The Asset Class That Has More Money Invested In Than Stocks [Chills 24 with FSMOne]

Welcome to another Chills with TFC session. In this series, we hope to bring on interesting, relevant people to have us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker in our pursuit of the life we love while managing our finances well. 

Our guest for today is the General Manager of FSMOne, Jean Paul Wong. He speaks French, grew up in the Maldives, realtor, pretty cool guy and we spent a great time talking about bonds. Will it ever outperform equities? We talked about Asian high yield bonds and their potential and how to evaluate bond funds. Because if you think about it, it is a basket of different bonds with varying maturity time and even varying risk factors. There’s a lot to understand in this giant bond market. 

For reference sake, this episode was recorded on 8 April 2021 and released early to our community members. Thanks for loving what we do and empowering us financially to do more for you. Let’s roll! 

There are many ways to invest. 

Jean Paul: Yes. 

Reggie: What are some ways that you feel are the most comfortable for retail investors to explore? How do they start? 

Jean Paul: I think for a lot of investors, we tend to be more familiar with stocks because maybe the company names that resonate with us. Because maybe we know the bank or the property company and so on. It’s something very relevant to our lives so I think that’s probably the normal way for most investors to get started. But I think for a lot of investors, if we’re looking to kick start our investment journey, actually a diversified form of many stocks or many bonds could be actually a good way to start. Simply because it doesn’t require us to know so much which can be quite intense and to just one company…

Reggie: Quite, you sure quite? It’s very intense! 

Jean Paul: I think when I started off, I kind of wanted to of course dabble in stocks and I think there’s nothing wrong with that. I think one thing that I missed out when I started off, looking back in hindsight is actually just to set the goals, to be very clear on the goals on why I’m investing. Because I think when I have the goals, then it gives me a very clear plan or strategy on how to do my investments. The reason why that’s important because there are so many things that happen in the stock markets, in the investment world that can distract us. If I have that clarity of thought when I was much younger, I think I would have given myself more time to be invested in the markets and that would have been a good thing for my portfolio. But of course it’s never too late in a way, because I think along the way those are lessons that I take with myself. Hopefully I can share it and hopefully it’s relevant to investors as well.

One point that I wanted to share also was the emotions part when it comes to investing, it’s something that is too prevailing in a way in terms of how it makes us decide on what to buy and sell and when to do it. Which shouldn’t really be the case because when that happens, we could be making an emotional decision that maybe doesn’t fit with that plan and the goal at the beginning that we told ourselves we wanted to achieve.

Reggie: Yeah. You talked about distraction. What is a distraction versus an information in that sense? 

Jean Paul: I think distraction… it could happen in the form of all the news that we’re surrounded with on a daily basis. 

Reggie: A lot, that’s a lot. 

Jean Paul: That’s a lot. Yes. You hear all the experts coming in and saying, “Hey interest rates may rise, inflation rates is on the rise. Tech is expensive. You should do this, do that.” It can get very confusing because different voices say different things. Different experts seem to be contradicting themselves. When I look at it and I try to sieve out all these noise, whether it’s from the investment websites or news portals, or even our mainstream media when it comes to investments. When I clear away all that noise, actually it’s back to… so why am I investing? 

Is it to ensure that my emergency funds can do better than what I get from my bank savings account? Secondly, am I investing because I want to retire early with a certain income stream on a regular basis? Thirdly, because I have kids who are quite young, am I trying to ensure they have an amount of money that will be of some use to them when you grow older? 

In the past I used to be a bit more traditional, I would think they probably should have this money for their tertiary education. I think that should still probably be the base plan, but I think along the way in recent times, especially with the pandemic, it opens up my mind as well as to maybe what they could do with that money. Who knows, maybe there’s an entrepreneur in one of my kids and if he or she wants to use that money to start a business… like how you’re doing yourself. So maybe… why not?

Reggie: Nice. In that sense, you are also on the lines of stay vested, understand your goals and stay invested rather than time the market kind of strategy. Am I sensing that?

Jean Paul: Part of that is definitely correct because a lot of my goals tend to be quite long-term in nature. So I’m referring to let’s say 10 years, 15 years or even 20 years from now. With that kind of timeframe, of course it’s easy for me to say, let’s stay invested, let’s not be too distracted by market declines here and there.

But I also know that there comes a time when we look at our portfolio, we should make some changes. A bit of spring cleaning maybe at the end of the year or at the start of the year… when it’s Chinese New Year, spring cleaning is a good time. 

Maybe it’s good to just see whether the tech sector… like last year, a lot of the disruptive innovation investments that I have in my portfolio, they ran up really fast last year. So is it time to trim some of that? Actually, while we stay invested and I believe in the merits if you have a long time horizon, it also doesn’t mean we shouldn’t make tweaks to the portfolio in the shorter term. It doesn’t mean we shouldn’t do a spring cleaning exercise once a year or we rebalance. 

One of the things for example, that I did earlier this year was to add to sectors that I thought were looking a little bit cheaper. For example, the financial sector, that’s something that I shared with investors as well.

For tech, I’m still exposed there. I took a bit of profits for one of my tech investments, but I see it as a very long-term play especially for disruptive innovation. I still have some exposure, but of course it’s extremely volatile this year because of what has happened last year. I was sharing with investors, no market or no sector just goes up indefinitely in one straight line. I think a bit of a correction is good and maybe that’s the time when either we add a little bit or we add to other sectors that are more attractively valued, whether it’s financial or so on.

Reggie: Yeah. You see even in our short little discussion, it’s about equity, equity, equity. 

Jean Paul: Yes.

Reggie: The general idea always seems like equity is the main guy, like Batman. Then you have all these like fixed income or like bond funds as your sidekick. Is there any way, any possibility that fixed income can actually outperform or bond funds can outperform equities in a longer term?

Jean Paul: I think there’s a bit of that impression for bonds. Like you say, it’s a bit of a sidekick, it’s Robin, not as high-profile as the main character. I think in some ways it’s because when you take a very long time horizon, equities tend to provide better annualized returns than bonds. But having said that, your question is about whether bonds can outperform equities. The answer is yes. 

It really depends on the time periods we’re talking about, firstly. Secondly, it depends on what kind of bonds we’re talking about. Because when we talk about bonds, it’s not just one type of bonds. It’s a bit like equities. When we talk about equities, maybe we’re talking about global equities, like the MSCI world index. But within equities, there’s a lot of different kinds of equities as well. 

For fixed income, it’s very similar. Very broadly you have your sovereign bonds as opposed to corporate bonds. So these are your government bonds versus your company bonds. That’s one difference.

Reggie: Sovereign bonds are government bonds? 

Jean Paul: Yes. The second kind of difference you may find, you have your investment grade bonds and your non-investment grade bonds that in the market we call junk bonds. Which may seem quite harsh, you know like junk bonds, but it’s because they are seen as higher risk. Because of the higher risk, at different periods of time, they can also offer quite interesting deals or coupons to us as investors. 

But if I go back to your question, if we look back at history during the GFC (Global Financial Crisis) period, that’s a classic example when… 

Reggie: Great financial crisis, right? GFC.

Jean Paul: Correct, that’s right. In 2008, you will find that during that year, equities were bashed across the board and bonds were also bashed to some extent. But there was one category of bonds that did okay and therefore, in a way if you zoom in on 2008, there was one category of bonds that could outperform equities during that time period and that’s really your developed market bonds, more of your US treasury bonds. 

Why did that happen in 2008? It’s simply because when there are extreme market conditions, people are usually trying to escape from the things that are free falling, which is your stocks and your equities. They want to go to something that’s safe, what we call the safe havens and in this case it’s really the government bonds. They did well in 2008. 

That brings me to the next point, which is bonds therefore are very different. There are different bond segments. In 2008, if I use that example again, your non-investment grade or your junk bonds did very badly too.

When it comes to us as investors, therefore how should we look at bonds? Because there are periods where it can outperform equities. That kind of gives us a clue already that when we build our portfolio, we will ideally want maybe two types of asset classes or more that are not totally correlated with each other. So hopefully in certain market conditions, the equities may not do so well, but the bonds can do better and vice versa. That also therefore means that bonds always merit a place. May not outshine Batman but I think Robin deserves a place in our portfolio using your analogy.

Reggie: Definitely. Everybody has their own fans. But then in that sense, could you just help me elaborate a little bit about safe havens? Cause people use this word pretty loosely also, like what is considered a safe haven? Is it a currency? Is it a government bond? Or how are we looking at? How do we define something what we call it safe haven? 

Jean Paul: Safe havens are traditionally seen as bonds that could be issued by a government. But it’s not all kinds of governments because there are some government bonds that have defaulted on giving out… yes, Argentina and you have Russia as well and there’s probably a few more. Usually, one way to define safe havens is to look at the kind of credit rating that the credit agencies attribute to the different sovereign bonds. You will like to have bonds that are essentially investment grade for sure.

If you want to go for the safety aspects and depending on the kind of bonds, some of them could be AAA rated or even A rated. They could be seen as fairly safe as opposed to those bonds that are rated a worse or even rated as junk bonds.

Reggie: But in that pursuit of safety, it sounds like the bigger countries, the bigger currencies are aware of the safety, but then how then do we factor foreign exchange rate into that picture? 

Jean Paul: Yes. When we talk about the bond market, then the US market features very prominently. First, as a very large market but also secondly because it’s the US, so we’re talking about the US dollar as well. I think a lot of the bonds, even in Asia when you look at corporate bonds or some of the sovereign bonds in Asia, they also are denominated in US dollars as well. It’s a currency that is very prevalent across bond markets across the world, not just in the US. When you look at that, then of course from a Singapore investors’ perspective, if we’re trying to preserve and maintain our returns in Singapore dollar terms, we have to be mindful that Singapore dollar depreciation or a decline in the Singapore dollar versus the US dollar, could actually be detrimental for us depending on what we invest into. So yes, the currency part matters in that sense. 

One way to circumvent or go around this problem is to go for a Singapore dollar hedge currency class for some of the fixed income funds. But usually this kind of structure only exists for bond funds, which are essentially bond unit trusts.

If you go into bond ETF (Exchange Traded Fund) space, you don’t really find a bond ETF that has a currency hedge class, for example. It’s not too common in that sense. Therefore, if currency is a factor that matters a lot to us as an investor, I think maybe a bond unit trust could be more attractive as an option, especially those that are Singapore dollar currency hedged.

Reggie: Okay, that’s cool. When we talk about packaged together, many people are packaging all sorts of stuff, right? In the bond funds space, how are things done in terms of packaging investment grade versus junk bonds and how do they come together into bond funds? Just kind of help us… I know there are all these bonds, 讲不完 (Chinese, can’t finish talking about), we cannot finish everything today. But help us envision a process, how is this done? 

Jean Paul: You mentioned the investment grade. If you use a rating agencies metrics, for example SMP (Significant Market Power), you’re talking about your BBB- all the way up to a AAA. These are considered your investment grade and there could be a bond fund that maybe specializes in just buying bonds that are investment grade. The second thing they could do is they could say, I’m just going to buy Asian investment grade bonds. So I think it’s important to therefore look at a funds objective, because that will tell us… okay this fund is going to be giving a certain kind of return because it’s Asian investment grade as opposed to an Asian non-investment grade or Asian high yield or Asian junk bond fund, then that by right I would then expect the kind of average yield to maturity to be higher versus an investment grade bond fund. 

Reggie: How much higher? Give us some context. 

Jean Paul: You could be looking at a difference of 200, 250, 300 basis points depending on the kind of actively managed bond funds. In the investment grade space, you could be talking about a 4% average yield to maturity. Maybe if it’s a high yield Asian space, you could be talking about 6%, 6.5% kind of average yield to maturity. That gives us a certain idea as to maybe how much yield I can expect from these different bond segments.

When it comes to how to package these products, for the ETF issuers or for the fund managers who are essentially the active ones, they’ll be looking at the investment mandate which is the investment objective I refer to. For ETF managers in a way, the task is maybe you can say a bit simpler. They’ll be looking at index and try to replicate the performance of that index whereas active fund managers would be also having an index. But by right we pay them a bit more management fees because they are supposed to deliver better returns than what the benchmark can. Because if they cannot, then of course it makes sense to just go for the index bond ETF.

But I think for bond ETFs, the other interesting thing to note as opposed to an equity ETF is that an equity ETF in terms of what the ETF issuer does, he could be buying essentially the whole index of stocks and trying to replicate that index very closely. So the tracking error, which is the difference between the ETF and the index that it tracks could be very small therefore. But when it comes to fixed income, it’s not as straightforward simply because when you’re talking about bonds, they are usually OTC (Over-The-Counter) traded. So you’re not buying them essentially on the stock exchange.

Reggie: It’s not as liquid, privately traded OTC. 

Jean Paul: Yes, there are not many exchange traded bonds. We have some on the SGX, right? Some of the retail bonds are traded on the exchange, but it’s a very small quantity of bonds and choices for us. When you’re talking about wholesale bonds that are OTC traded, we’re talking about firstly a huge investment outlay. Usually it takes about $250,000 to buy one bond. For ETF issuer, when they look at this universe, they don’t do a 100% full replication because there’s a capital issue, there’s also of course the ability to replicate fully based on the liquidity point that you brought up and so on.

It could be a partial replication of the index. They just probably want to ensure that it’s close enough and good enough for them to be a good proxy for the index. That’s usually what happens for the bond ETFs. 

Reggie: So then what is an okay tracking error in this space based on your broad understanding?

Jean Paul: I think the tracking error… usually there will be numbers given by the different ETF issuers and it varies. For some bond universes especially maybe the US side, like your US treasuries, I think the tracking error could be quite small. But there could be slightly higher tracking errors for certain sectors of bonds. If I can bring up the example of the Chinese bond market which has become a little bit more prominent in recent times, because there were two ETFs that were listed on the SGX last year. These are Chinese onshore bonds. The tracking error simply because they don’t do a full replication, could be a bit higher.

You could be talking about 0.2, 0.25 that kind of tracking error, very broadly speaking. Is it a good enough replication of the index that they’re trying to track? I would say yes, it’s good enough. If we go to one of the two Chinese onshore bonds that were launched on the SGX, they could be having about 50 to 100 bonds inside the ETF whereas the index could have about 200 plus. It tells you that it’s really not a full replication, but it’s good enough because it’s probably from a goal of achieving that kind of yield. Maybe the ETF issuer feel that it’s good enough. That is probably a more important point. 

I brought up those two bond ETFs because I thought it’s a very interesting addition to the kind of bond ETF choices we have. Traditionally, we always look at bonds from the perspective of US bonds, whether it’s investment grade or non-investment grade, and also Asia similarly, and also for emerging markets. But Chinese bonds, especially the Chinese onshore bonds because of the greater opening of the authorities in terms of having access for foreigners and the kind of yield they can give, and the current volatility, which is actually quite low surprisingly. So even in market conditions like last year in March or even earlier this year, the Chinese onshore bonds actually were pretty steady and not too volatile. We’re talking about, let’s say very broadly the kind of yield we could be looking at is about 3+%. That’s maybe one novel bond segment that could be interesting for investors, as opposed to the sub 3% that we may be getting from the local Singapore dollar investment grade bonds. 

Reggie: If we’re exploring the Chinese market, everybody’s trying to explore the Chinese market these days as a realtor investor, trying to go into what you pointed out, Chinese bonds. What are some factors that we need to know that is different? Because my perspective is they operate on a different political, cultural, financial, social system. So then as someone that is so used to Singapore and like in the US and all that, how do I need to see them differently? What are some core ideas? 

Jean Paul: Yes, I think it’s a good point because it’s a new kind of investment universe to many of us, including to myself. I think one thing to look at is what are the kind of things they invest into. Chinese onshore bonds, like the two ETFs that are launched on the local stock market, they are essentially investing into Chinese government bonds and one of the ETFs also does a bit of investments in what they call the Chinese policy banks which are essentially quasi sovereign entities as well, just for the extra kicker or booster in terms of yield. 

But I guess the main thing to note is… are these investments for that kind of yield that I’m maybe expected to get, is it worthwhile for the volatility? That’s one factor to look into. Second, it’s also the currency point that you brought up. Because if you’re talking about Chinese onshore bonds and essentially these are RMB denominated products. So your currency point that you brought up earlier is very valid once again, because if I am a Singapore based investor, I just want my investments to be secured in terms of Singapore dollar. To me I’m being exposed to certain exposure to the RMB movements versus Singapore dollar.

The question is therefore, what’s my view on the RMB versus Singapore dollar currency moments especially in the longer term? I would like to assume that if I’m going to have an exposure there, that the RMB by right because of great economic powers and maybe the fact that the onshore Chinese bond market is still under penetrated as point of time… these are potential long-term factors that may help the Chinese RMB to appreciate in the longer term. Therefore, that could be extra kind of investment return for investors. So I think that is one important point for the currency aspect especially, when you look into the Chinese market.

Reggie: Nice. When we’re investing even in China, the primary idea is always let’s go with the investment grade stuff. Country, sovereign bonds, those are very high quality based on the grand universe of the bond world, right? 

Jean Paul: Yes. 

Reggie: At what scenario should I explore corporate bonds, or like high yield bonds, or like junk bonds? These three words used very interchangeably. They kind of mean the same thing. Under what circumstances should I explore something like that? 

Jean Paul: It’s back to the point of what am I trying to achieve for this bucket of my investments or this bucket of my wealth. I bring the term bucket here to say that from our portfolios or our money or investments, we could have different buckets, meaning that they could be serving different objectives. I alluded to this point early on where I have an emergency funds bucket and I want it in a way I would like it to be quite safe. So for myself, I tend to look at more of the Singapore dollar money market or short duration bonds in that space, because I’m just trying to get a better return than fixed deposit rates and savings rates. But I don’t want too much risk because I may need that money quite urgently at the short notice.

But if I’m looking at my other buckets where I have more time, then I think that’s where interesting sector like the Asian high yield can come into play or even Chinese high yield can come into play. Because I could be getting that extra kicker in terms of return. I could be looking at 6%, 7% possibly or higher, of course at higher risk as well. I need time to go on my side in that sense. So I wouldn’t really want that kind of investments in my emergency funds bucket. 

But in my retirement fund bucket, I’ll be happy to bring in Asian high yield. I think it’s a very interesting space because I could be looking at an average yield of 6% and a lot of Asian high yield corporate bonds are actually Chinese bond issuers. So in a typical index that tracks Asian high yields, I think a study over half are actually Chinese corporates. It’s not for everyone because some investors will be a bit concerned about the corporate governance issues and so on. It’s fair enough.

If you look at Chinese corporate bonds and I’m talking about the junk bonds here, a lot of them are also in the Chinese property space. So again, some of us may feel that that comes with a certain amount of risk… the default rates and so on. I think we have to weigh that versus the probability of a default, the default risk.

If we think that it’s something that’s manageable and attractive because of the yield I’m getting, then it’s still a very attractive investment. Actually for myself, I really like Asian high yield in my more risky portfolios or buckets because of that kind of yield that I’m getting. And I like to reinvest that so that I get the power of compounding effect as well in the longer term as opposed to… let’s say your government bonds or your very safe investment grade corporate bonds, which are not going to give you 6%. They’re just going to give you say 2% or 3%. Good enough for certain purposes and for certain investors who are very risk averse. But if you are able to take on some risks, Asian high yield with short duration features inside. that’s a pretty attractive idea.

Reggie: Okay. By the way, caveat to you guys, this is not a recommendation. Here for education purposes only. But following that, I want to hear a little bit because when we talk about like bond funds… the beauty of bond funds is there’s a collective, you’re not buying anything in particular. Based on the certain idea, you buy a basket of bonds, the risk of default then dilutes across all these different bonds. What is an okay default rate then, in such a structure of like junk bonds, Chinese junk bonds?

Jean Paul: Certain metrics give us an idea of what the market expects and does a default rate. It could be a few percentage points high, for example. So that’s why a diversified bond comes in with the features that I can minimize the impact of certain defaults in my portfolio. If you’re looking at Asian high yield or Chinese high yield bonds, then I think there are certain assumptions in the marketplace on the kind of default risks that we could be expecting. 

Our team or I myself when I look at it, I think that based on the kind of numbers that we’re looking at and also versus the yield that we’re expected to get, it’s still pretty attractive at this point. But back to your main point, the diversification aspect of a package product, whether it is a bond ETF or bond unit trust, I think for the kind of default risk you would like to see, of course it should be minimized. I want to say NIL, but I think from an investment point of view, you can’t always guarantee NIL.

Especially for active fund managers who may be sticking their head out to say that I’m willing to take certain higher risks, even though maybe this bond may carry higher default risk. But I’m willing to take it because I think that I’m well compensated in the next few months by the yield that the bond is giving me. I think that’s the kind of thinking that goes through the mind of an active fund manager. 

Of course for a bond ETF, it’s more of tracking the index. There isn’t so much of that kind of thinking in terms of bond selection. But of course your bond ETF issuers also do the task of rebalancing. It’s not as if the bond ETF constituents do not change at all. They do change and they could change because the ETF issuers have a certain rebalancing process in place to ensure that certain bonds come out maybe because it’s approaching maturity periods or maybe for other reasons they take them out. Or maybe there are new bonds into the market because there are new bond IPOs (Initial Public Offering) as well constantly and they decide that… okay, I like this new bond in the market because of the yield that I’m getting, the coupon rate that I’m getting, so they added in. Even for one ETF manager, that constant update as well in terms of the composition the ETF. 

Reggie: In that sense, you rightfully point out the whole thing about like index, like bond funds, they’re following an index, they buy, they hold to maturity, to the end of the coupon. That’s what most bond funds up there they do. But what about the active bond funds? Because that is where the sexy stuff happens, right? Where the secondary market trading in the bond space, where actively managed strategy start to come in and this is a rabbit hole. It gets very complicated for a lot of people that don’t understand. So could you just walk us through some of the short-term measures or short-term strategies that some of these bond funds are using and whenever we see certain keywords, what do we need to understand? 

Jean Paul: For active fund managers who have bond funds under their care, they would be looking at the index or the benchmark that they set their fund against, because I think one of the key metrics is to ensure that they can provide outperformances. They would then look at the kind of yields, the credit risks, the default rates of all the different bonds and whether they should overweight or underweight certain bonds in their portfolio versus their benchmark… whether they can take into that at the sector level or they could do it at the country level and so on. They could also have some aspects of currency management because maybe they have certain views on currencies, whether certain currencies will appreciate or depreciate and so on.

I think for investors, first thing when we look at bonds is to maybe just go back to the first few things we talked about, which is if you’re looking for safer kind of bond segments, then you’re more Singapore centric, government, or investment grade bonds could be a first foundational kind of step we can take. Don’t expect super high sexy returns for obvious reasons. But those are the Robin…

Reggie: Robin is always your friend! 

Jean Paul: Robin will be having your back in terms of ensuring that when times are bad, the portfolio just doesn’t go downhill 100%, so I think that’s what that is for. As we then look at what else can I look into to give me the extra kicker in terms of yields and potentially returns and so on from a total return perspective, including the price appreciation perhaps, then I think that’s where your high yield bonds come in and a lot of it could be from Asia because that’s a sector that looks pretty attractive from a valuation perspective. And to just then look at the mandates of the ETFs or the unit trusts, because I do understand that certain investors also may have their preferences because of cost than they like…. okay, I would rather go for the ETFs because of the lower cost. I think there are merits in that especially for very simple bond ETFs, for that kind of like 10, 20 bids a year, it’s really low cost to go and have some exposure into these government bonds and so on. 

But maybe if you’re an investor who wants to have a bit more active management because of the potential for higher returns, but also maybe you want some Singapore dollar hedge currency courses, that’s where the bond unit trust could be a bit more interesting. 

So very simply simplistically, I would like to keep it that way in terms of what we should focus on. Your question was about how the fund manager could be looking at how he manages his portfolio. That’s a lot of things and there’s a lot of ways as well. If I can maybe talk about some of the risks for example, a lot of fund managers or bond ETF issuers will be talking about currency risk, which we talked about quite a bit. We can also be talking about interest rate risk because depending on the kind of interest rate expectations we have and the market has, that also impacts the potential prices of bonds going forward. 

Entering 2021, I think one of the key investment themes that popped out was in a way because of all these very loose monetary expansionary policies. Yeah, just print non-stop! Essentially what that means is that there were some concerns about… hey, what does that mean for inflation? And when there are inflation risk creeping into our mindset, that’s when we will be thinking the regulators or the central banks would start to want to increase interest rates. So there’s been a bit of talks in the markets in the last few weeks on this. In the US and of course a lot of the policies in the US will impact us even in Singapore, from monetary policy and interest rate policy. When that happens, when their expectations of interest rates going up, then of course the negative relationship between interest rates and bond prices. That could then impact us on the bonds price movements, because of all these speculations on what may be happening. Interest rate is definitely another key thing that I think fund managers and even as a bond investor, we should also keep an eye on as well. 

Reggie: In that sense, when we go and stew everything down to a bond fund, there are all these different bonds packaged into it. As a realtor investor, I could always just pick the best and just pray everything works right, in essence? There are other things like maturity time, the amount of like bonds that come into the fund, how do I evaluate all these things? Do I need to care about maturity length, coupon payments and the amount of bonds that keep coming in? It’s like a deal flow kind of thing. Does that matter to me? Or how does that work? 

Jean Paul: As investors, especially when we are buying a bond ETF for example, we don’t have to be too overly worried about all these different things. Because I think it’s down to the investment mandate of that bond ETF we chose. That will give us a broad picture of what kind of returns and risks I’m looking at. In the interim period while I’m invested in that bond ETF, yes, there will be a different consideration. I mentioned about the interest rate risk which is very much linked to the duration, the average duration or weighted duration of the different bonds in the bond ETF. Because when you have a bond ETF with an average weighted duration that is quite long in terms of number of years, if there are interest rates concerns about interest rates going up, that would have a more negative impact on a bond ETF with a longer duration as opposed to a bond ETF with a shorter duration. So I think…  

Reggie: Can you give us some clarity there to why is it like that? 

Jean Paul: Duration very simplistically if I can explain it is… let’s say for a certain amount of increase in interest rates that we expect in the market, let’s say we expect there’s a 1% increase in interest rates. We could expect the bond price to also change about 1% in the opposite direction because of that inverse relationship. The bond price could be down 1%. But if the duration is long, we could then expect… let’s say the duration of the bond ETF is five years, so if we expect interest rates to go up by 1%, then we could expect the bond prices to decline by roughly 5% based on the duration.

That gives us a certain very broad picture idea of what could happen if interest rates move. I’m using an example of interest rates going up because I think that’s what markets are worried about at this point. 

Reggie: And I don’t think it can go down anymore. 

Jean Paul: Yes, that’s right. The interest rates have come to that kind of level, that kind of low level. So duration in that sense is an important thing and I think a lot of your bond ETFs factsheets do have the information on average weighted duration of all the bonds inside. That’s one important metric that you pointed out that is useful for investors to just have a rough idea. Because when we go for this calm environment now, where there are certain inflationary risk and therefore we could expect interest rates to rise at some point. It is more a question of maybe when. I think the right thing or strategy to adopt is to go for the shorter duration bonds, as opposed to maybe having very long dated or long duration bonds in your portfolio. 

Reggie: Nice, cool stuff. I think you’ve shared a lot of stuff, but one last question since we talked about negative interest. How will that affect our bonds if let’s say we own bonds and if interest rates continue to stay low or maybe even explore the negative territory? How does that play out? How would that look like? 

Jean Paul: If this situation of interest rates of very low to zero interest rates… in fact, in certain markets we’re talking about negative real interest rates already. So if this persists, of course a lot of your safe havens that we were talking about, a lot of your developed markets, government bonds are not attractive. Because who wants to get quasi 0% returns and maybe even real negative returns when you take into account inflation expectations and inflation rates? Of course if this kind of low interest rate environment persists even longer, then all the more I think it’s more interesting to look at within the bond space, to look at the higher yielding segments, and to see whether it’s worthwhile taking the extra risks to get that extra returns in the high yield space.  

Reggie: Okay, cool. I think you’ve shared a lot of good stuff. Is there any other thing you want to add?

Jean Paul: I think for bonds, maybe I should just add that even for myself, I do have some exposure as well to bonds and for my portfolio. In terms of what you can do, or how it can benefit me is really in terms of the kind of regular coupons I get. I also like the fact that for the actively managed bond funds I have, I can reinvest the coupons I get every quarter or every six months, just to enjoy the power of compounding in the longer term. 

From a portfolio perspective for many investors out there, if you’re looking to build your portfolio, you want to have your exciting growth equities and so on, fair enough… but you also want to consider having a little bit of bonds if you haven’t done so, simply because of the kind of protection and less volatility that it brings. Also, the kind of regular coupons that it gives me as well, I think it’s worthwhile considering a portfolio with equities and bonds as a diversification way of managing the risks that we face in global markets as opposed to having a 100% inequities or a 100% hacked. I think those are not very advisable for any investor, unless that bucket is just like 10% of your overall wealth and you just want to be more aggressive.

Reggie: And that’s a story for another day.

Jean Paul: Yes, that will be another story. 

Reggie: Thank you. Thanks for coming on. 

Jean Paul: Awesome. Yes, you’re welcome.

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I have three questions that I ask every single guest. First question is… what is a core life principle that you hold closely to? 

Jean Paul: I think one key principle is to keep learning. I’ve been working for coming to close to two decades and I’m just always surprised sometimes in the course of my daily work by the things that I come across that are new to me. It’s not just in the investment world, it’s also of course just the work, working with my colleagues, with my team mates. I learn from them as well. The concept of you know, just to keep learning is probably underappreciated to some extent, or maybe we size take it in a very practical way, where we feel like we need to take a course or take a master’s course. But I feel it’s…

Reggie: SkillsFuture like that.

Jean Paul: There are good SkillsFuture courses for sure. It is to keep learning from everyday things. And that keeps me feeling refresh and also curious in how I approach things, because in the daily course of my work, there’s so many things happening, keeps us very busy, sometimes quite stressed up and so on. But when I just remind myself of… but I’m here to learn from this. It could be something not very pleasant as well. It just opens up my mind to how I can maybe learn from it and share that with my colleagues and even my kids. I think that’s something that I really believe in.

Reggie: Nice, cool. Next question, what is a personal finance advice that you feel needs to be further propagated? 

Jean Paul: When it comes to investing, we should be thinking of how we can minimize the emotional part of it. So it’s very conceptual. But what I’m trying to say is… it’s because I think a lot of us including myself, when I started off investing after school, after uni, I get very carried away by buying all the exciting stocks. And I think I did lost track of the reasons why I’m here to invest. I will remember that along the way somehow, but then may again then get distracted again. Simply because of markets going down and people are worried, and I may then make a decision to… oh, maybe I should also then sell. Or there’s a fear of missing out.

In the last few months I’ve heard friends basically punting on GameStop. Nowadays when I hear that I’m not tempted to join, I don’t fear of missing out but maybe 15 years ago I would have. My advice therefore is to be very focused on what you really want to achieve. One way to do that to be very robotic and mechanical, in a way boring in your strategy is to have a regular savings plan, something disciplined. That is the part where you know no matter what, you know that you’re just going to be invested. Do your rebalancing once a year, just to make sure that your asset allocation is in order. The expensive stuff in the portfolio that has risen up a lot, you trim down a bit, take some profits from there. Allocate some of your profits into other sectors that haven’t done as well. So I think that is one strategy that I think for the last few years I’ve really believe in the merits of, because I can see my portfolio steadily growing as a result.

If I could have told myself 20 years ago when I started off what I should be doing, then really I would have done the regular savings plan. I have a few interns in my company and they’re so young, 20, 21. So I always tell them, it’s good that you’re punting, speculating in a lot of exciting stocks or commodities and what not. And I say, learn from it, learn from the experience. But start a regular savings plan in something quite boring, maybe even the bond ETF or an equity fund. I told them maybe in 10, 15 years time let’s catch up and let’s just look at how that part of your portfolio has performed. Because I’m quite confident that the boring part would have done quite well.  

Reggie: Nice, thank you. Number three… which part of your life are you giving additional focus on now? 

Jean Paul: In terms of focus at this point in my life, is just to be healthier. Whether it’s from a mental point of view or from a physical point of view, in terms of exercising, hopefully eating better and so on and…

Reggie: We are one month away from CNY (Chinese New Year).

Jean Paul: Yes, so my new year resolutions, I think… still on track. Haven’t given up on the goal of trying to exercise more frequently. I think why I’ve been looking at that more recently is yes, I’ve gotten obviously older, I’ve entered a new phase of my life, hitting forties and all. But it’s just that I think when I’m healthier, it helps me to do a lot of things better. Whether as an employee in the company, in terms of making perhaps some decisions, or to work with my colleagues and the clients, or even in a very personal way dealing with the family and my kids, my young kids. 

When I see myself as healthier, I can do a better job in all these different functions. I think pandemic as well has helped me to maybe refocus a bit of my priorities and energies into maybe what I should be doing. So it’s not just always work, work, but it’s just being healthy and that actually helps me to do me more at work in fact. A bit of that kind of thinking in the last few months. 

Reggie: Nice, good stuff and I like that you call it functions. Take care, thank you. 

Thank you.