Monthly Report - April 2020

Foreword:
Green everywhere! Staying invested during these troubled times have definitely paid off. The recovery is mainly attributed to the easing of the COVID19 situation. Countries are reopening up in stages. Oil price continue to weaken due to low demand. On 21st April in fact, it went down to negative territory. However, the market was quick to brush it off and continue its climb. It's not back to pre-COVID19 levels but it is getting there.

Analysis:
The equity funds rallied the most at about 10 - 30% increase within the month of April. The technology & healthcare sector did very well to weather the storm and emerged positive.
   The ASEAN market is lagging in overall recovery due to its relatively larger drop last month compared to its peers (USA, Europe & China).
   The higher net cash flow in this month due to (1) undertaking of home loan moratorium and (2) lower spending as a result of lock down. The additional cash has been invested into United Global, StashAway and Principal China Fund.

Forward Strategy:
No change in minimum monthly investment allocation, i.e. RM1,500 into FSM Mutual Funds and RM500 into StashAway. Any additional saved cash will be added into the same funds.
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Fund Report - United Global Quality Equity Fund (Dec 19)



Fund Description:
This fund invests in large cap companies globally with huge holdings in United States.

Comments:
According to the fund report, huge weight has been purposely put into the tech sector and the bet paid off handsomely in 2019. I am hoping they still maintain the same allocation going into 2020 as both the highest % sectors (technology & healthcare) fared the best during this COVID19 + Oil Price crash event.
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Fund Report - StashAway (Apr 20)



Fund Description: 
StashAway is a Malaysian robo-advisor app which allows me to access index funds in USA. I am currently invested in the most aggressive portfolio hence why you see a lot of sector-specific funds.

Comments:
The month on month chart shows that all the funds have made huge profits in Apr-20. In the big picture however, this fund basically rebounded almost to pre-COVID19 levels so it is about a net zero gain between Feb-20 to Apr-20. That said, I am not complaining and if anything, quite grateful. It could have been so much worse.
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Fund Report - Manulife Investment APAC REIT Fund (Feb 20)



Fund Description:
This fund invests in Real Estate Investment Trusts (REITs) in Asia Pacific. It is focused in highly developed financial and commercial hubs, namely Singapore & Hong Kong.

Comments:
The lockdown due to COVID-19 has put a serious dampener on the NAV. That said, I'm glad they did not attempt to go defensive by holding more cash (still maintain 5 - 6%). In fact, the following statement by the fund manager brings a lot of relief, "... the sell-off creates opportunities to buy into names with sustainable quality yields."
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Fund Report - United ASEAN Discovery Fund (Feb 20)



Fund Description:
This fund invests in Small-Medium companies in South East Asia. Basically, a Growth Stock fund. It also tends to be a very volatile fund so it works very well with the DCA method.

Comments:
Due to the current trying times, the fund decided to hold more cash (25%) than usual (10%) by reducing their exposure in Indonesia. It insinuates that they could expertly time the re-entry into the market which we know even the best of the best have problems doing. If it were up to me, I'd keep 100% of the funds invested to ensure I do not miss out on the rebound. Anyway, we will track how they fair from my monthly reports.
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Analysis - A Case Against Real Estate Investing

Below is an analysis of two different people with two different investment philosophies. Ricky Renter believes in real estate investing and Steve Stock believes in putting his money into mutual funds (stock market) instead.



Yr
Ref
Milestone
Ricky Renter
Steve Stock
0
A
Initial Capital
Home sale price is RM500k. A 10% DP of RM50k is required. Ricky starts off with a total Fixed Equity of RM500k (Home Value) – RM450k (Mortgage) = RM50k
Steve invests the RM50k into his stock portfolio.
0 - 35
B
Appreciation
Ricky's home appreciates at a rate of 1% p.a. against his initial home value of RM500k.
Steve's stock portfolio has a return rate of 5% p.a. against his 50k initial investment.
C
Mortgage Repayment
Home loan interest rate is about 4%. For a RM450k loan to be repaid in 35 yrs, it works out to be a flat RM2k/month. Luckily for Ricky, inflation & home value increase has no affect on the repayment amount.
Steve has no mortgage repayment obligations.
D
Maintenance & Repair
The home will require a yearly repair cost of about 1% of the home value. So for the RM500k home, the yearly maintenance cost is about RM5,000. The 1% p.a. increase will take inflation into account.
Steve has no home repair obligations.
E
Property Occupied (10m/yr)
Ricky gets to collect monthly rental. We also gave Ricky the benefit of yearly rising rental rate (1% p.a.). During occupied periods, the tenant is essentially paying for Ricky’s mortgage. However, to be realistic, we assume tenancy of 10 out of 12 months only.
Steve has no rental income.
F
Net Cash Flow
 Ricky’s net cash flow sums up (C) + (D) + (E). Although Ricky gets an increasing rental rate every year (1% p.a.) and his mortgage repayment is fixed, the net cash flow is still negative due to (1) Maintenance cost also increasing 1% p.a. and (2) During vacant periods, Ricky has to directly service his mortgage loan.
When Ricky derives a negative cash flow, he needs to withdraw that amount from his savings.
For a fair comparison, Steve gets to withdraw the same amount from his savings. But instead of paying off the maintenance and outstanding mortgage (which he does not have), Steve contributes it into his stock portfolio.
35
G
Mortgage Paid Off
Ricky’s property would have appreciated to RM708k. At the same time however, Ricky would have withdrawn a total of RM217k for maintenance and servicing his mortgage loan during vacant periods. His total equity comes up to RM491k.
Steve initially started off with RM50k in his stock portfolio and makes a yearly contribution of Ricky’s net cash flow (F). His portfolio returns a rate of 5%. His total equity (i.e. his stock portfolio), sums to be RM956k.
35 - 50
H
Ricky Reaps the Rewards?
Ricky no longer has outstanding mortgage loan. All the rental income now goes into Ricky’s pocket minus the maintenance cost. He is now at a net positive cash flow every year. The additional income will go to stock investment (5% p.a). The home continues to appreciate at 1% p.a.
On paper, Steve no longer has the upper hand here. Unlike Ricky, Steve does not have any rental income. And since Ricky no longer needs to withdraw cash from his savings to fund the negative cash flow, Steve will also stop his yearly contribution to his stock portfolio. Steve will rely solely on the 5% p.a. return rate on his portfolio for equity increase.
50
I
Ricky Wins! Not.
Ricky now has a home value of RM822k and stock portfolio value of RM486k BUT we must not forget the RM217k accumulated expense from point (G). That sums up to RM1,091k.
Steve’s stock portfolio that started off at RM956k at year 35, grew 5% p.a. with zero cash in. How did he do? His portfolio grew to a whopping RM1,989k at year 50!

Steve Stock comes up way on top. There are several other scenarios where Ricky Renter could possibly win this one instead:
  • Stock Market rate of return goes down to 3.4% p.a. However, any decent mutual fund portfolio could return 5% p.a. or more.
  • The occupancy rate goes up to 11 months per year (92%). This would take mix of a good property agent, a good location and a bit more spent on maintenance & renovation.
  • Maintenance rate reduced to less than 0.4% of home value per year. Be warned that skimping on home repairs may reduce the rentability of your property (i.e. reduce your occupancy rate).
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia

Analysis - Moratorium, Opt In or Out?

So as the economy downturn starts to take its toll on us financially, Bank Negara has decided to throw us a bone by offering a 6 month break from monthly repayments of our home loans. The fancy term for this temporary repayment break is 'moratorium'. 

However, this repayment isn't exactly a full on repayment holiday. If we ceased the mortgage repayment during this 6 month break, we will still be hit with the monthly interest during the holiday. This is where a lot of us get confused because we tend to think that if we took this 6 month repayment holiday, our loan will simply be extended by 6 months. That is unfortunately, not the case.

Say I took a RM100,000 mortgage at 3.75% interest rate and to be repaid in 30 years (360 months). Based on a quick calculation, the repayment rate is about RM 463/month. Now, if I took the moratorium and not pay anything for 6 months, the monthly interest will be added onto my RM100,000 mortgage and total up to RM101,867 by the end of 6 months. From month 7 onwards, if I maintained my repayment at RM463/month, my last payment would have to be extended to 378 months. That is an 18 month period increase, not 6 months! Putting text into table, see below:

Month
No Moratorium
Continue payment
RM463/month
With Moratorium
6 month break
RM463/month
Mortgage Value
Mortgage Value
0
100,000
100,000



6
99,089
101,867



360
0
8,101



378
0
0

However, one wonders, would the power of compound interest work for me if I took the moratorium on my home loan and invested all that 6 month cash into an aggressive portfolio? Below is an analysis on my actual home mortgage (RM595,700 at 296 months of payments left):


It's clear that I will take the 6m moratorium break and invest all that extra cash into an aggressive fund.
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Location: Kuala Lumpur, Federal Territory of Kuala Lumpur, Malaysia
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