Saturday, June 7, 2014

My unit trust portfolio

Throughout my investment journey I learned the importance of diversification and dividend investing. Diversification hedges against single stock/bonds mishap and over confidence in one company; dividend provides the psycological consolation of recurring income from my investments. 

Last year after much deliberation, I liquidated part of my stocks portfolio and purchased unit trust in order to diversify the systemic risk. I still hold a good number of blue chips like DBS, SGX CAMBRIDGE, OUE, Semb Corp Industries but I decided that no matter how diversified I am in local stocks, I am subjected to political and country risks. If one day the PAP is ousted from power, our stock market may take a severe beating. 

Last year, I pledged my stocks for a credit line with my then bank at 1.05% interest. Hence the unit trust you see below are partially funded by cash, ie 300k and partially borrowed.

I chose dividend payout for all my funds (with exception of USD bond funds) as I usually reinvest them at my discretion when markets are down. The markets are in a staggered uptrend mode. By opting for dividend payout in cash instead of reinvestments, I am forcing the fund managers to take profit on a monthly basis for me. There is no point for me to reinvest and keep buying higher.

After 1 year, the total dividends I have received is approximately $30,000. The capital loss on my funds works out to be 9,900. Hence the net return is 3.2%. Moreover, I incurred a interest cost of about $3150. Hence the return works out to be 2.76%. However, if you calculate base on my initial capital of $300,000, my leveraged yield works out to be 5.65%, if I liquidate everything on Monday.

At current market, I intend to hold the unit trust portfolio for the long term, possibly till retirement. The whole purpose to construct a leveraged unit trust portfolio is to lock in the contract for low interest rates (1.05%) and use the dividends to repay the loan. Technically, the loan can be repaid in about 10 years time assuming dividends remain constant. I can repay the loan anytime if I sell off my stocks anyway.

I still have about $300,000 “debt headroom” to draw down and capitalise on any market opportunity that may appear. Eg, the stock market crash 20%, I can utilise $100,000 to pick up deeply discounted stocks at low interest rates while waiting for recovery, the dividend yield will be able to pay for the interest accured.

Is it possible to replicate this strategy? Yes and no. I bought most of the unit trust from fundsupermart and transferred to the bank I was previously working. The interest rate was granted at staff rate and if you walk in to any bank for such service, be prepared for at least 1.6% loan rates and 2% sales charge.

The good thing about buying unit trust for dividend is the payment is usually prompt and gains are not taxable. This serves as good income if I am out of job but if I am gainfully employed, the dividends will pay for the loan and interest while buffing up my credit limit to draw down in the event there is a market crisis. I will opt for dividends reinvestment scheme if any unit trust fall below 10% from my initial purchase price.  

At low interest rates environment which in my view will continue for several years, borrowing money to spend/invest is the best way to hedge against zero interest rates environment.

My investment portfolio has grown significantly from the leverage. Including CPF and SRS funds, I have about 1M invested already. My cash stock dividends and trading gains works out to be about $20,000 a year which in totality brings me $4,000 passive income a month. I will work towards a 5 figure passive income in order to have a more comfortable life ahead. Still slightly away from the 50% mark, I shall persevere.

Do follow Sg Blue Chip on my investment journey.