Knowledge is Power: Dividend Contribution to S&P 500 Return, Latin America Oasis, Oil Services Stocks Edition

Posted by on

The bull market in US equities in 2019 was one of the best in recent years. However for many folks it did not feel like a bull market because stocks heavily in the last quarter of 2018. In addition, not all sectors participated in the roaring. For instance, energy stocks never recovered to their greatness and continue to struggle. Some of the sectors soared. The PHLX Semiconductor Index shot by over 60% with some US semiconductor stocks such as Cirrus Logic(CRUS), Advanced Micro Devices(AMD), Lam Reseearch(LRCX), etc. more than doubling in their prices.

Among the foreign semiconductor stocks trading on the US markets trading as ADRs the following were notable for their returns:

STMicroelectronics (STM) – 94%

ASML (ASML) – 90%

Semiconductor Manufacturing International (SMI) – 77%

Taiwan Semiconductor Manufacturing (TSM) – 57%

With that said, let’s review some of the interesting articles from around the web:

The Roman Forum, Rome, Italy

Even Small Fees Will Substantially Reduce A Portfolio’s Return

Posted by on

Investing in equities involve analyzing a multitude of factors. Some of these factors include worrying about Trump’s impeachment, who will win the US Presidential elections net year, US-China Trade wars, oil prices, Fed’s QE programs, value of the dollar, etc. All of these factor’s are beyond an investor’s control. One of the few factors that an investor can control is fees. Typical fees include annual fees, investment advisory fees, 12b-1 fees, commissions, etc. These fees vary from one firm to another. Though some of these fees may seem small over the long run they will reduce a portfolio’s return by a huge amount. So investor’s have to carefully analyze the impact of fees when making their investments. Simply ignoring small fee rates such as annual 0.5% or 1% is foolish.

The following chart shows the impact of fees at 0.25%, 0.50% and 1% for a $100,000 investment over 20 years:

Click to enlarge

Source: How Fees and Expenses Affect Your Investment Portfolio, SEC

Over 20 years, someone who chose a 0.25% fee option will have nearly $30,000 more than someone who chose a 1% fee option. This is significant amount indeed.

It should be noted the SEC uses a potential return of 4%. If this figure was higher say 7% or 10% then the fees over the same 20 years will be even higher as the fees are deducted annually.

In addition, there is also the impact of opportunity costs. This simply means fees that are paid annually could have been invested to generate additional returns for the portfolio. The following chart illustrates this logic:

 

Source: How Fees and Expenses Affect Your Investment Portfolio, SEC

One way investors can reduce fees paid is going with ETFs than mutual funds.

Singapore Leads The World in Saving For Retirement

Posted by on

The tiny city state of Singapore is one of the best run countries in the world. Singapore is the world’s top saving country.Both the government and citizens take pride in responsibility and act accordingly. One of the areas that other countries can emulate from Singapore is saving for retirement.Unlike other developed countries including those in Europe and North America, the state acts in the best interests of the country and its citizens. For example, while the west focuses on the trivial issues like the ban on bubble gums it fails to pay attention to important policies such as saving for retirement. According to a recent article at U.S. Global Investors Singapore is a masterclass in fiscal responsibility. From the article by Frank Holmes at U.S. Global Investors:

Brown’s idea is incredibly similar to what Singapore already does, starting with the Central Provident Fund (CPF)—a sort of Social Security-401(k) hybrid that all Singaporeans are required to participate in. The CPF not only provides participants with retirement earnings but can also be withdrawn before retirement for specific housing and medical expenses. Both employees and employers are responsible for making contributions—20 percent of income on average for the former, 17 percent for the later—which are then invested to earn about 5 percent annually.

The CPF program, launched in the mid-1950s, is often cited for helping residents of the Asian city-state become among the world’s most fiscally responsible. Compared to people in most other developed countries, Singaporeans save a much larger portion of their earnings as a percent of GDP.

A recent study, in fact, found that six in 10 Singapore millennials—those aged 25 to 34—currently save over 20 percent of their salary. Most are not just adequately prepared for retirement, but they’re even more prepared for retirement than their middle-aged counterparts, according to the study.

Again, Singapore has managed to do this without levying huge taxes to support entitlements.

Personal income is taxed progressively between 2 percent and 22 percent, and because there’s no capital gains tax, dividends paid by Singapore-resident companies are completely tax-free.

Corporations pay a reasonable 17 percent on average, and there’s no payroll tax.

What this means is that Singapore’s tax revenue as a percent of gross domestic product (GDP) stands at only 14.1 percent, about two and a half times lower than the OECD average of 34.2 percent.

Some might initially think that lower taxes would result in a lower standard of living, with crumbling infrastructure and services, and yet Singapore’s infrastructure is regularly regarded as the best in the world, with the World Economic Forum (WEF) ranking it first in quality of roads, railroad density and efficiency of air transport and seaport services. The city-state came in first overall in the WEF’s Global Competitiveness Report 2019, followed by the U.S. Hong Kong, the Netherlands and Switzerland rounded out the top five.

Source: Expecting a Market Downturn? Make Sure You’re Following the “Noah Rule”, U.S. Global Investors

Though Singapore is also a developed country on par with developed Europe and the US, the high saving rate is indeed surprising. In addition to state policies that encourage savings, cultural and other factors may also be a factor that drive Singaporeans to save a high portion of their household income.

To put things in perspective, the current personal saving rate in the US is just 7.9% of disposable income. The following chart shows the rate since the 1960s:

Click to enlarge

Source: St. Louis Fed

Australia’s Top Companies in 2009 vs. 2019

Posted by on

Some of the developed economies in the world are natural resources-based. These economies are dominated by commodity companies and financials. Highly innovative and disruptive tech sector form a small part of these countries. Countries such as Canada and Australia fall int his category. The Canadian economy is dominated by mining, energy and financials. Similarly resource and financial firms dominate the Australian economy. As a result, the largest companies tend to remain that way for years or even decades. Since technology sector is so small and there are no world leading startups, the top firms such banks and energy firms continue to remain the top 10 positions of the ASX 100 index.

The following chart shows the sector breakdown of the benchmark ASX 100:

Click to enlarge

Source: S&P

The IT sector accounts for only 2% of the index.

Compared to the Australian index, the IT sector in the S&P 500 accounts for about 23% of the index. In the past decade, Apple(AAPL), Microsoft(MSFT), Alphabet(GOOG), Amazon(AMZN), Facebook(FB) have grown exponentially to become world leaders in their fields. The only tech company founded in Australia and turn into a global enterprise is Atlassian(TEAM) which is listed on the NASDAQ and has a market cap of about $30.0 billion.

According to a recent article at WHICH-50, the top 10 firms in the ASX 100 have not changed much since 2009. Though some have changed positions with the top 10, the list remains the same. For instance, Commonwealth Bank (CMWAY) was number 2 in 2009 and how is the top company in Australia as shown in the chart below. From the article:

Despite a decade of disruption, Australia’s largest public companies of 2009 are still holding on to their positions at the top of the ASX100.

Australia’s newly-listed tech companies are starting to replace some of the traditional incumbents, but their failure to build genuine scale offshore is slowing their rise up the ranks.

It is a very different picture in the US, where Apple, Microsoft, Alphabet and Amazon have cemented their dominance over ten years — all hovering around $US1 trillion in market capitalisation.

The nine most valuable companies listed in Australia in 2009 — the big banks, miners, retailers and Telstra — have shuffled positions but can all still be found in the top 12 positions at the end of 2019. On the surface, they appear relatively immune from disruption despite the industries they operate in being radically reshaped by the rise of the internet and mobile technology.

Further down the list there is evidence of the erosion of value the internet has unleashed on traditional industries, particularly in the retail and media sectors. Of the companies that have disappeared from the list over the last decade, the majority have been acquired by foreign companies or swallowed by larger local players in their sector. Think Fairfax’s coupling with Nine Entertainment, CBS taking control of a flailing Network 10 and South Africa’s Woolworths buying David Jones — thwarting plans for the department store to merge with its rival Myer.

 

Australia’s experience contrasts with that of the US, where the story is of technology companies sucking up the oxygen and capital to dominate the index, giving rise to the term “big tech”.

The pace of disruption has claimed casualties along the way, around the world.

According to PwC’s Global Top 100 Companies by Market Capitalisation report, just 53 companies from the 2009 Global Top 100 survived to be in the list on 31 March 2019. 

Amazon and Apple added the most to their valuations over the decade, followed by Microsoft and Alphabet. From China, internet companies Tencent and Alibaba — which were founded in 1998 and 1999 respectively — are also among the top ten most valuable global companies, illustrating the astronomical growth in the tech sector.

Kent Kwan, co-founder of investment company AtlasTrend, noted Australia has not experienced the growth of “big tech” like the US or China markets.

Source: Cover Story: At The End Of A Disruptive Decade, The ASX Top 10 Looks Very Familiar. What Gives? by Tess Bennett, WHICH-50

The entire article is worth a read.

Disclosure: Long Westpac(WBK) and National Australia Bank (NABZY)