US Presidential Election on 2 November 2020. In the last leg leading to election day, more aggressive posturing and rhetoric between the Presidential hopefuls will induce greater uncertainties in the markets. Given this backdrop, investors should buckle up and expect more profit-taking in the US stock market, which will cause a spillover effect and weigh on Singapore equities.

On the local front, albeit valuations of locally listed companies remained depressed, there is still no obvious catalysts insight which may help propel the market. The local benchmark Straits Times Index (“STI”) has also recently lost the critical support level to drop below 2,500.

Going forward, we believe the investment landscape will become increasingly challenging to navigate, especially leading to the third-quarter earnings season which will coincide with the US Presidential election. Therefore, investors should play more defensive in their strategy, given the broad picture.

SG Market showing no sign of strength: STI – Contracting Bollinger Bands signalling consolidation around 2,500-point. Price action yet to crossover MA towards upper limit to suggest continuing weakness.
Chart source: POEMS, Phillip Securities as at 18 September 2020.

Diversify, but capture fundamentals

In periods of great uncertainties, keeping to a diversified portfolio would be a prudent thing. However, a traditional market-cap weighted STI ETF, may not produce the desired effects of diversification from an investment standpoint. This is due to certain flaws about traditional market-cap weighted indices.

One subtle drawback which displaces the notion that traditional market-cap weighted indices are diversified is they tend to build up excessive concentration. For instance, portfolio weights would skew toward stocks with higher market capitalizations. Consequently, there is also a higher likelihood for concentration risk to build on a sector level in the portfolio.

The second crucial drawback of traditional market-cap weighted indices is that they are not risk-adjusted. In that sense, there are no strategies built in to capture the fundamentals of the constituents. This drawback compounds the problem because it could allow for higher allocation in underperforming sectors.

Phillip SING Income ETF (“SING Inc”) is designed to address the shortcomings of traditional STI ETFs. Firstly, SING Inc has capped weights on individual constituents at 10% to reduce concentration risk. In addition, SING Inc takes on a factor-based approach by assigning scores to rank constituents on quality (economic moat), distance-to-default (financial strength) and trailing 12-month dividend yield. Due to this approach, we have observed that SING Inc has outperformed traditional STI ETFs in our recent 1H2020 review.

One difference that we think will continue to underpin the outperformance of SING Inc is the lower allocation in the industrial sector. Due to the demand shocks from the pandemic, the impact on revenue stream would be disproportionately higher for the sector, in addition to their capital-intensive business (higher capex, i.e. capital expenditures). As at end-August 2020, the industrial sector accounts for 7.17% of the portfolio, compared to Nikko AM Singapore STI ETF’s 17.4% (end-August 2020) and SPDR STI ETF’s 15.64% (Industrials plus Oil & Gas; end-August 2020).

Meanwhile, SING Inc has a higher allocation in S-REITs (28.79%) which has served as a bedrock for returns during this period.

Source: Phillip Capital Management (“PCM”); as of 31 August 2020.

REITs For Stronger Stability

As briefly mentioned above, another angle to look for defensiveness is from the S-REITs space. We have observed that S-REITs as a whole has outperformed the STI in 1H2020. In our opinion, favourable government fundamentals would continue to underpin the healthier performance of S-REITs relative to other sectors. The new measures kicked-in during the start of the circuit breaker also included equipping S-REITs with more financial headroom for manoeuvring in the longer term.

Although general business activities have yet to recover to pre-crisis level, we believe the worst is over for S-REITs given the low possibility for the Singapore government to enforce another lockdown. On this note, traders and investors may be looking at S-REITs for potential recovery plays, given that valuations are still attractive compared to historic levels.

Nonetheless, within the S-REIT industry, selection and allocation would still be key. In Phillip Singapore Real Estate Income Fund, we view that S-REITs with strong sponsors, quality assets and healthy balance sheets with lower gearing would recover disproportionately quicker. Sector-wise, we are overweight in the industrial sector and continue to be underweight in the hospitality sector.

Particularly, we like the broad development of industrial and logistic REITs playing to the growth of e-Commerce and data centres. We view this phenomenon of industrial S-REITs expanding the portfolio mix with tech parks and data centres would drive greater value and hence is a significant long-term tailwind for the sector.

Source: PCM; as of 31 August 2020

Enhance Yield Pick-up For Idle Monies

In view of looming greater uncertainties, risk-averse investors may choose to stay on the sidelines or keep a substantial amount of cash in their bank accounts. However, idling monies in savings accounts may not be the most optimal way to manage cash, given the close-to-zero interest rates that are being offered to individuals.

Instead, investors should park their sidelined funds or excess cash in defensive vehicles that are highly liquid. Phillip Money Market Fund (“PMMF”) is one such vehicle.

In spite of the low-interest rate marketplace, PMMF invests in high-quality[1] money market securities and deposits or private placement to established institutions to attain yield pick-up for unitholders. For context, the monthly yield (annualized) in August 2020 for PMMF was 0.331% versus the average bank savings deposit rate of 0.10% p.a.

Apart from higher efficiency, investors are also able to redeem their units on the day itself, with the caveat that requests are eventually received by the Manager before 11.30 am[2]. For this reason, investors can invest in PMMF without compromising on yield for liquidity or vice versa and allow them to capitalize when the market eventually stage a rebound.

As of 31 August 2020, PMMF has allocated about 73.68% into fixed deposits and cash. The remainder 26.32% is invested in money market securities, with a weighted average maturity of 42.5 days.

Phillip Money Market Fund

Portfolio Metrics As of 31 August 2020
Weighted Average Maturity:         42.5 days
Average credit rating:                     A

Asset Allocation
Fixed Deposits: 45.47%
Cash: 28.21%
Money Market Securities: 26.32%
Fixed deposits & cash: 73.68%

Source: PCM; 31 August 2020.


[1] “high quality” as defined in the Appendix 2 of the Code on Collective Investment Schemes (last revised on 16 April 2020).

[2] For direct clients only. Redemptions via other distribution channels will be subjected to redemption policies set by other distributors.


Important Information

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM. An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details. Investments are subject to investment risks including the possible loss of the principal amount invested, and are not obligations of, deposits in, guaranteed or insured by PCM or any of its subsidiaries, associates, affiliates or PDs. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved. Any use of financial derivative instruments will be for hedging and/or for efficient portfolio management. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products. The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions. The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice. The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. This advertisement has not been reviewed by the Monetary Authority of Singapore.

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With effect from 1st July 2014, this FATCA Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”) and should be read in conjunction with those Terms and Conditions, including those under our Personal Data Protection Notice.The existing terms and conditions of any contractual agreement entered into between PCM a nd you (the “Existing Terms and Conditions”) remain in full force and effect. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments,industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at http://www.phillipfunds.com/ .

On March 18, 2010, the United States of America’s (“U.S.”) Hiring Incentives to Restore Employment Act of 2010 (Pub.L.111-147H.R.2847)) (the “Act”) was enacted into law. Section 501(a) of the Act added a new chapter 4 (sections 1471-1474) to Subtitle A of the U.S.’s Internal Revenue Code (Code).Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (as defined in section 1471(d)(4)) (FFIs) with respect to certain U.S. accounts (as defined in section 1471(d)(1)) of specified U.S. person, and imposes withholding, documentation, and reporting requirements with respect to certain payments made to certain foreign entities.

PCM will be obliged to comply with the provisions of FATCA under the terms of the inter-governmental agreement (“IGA”) Model I between the U.S. and Singapore and under the terms of Singapore’s subsidiary legislation which will be issued pursuant to Singapore's Income Tax Act (Cap. 134) to implement the IGA. “FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S. Internal Revenue Code.

“FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S.Internal Revenue Code.

“U.S. person” means a U.S. citizen or resident individual, a partnership or corporation organised in the U.S. or under the laws of the U.S. or any state of the U.S. thereof, a trust if: (i) a court within the U.S.would have authority under the applicable law to render orders or judgments concerning substantially all issues regarding the administration of the trust; and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the U.S..This definition shall be interpreted in accordance with the provisions of the U.S. Internal Revenue Code.

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PERSONAL DATA PROTECTION NOTICE

With effect from 1st July 2014, this Personal Data Protection Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”). Without prejudice to the existing terms and conditions of any contractual agreement entered into between PCM and you (the “Existing Terms and Conditions”), which remain in full force and effect, this Notice shall be read in conjunction with the Existing Terms and Conditions. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We are required under the Personal Data Protection Act (“PDPA”) to put in place the necessary arrangements to protect personal data and comply with the PDPA. Personal data includes any data and information, whether true or not, about an individual (a natural person) who can be identified from that data or information, such as your name, NRIC, passport or other identification number, telephone numbers, address, email address and any other information relating to individuals which you or your authorized representative have provided to us or we are likely to have access to (“Personal Data”).

This Notice outlines the purposes for the collection, use and/or disclosure of your Personal Data by PCM, how we protect your Personal Data and your rights with respect to the collection, use and/or disclosure of your Personal Data. This Notice supplements but does not supersede nor replace any other consents which you may have previously provided to us in respect of your Personal Data, and your consents herein are additional to any rights which we may have at law to collect, use and/or disclose your Personal Data. We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments, industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at http://www.phillipfunds.com/.

1. PCM may collect, use and/or disclose your personal data for any of the following purposes listed below (collectively “Permitted Purposes”):-

i) carrying out activities, duties and obligations in connection with our products and services which you have applied for, including evaluating your eligibility and credit profile, verifying the identity or authority of your representatives, administration of your account and/or managing our overall relationship with you (including but not limited to the outsourcing of any of our functions to service providers or vendors, due diligence checks, accounting and portfolio valuation, billing and collections, business continuity and print management);

(ii) developing new services and/or products;

(iii) providing you with marketing, advertising and promotional information, materials and/or documents related to financial products and/or services that we may be selling, marketing, offering or promoting, whether such financial products or services exist now or are created in the future;

(iv) marketing and promotional events, including but not limited to images, photographs or videos of you during the events;

(v) meeting or complying with PCM’s internal policies and procedures and any applicable rules, law, regulations, codes of practice or guidelines, orders or requests issued by any court, legal or regulatory bodies (both national and international) (including but not limited to disclosures to regulatory authorities or financial industry self-regulatory bodies; conducting audit checks (internal/external), surveillance and investigation; handling of customer feedback or complaint; dispute resolutions; recording of telephone conversations and/or electronic communications with you; conducting checks or investigations for prevention and/or detection of financial crimes such as money-laundering, financing of terrorism, fraud and/or bribery etc.);

(vi) legal purposes, including but not limited to obtaining legal advice and enforcing or defending our legal and/or contractual rights against you;

(vii) risk management, statistical and trend analysis;

(viii) processing and/or storing data and/or information related to your relationship with PCM.

2. PCM, in order to facilitate the discharge of its duties and obligations to you, may be required to disclose your Personal Data for the Permitted Purposes and/or for processing of the Permitted Purposes on a need-to-know basis, to any of the following entities and the directors, officers, staff, employees and agents of any such entities, whether located within or outside Singapore (“Relevant Persons”):-

(i) any associate or related company of PCM and the directors, officers, staff, employees and agents of any such person;

(ii) any actual or proposed assignee or transferee of any of PCM’s rights and obligations or any actual or proposed delegate of any of PCM’s functions and duties under its contractual relationship with you;

(iii) any relevant governmental, supervisory or regulatory authority or court of law, including the Monetary Authority of Singapore, to which PCM is or may be subject;

(ix) any person in order to give effect to any instruction from you or any person acting or purporting to be acting on behalf of you;

(x) any person as PCM may consider necessary in order to comply with any order, directive or policy of any court or governmental or regulatory authority in any jurisdiction;

(xi) any person when required to do so in accordance with the laws of any applicable jurisdiction or rules of any professional self-regulatory bodies or securities exchanges;

(xii) any agent, contractor or third party service provider who provides their services in connection with the operation of PCM’s fund management business, including but not limited to the custodians, trustees, fund administrators, registrars, banks, legal firms, accounting and auditing firms, printing firms, IT service providers, credit reference agencies, credit bureaus, data screening entities for the purpose of due diligence checks and the prevention and detection of financial crimes.

3. PCM’s related companies and third party service providers shall be bound by the same provisions as set out in this Notice and we will require them to ensure that your Personal Data are kept confidential and secure.

4. You represent and warrant that your Personal Data provided to us is accurate and complete for us to make a decision that affects you or to disclose your Personal Data to the above-mentioned Relevant Persons on a need-to-know basis. Where applicable, when you provided Personal Data relating to another individual (e.g. your dependent, spouse, children and/or parents) to us, you represent and warrant that such Personal Data is accurate and complete and the consent of that individual has been obtained for the collection, use and disclosure of his/her Personal Data in accordance with the provisions listed in this Notice.

5. We will retain your Personal Data to the extent that one or more of the Purposes for which your Personal Data was collected, used and/or disclosed is/are still valid and for legal, regulatory reporting or regulatory investigations purposes for which retention may be necessary.

6. PCM may terminate any contractual relationship which you may have with us, if any information provided to us is insufficient, misleading or erroneous or if any information that is required to be disclosed to any regulatory authority for compliance with any law or regulation is not provided by you.

7. You may request access to or make corrections to your Personal Data records. Depending on the information requested PCM may charge a small fee when you request access to your Personal Data. Upon your request and subject to the provisions under the PDPA, PCM will respond accordingly within reasonably possible time. Please submit your request to our Data Protection Officer via pcm@phillip.com.sg.

8. You may withdraw your consent to any use or disclosure of your Personal Data for any or all of the Purposes as set out in this Notice by giving written notice to us. If you withdraw your consent(s), depending on the nature of your request, we may not be in a position to continue to provide our products or services to you or administer any contractual relationship in place. Such withdrawal may be considered a termination by you of any agreement you may have with us. Where there is any breach of your contractual obligations or undertakings, PCM’s legal rights and remedies are expressly reserved in such event.