Implementing Permanent Portfolio in Singapore

Author: | Date:

A few readers have shown interest in constructing their permanent portfolio. Since most of the information about permanent portfolio are based in the US, there is a need for Singaporeans to use other financial products that are tailored to our needs. During the interview with Craig Rowland, he highlighted that permanent portfolio is designed to work in your own country, so as not to assume the currency risk.

To recap, the permanent portfolio consists of four components with equal weightage: Stocks, Bonds, Cash and Gold.

Stocks

Singaporeans can consider the STI ETF listed on SGX to form the stocks component in their portfolio. It is denominated in SGD but it is focused on Singapore and a few regional companies. It does not have the diversification of international stocks like the Vanguard Total World Stock Index Fund. I would say that the stock market is pretty much correlated despite of geographical location. If you are comfortable focusing on Singapore, you can stick with STI ETF. Alternatively, you can divide the stock component into STI ETF and VT, to take the advantages of both funds.

ETF Straits Times Index ETF (ES3) Vanguard Total World Stock Index Fund (VT)
Tracked Index Straits Times Index FTSE Global All CAP Index
Top ten holdings(as of May/Jun 12) SingTelDBSOCBCUOBJardine MathesonKepCorpHong Kong LandF&NWilmar

Jardine Strategic

AppleExxon MobilMicrosoftIBMRoyal Dutch ShellGeneral ElectricChevronAT&TNestle

Wal-Mart

Exchange SGX NYSE
Fund Cost 0.3% 0.25%
Denomination SGD USD

Click Here for a Comprehensive Guide to STI ETF 

Bonds

Singapore is one of the countries in the world with little or no debt. With a triple A rating from many credit rating agencies, Singapore Government Securities (SGS) Bonds can be considered the safest securities in the world. Since 8 July 2011, we can buy and sell SGS bonds over SGX through our brokers, and store the securities in our Central Depository Account. This is convenient for you to rebalance your portfolio when required. For the purpose of permanent portfolio, you should buy the longest duration bond available in the market. Currently, there is a 30-year bond that will expire in 1 Apr 2042 – see the list of SGS bonds.

Alternatively, you can buy ABF Singapore Bond Index Fund listed on SGX. It buy and hold SGS Bonds as well as bonds issued by statutory boards such as HDB and LTA. I would think that the fund cost of 0.2% is unnecessary considering it is so easy to buy and sell SGS bonds over the exchange.

SGS Bonds ABF Singapore Bond Index Fund
Tracked Index Nil iBoxx ABF Singapore Bond Index
Exchange SGX SGX
Fund Cost Nil 0.2%
Denomination SGD SGD

Cash

There are a few options to keep this component of your portfolio liquid. First, put the money in a savings account. Of course, the interest earned will be miserable. Second, put money in short term fixed deposit or short term SGS bonds (less than a year). But the money would be locked during the period of deposit.  Third, put in POEMS Cash Management Account (basically your idle money in your POEMS brokerage account will be automatically invested in Phillip Money Market Fund). This is the most convenient as you can re-balance (buy and sell stocks/bonds/gold) in your brokerage account without the need to shift money around. However, it does charge a management fee of 0.45%. Currently, my preference is to stick to option 3 in favour of convenience.

Bank Savings Deposits Fixed Deposits/Short term bonds Phillip Money Market Fund
Tracked Index Nil Nil No index but put money in short term saving deposits and government debt securities.
Where to transact? Banks Banks for Fixed Deposits and SGX for bonds Phillip Brokerage Account
Fund Cost Nil Nil 0.45%
Denomination SGD SGD SGD

Gold

If you have a large portfolio, it would make sense to buy gold bullions. This is because it is very difficult to re-balance the portfolio since you cannot cut part of the bullion to sell it. I would recommend gold ETF for starters. One can buy the SPDR Gold ETF listed in SGX. This is the same fund listed in NYSE. Personally, I would prefer to buy iShares Gold ETF listed on NYSE as it charges a lower management fee.

SPDR Gold ETF iShares Gold ETF
Exchange SGX NYSE
Fund Cost 0.4% 0.22%
Denomination USD USD

Conclusion

It is possible to construct a low cost permanent portfolio using financial products listed on SGX and a Phillip Cash Management Account.

Weightage Product Cost
Stocks 25% STI ETF 0.3%
Bonds 25% SGS Bonds Nil
Cash 25% Phillip Money Market Fund 0.45%
Gold 25% SPDR Gold ETF 0.4%

 

The following two tabs change content below.
Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.
  • If you are looking for a low cost gold ETF, I’d suggest Perth Mint’s ASX listed Perth Mint Gold (code: PMGOLD) which has a 0.15% management fee. The gold is also a lot more local to Singapore and if things really get bad you can redeem for physical in any Perth Mint coin or bar.

    I would suggest also considering physical for part of the gold allocation that would be considered “core” (ie not likely to sell because of rebalancing) and use ETFs for rebalancing.

  • Looking at your final portfolio, a 25% weighting on SGS Bonds and another 25% on cash will make your portfolio almost 50% cash. SGS Bonds only rank superior to cash but not much, not even enough to cover the effects of 3-4% inflation. Gold is also non yielding. Thus you have 75% on low to non yielding assets which I would argue is not wise especially if this portfolio is a longterm one. You might as well keep everything in cash. Your portfolio is based upon the old pre 2008 crisis assumption which is not in tune to present day reality. In the present global negative real rate environment one needs to be more acceptable to risk not by choice but by reality. Taking more equity risk is the only way to counter effect of inflation and therefore more time needs to be dedicated to reducing portfolio risk in equities via proper geographic diversification rather than diversifying it away into other low yield asset class. Also having a considerable allocation in high yielding coporate bonds instead of govt securities will also generate the additional return. Standard 25% allocation across the 4 asset class will not get you anywhere. In these uncertain environment, portfolio must be properly diversified but more acceptable rather than adverse to risk. Otherwise, how are you going to outpace inflation which at last count is 5%?

    • Hi ryan,
      I see that you made the mistake of evaluating performance of each asset incompletely and also do not understand the inter relationship of the assets to one another and to the entire portfolio. Hence you come to the wrong conclusion about the expected portfolio results. Fact is, the past 5, 10, 20, 30 and 40 years of Permanent Portfolio performance is consistently profitable and well documented on the Internet – check out crawlingroad.com and others. Such a portfolio works because each ‘volatile asset’ work with or against each other to produce a relatively ‘stable portfolio’. Like chemistry – reactive elements combine to form a more stable compound with different properties. How each asset interact with each other exactly? Please read about the strategy in more detail, and you seem to have the background knowledge to find out more about “Risk Parity Strategy” also. The Permanent Portfolio strategy has clear reasons why it uses government bonds and not coporate bonds, why it uses gold and not silver, why it uses index fund and not stock pick, why 25% for each assets, …etc. So rather than I answer these questions, if you are interested I am sure you can find out more online. If you have a specific question I may answer. I spent months to analyse this strategy from different angles until I have no reason to deny that this strategy works, and it does work for me in real life. Fact is, in these uncertain past 12 years, Permanent Portfolio has been one of the best performing portfolio, and a Permanent Portfolio Fund was reported to be the best performing fund by Bloomberg in 2011, in part due to its gold and long-term bond allocation. Fact is, last 12 years annualised return of Permanent Portfolio is more than 8%~9% and hence outpaces inflation of 5%. According to my indepth understanding, this 4 asset portfolio is very well diversified. Facts speaks for themselves. Also, contrary to common perception, having 8, 12, 20 or 40 different assets does not necessarily make a portfolio well diversified, and infact makes it harder and costlier to manage for common people. Hope this help clear the air for some.

  • Hi Alvin,
    I expect that ABF Singapore Bond Index Fund is not suitable for Permanent Portfolio because it does not contain significant percentage of long term bonds. In a deflationary environment, this fund would not be volatile to rise enough to compensate for price drop in stocks and/or gold. The 30 year Singapore Government bond (symbol PH1S on Singapore Exchange) is one of the ideal bond to use since this 30 year bond has more similar price volatility compared to stocks and gold. Volatility here refers to the potential range of price motion.

    • Yes SH. I have actually selected SGS 30-year bond for the bond component. I agree with your reasoning. Moreover, it is better than any ETF because it has no annual fees 😀

  • […] The volatility of a portfolio is the weighted average of the individual assets in the portfolio. If a portfolio is made up entirely of risky assets that move in tandem with each other, it is only logical that the portfolio fluctuates greatly. However, if the volatility is made up of assets that have a negative correlation with each other, (ie. one is expected increase in value when others fall) then volatility evens out. The most classic example of this would be the composition of the Permanent Portfolio. […]

  • Hi Alvin

    Thank you very much your articles and info on investing.

    Would like to ask how can we purchase the Vanguard Total World Stock Index Fund (VT) and apply DCA to it at the lowest cost?

    Thank you

    • LW, you would have to apply Standard Chartered Brokerage which do not have a minimum commission even if you DCA a small amount per month.

  • Hi, I notice the returns are ‘annualised’ at 8-9% based on 10 years, which is somewhat similar to DCA on SDF-STI index fund (also at annualised returns above 7%).

    But on a side note, can I say the real returns on the total funds are actually at about 3-4% at the end of 10 yrs?

    If so, this begets the issue that I have been musing about: there are too much articles online talking about ‘compounded returns at 7% will reap a returns of xxx at xxx years’, ‘ rule of 72’, etc – when it’s really very difficult or tough to find an instrument where reward-risk ratio is good to bring that actual ‘compounded interest of 7%’. Perhaps the closest I know is the CPF SA at 4% compounded.

    Pls don’t get me wrong, BigFatpurse is doing great. I guess after a while trying out and investing, I realised the ease of finding these ‘compounded 7% returns’ outweighs the actual possibility of finding the strategies to achieve them.

    It’s more realistic to achieve compounding interests at 3-4% yearly though, and I think PP (and passive index investing) might be able to achieve that.

  • Hi Alvin

    Thank for all your sharing so far.

    Just wish to know what is the minimal capital to get started in constructing a Singapore Permanent Portfolio?

  • >