STI’s 3 Year Dollar Cost Average Return of 6.3% p.a.

This article was first published on SGX Market Update. You can read the original article here.

  • RSS Plans provide an alternative means for investors to build gradual STI exposure, make use of dollar cost averaging with performance measured by return rates. From 30 June 2014 to 29 May 2017, the indicative return rate of an RSS Plan on a STI ETF came to 6.3% p.a.
  • RSS plans utilise dollar cost averaging. Over the three year period, dollar cost averaging on the STI ETF meant that one third more units were bought at market lows in January 2016, compared to market highs in April 2015.
  • Providers of RSS Plans on the STI ETF include Phillip Capital, POSB, OCBC Bank and Maybank Kim Eng. The plans are available both on the STI ETFs and certain SGX-listed stocks. More information can be found here.

The Straits Times Index (STI) has been providing an on-going performance benchmark for the stock market since the beginning of 1967.  This was in the form of the Straits Times Industrials Ordinary Share Index, which then measured the price moves of industrial stocks. The Index was regularly illustrated in the Business Times which was then a Commercial and Financial Section within the Straits Times. Five years on from the base price of 100 on 30 December 1966, Singapore was well into its export promotion phase and the Straits Times Industrials Ordinary Share Index had reached 200.

Two popular methods of investing the STI, in is index form, are Exchange Traded Funds (ETFs) and Regular Shares Savings Plans (RSS Plans).  The first STI ETF listed 15 years ago in April 2002, which has since generated a 196% total return.  RSS Plans provide an alternative means for investors to build gradual STI exposure, make use of dollar cost averaging with their performance measured by return rates.

There are four RSS Plan providers in the Singapore market. They are Phillip Capital (launched in February 2002), POSB, OCBC Bank and Maybank Kim Eng (most recent to launch in March 2015). All four providers provide access to investing in the STI ETF and Singapore blue chip stocks from just S$100 a month.

Dollar Cost Averaging

Dollar cost averaging commits a fixed amount of dollars to invest each month, rather than shares/units. This  effectively means that the Investor will purchase more units at market lows and less units at market highs. For instance, applying month-end STI ETF prices, and a fixed amount of S$1,000 every month, the Investor would have purchased 373 units of the STI ETF in January 2016 when the units were priced at S$2.68.

Conversely, when the STI ETF units were priced at S$3.57 in April 2015, the Investor would have purchased 280 units. This means that the investor purchased one-third more units in January 2016, near market lows, than in September 2015, near market highs. The chart below illustrates units that would have purchased on a RSS Plan on the STI ETF, assuming S$1,000 monthly deposits and month-end STI ETF prices.

SGX - Market update

Source: SGX My Gateway, units purchases based on month-end prices of the Nikko AM STI ETF. Based on month-end investments with exception of May 2017, which was priced at same 29 May 2017 close.

Note this dollar cost averaging example and discussions on return rates below is for educative purposes only and does include transaction fees.

Internal Rate of Return

A common mistake in assessing returns of RSS Plans is to compute a simple Return on Investment (ROI) using the summed monthly investments. For instance applying three years of S$1,000 investments on the STI ETF would have generated an ROI of S$3,720, which represents 10.3% (or 3.3% p.a.) on the summed monthly investments of S$36,000.

However, S$36,000 is not the relevant base for computing returns. The base started with S$1,000 and has been variable albeit consistently grown by S$1,000 each month. Investing logic means that it would be much easier to make S$3,720 starting with S$36,000 three years ago, than it would be to make S$3,720 starting with S$1,000 three years ago.  Hence for RSS Plans, a different return measure known as the Internal Rate of Return (IRR) can be used in place of the aforementioned simple ROI.

IRR simply compares the equal monthly instalments to the current value of the portfolio and computes an annualised return that would have been necessary to achieve the current portfolio value. Hence based on equal monthly payments of S$1,000 over the past 36 months, and the current portfolio value, the RSS Plan on the STI ETF would have had to achieve a 6.3% annualised return. Hence this is a return rate, in addition to a indicative return because the portfolio value is based on month-end STI ETF prices.

Indicative Returns of June 2014 – May 2017 STI ETF RSS Plan
Initial Investment Total Investment Portfolio Value Difference Internal Rate of Return
S$1,000 $36,000 S$39,720 S$3,720 6.3% p.a.

Source: SGX My Gateway, note returns based on STI ETF value of S$3.32 on 29 May 2017.

Based on month-end investments with exception of May 2017, which was priced at same 29 May 2017 close.

Note the 3,720 incremental value includes dividend distributions.

This 6.3% p.a. return is almost twice the annualised return of 3.5% which would have been achieved if the investor did not dollar cost average, rather invested with full funds three years ago.  The return is also based on the 29 May 2017 close price of 3.32 for the STI ETF. Had the STI ETF closed at S$3.00, the IRR would have been a decline of 0.3% p.a. and had the STI ETF ended at S$3.60, the IRR would have been 11.5% p.a. At the higher unit price of $S3.37 achieved earlier in May, the return rate was 7.3% p.a.

Hence, market risk is still an inherent part of an RSS Plan, albeit less than lump-sum investing due to the dollar cost averaging.

STI Stocks

Within the STI, there have also been opportunities to outperform and underperform the Index returns.

Over the past three years, the STI’s strongest five stocks were SATS, Thai Beverage PCL, DBS Group Holdings

Hongkong Land Holdings and Ascendas REIT. These five stocks averaged 45% total returns over the 36 months, which compared to a decline of 25% for the five least strongest STI stocks over the period.

The respective returns are tabled below. For more details on each stock click on the stock name to see the full profile in SGX StockFacts.

Name SGX Code Market Cap S$M Total Return YTD % Total Return 3 Yr % Total Return 5 Yr %
Jardine Matheson Hldgs J36 64,517 12.3 23.0 56.9
Singapore Telecommunications Z74 60,905 2.5 9.7 51.7
DBS Grp Hldgs D05 52,887 21.9 35.5 84.8
Oversea-Chinese Banking Corp O39 43,672 19.1 24.1 51.6
United Overseas Bank U11 38,254 16.3 15.9 60.5
Hongkong Land Hldgs H78 24,313 16.2 30.1 60.7
Wilmar International F34 23,076 1.7 19.1 7.3
Thai Beverage Y92 21,595 2.8 48.1 200.7
Jardine Cycle & Carriage C07 17,533 9.0 7.8 21.9
CapitaLand C31 14,950 20.1 19.9 59.9
Genting Singapore G13 14,009 31.1 -7.5 -17.5
Global Logistic Properties MC0 13,686 31.8 10.2 50.4
Keppel Corp BN4 11,802 14.0 -30.7 -18.3
Singapore Airlines C6L 11,673 1.1 4.4 7.8
Singapore Technologies Engineering S63 11,596 16.3 8.8 50.1
City Developments C09 9,639 28.0 4.9 11.4
Singapore Exchange S68 7,928 4.3 20.4 43.8
Ascendas REIT A17U 7,556 17.8 26.7 74.9
CapitaLand Mall Trust C38U 6,931 6.7 11.6 43.2
SATS S58 5,641 4.7 82.5 152.7
Sembcorp Industries U96 5,621 13.0 -35.8 -24.5
UOL Grp U14 5,586 17.6 8.3 82.5
Singapore Press Hldgs T39 5,275 -5.4 -10.5 16.3
ComfortDelGro Corp C52 5,189 -0.3 13.1 95.1
Golden Agri-Resources E5H 4,903 -13.6 -34.9 -39.5
Hutchison Port Hldgs Trust NS8U 4,874 -5.9 -22.9 -7.6
CapitaLand Commercial Trust C61U 4,867 15.3 16.4 75.7
Yangzijiang Shipbuilding Hldgs BS6 4,828 59.7 25.5 45.5
StarHub CC3 4,668 -0.4 -23.5 9.8
SIA Engineering Co S59 4,377 16.3 -11.2 21.5
Average 12.5 9.6 44.3

Source: SGX, Bloomberg & SGX StockFacts (data as of 29 May 2017)

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