The SRS Fund Oct 2022 Update

A Long Term Horizon

The SRS fund is constructed base with a focus on financial and real estate sector using a diversified portfolio of stocks with good long term fundamentals.   The investment horizon is long term in nature with its mandatory first withdrawal date set at the age of 62.  

A portfolio with a long term horizon is certain to go through market crashes probably several times along the way.  While the investor is unable to control factors such as interest rates and inflation, one can certainly choose to invest in businesses that can weather through all types of conditions. 

The rise in interest rate is like a tsunami submerging all REITs due to its sudden impact.  The stronger REITs with good sponsor will likely survive while those weaker ones will eventually drown.  On the other hand raising interest rates started to fuel banks earnings giving the portfolio a good balancing effect. 

Investors with a long term horizon need not worry too much about the impact caused by interest rate cycle as the very term cycle means is self correcting and oscillating.  

As risk free rates moves up, valuation of REITs will have to fall to compensate for the risk premium.  When risk free rates fall risk premium will also subsequently be reduced. 

Overall however investors needs to demand returns exceeding inflation because a high return simply meant for nothing if the eventual purchasing power is lost. 

In the medium terms of 3 to 5 years, I expect inflation to hover in between the 4% – 6% level and I consider this level of discount rate/interest rate to be reasonable in the calculation of intrinsic value of companies.

This higher hurdle means a more conservative approach to valuation and as such equity prices in particular the US market will need to come down.  The same cannot be said of the China market where valuations have almost reached scream buy levels (huge margin of safety if numbers are legit).  I consider the Singapore market to be fairly valued and expect continue interest rate pressure in the REITs sector.

The SRS Fund Review Oct 2022

The month of Oct extended Sep losses in REITs as the sector continue to reprice from higher rates. Banks report a stellar set of results due to increasing net interest margins. Again I have continue to sit on my ass and do nothing to the portfolio to not only reduce frictional cost but wait for business especially the REITs to start peddling especially now they are at the deep end of the pool.

Dividend in Q4 should normalise to around the $2,000++ level and is expected to boost the portfolio cash to around 7% of portfolio. I will continue to seek investment opportunities with the fall in valuation of many companies. There is also a likelihood for the portfolio cash to be place in short term risk free as it approaches the 5% return level.