The latest buzz in Singapore’s financial market is the launch of Astrea V PE Bond, a retail private equity bond by a Temasek unit. If you have not heard about it, you do not have much to lose. But if you are contemplating to subscribe to it, you should continue to read.
Just google “Astrea V Bond”, you can see that it has already been discussed by many financial bloggers. Many expressed their enthusiasm for the new launch. You can also take a look at the short video clip to have a grasp of it.
There was a similar issue last year, Astrea IV Bond, which was 7.4 times oversubscribed. Wow…
I guess the excitement this year is due to the reason that many people tried to apply for the bond last year but couldn’t get allocated, and our eyes tend to light up when we see things we cannot get.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” While it’s true that it is common sense, it’s not common practice. We all think that we make rational decisions, but most of the time, people are just making herding behaviours.
In Daniel Kahneman’s famous book “Thinking Fast and Slow” (2011), he described that we have two thinking systems:
- An instinctive and emotional System 1 and
- A deliberative and logical System 2.
After living for more than a decade in a low-interest rate environment, investors are hungry for yield. In the context of Singapore, the government’s property cooling measures forced many investors to sit on the sideline with cash. Today, what are they doing with their money? Chasing yield.
The sport of “yield-chasing” often brings an adrenaline rush. With so much information overload on the internet, your System 2 often shuts down and your System 1 starts to pay attention to words like these: “Temasek”, “3.85% interest” and “Oversubscribed”. And those words are enough to get a yield-seeker excited.
The purpose of this article is to re-activate your System 2 thinking so that you can make some rational decisions concerning what’s in your best financial interest.
There are three classes of Astrea V bond. In this article, I will mainly talk about the A-1 class which is offered to the retail investors. I reckon the professional investors have done their homework.
#1. Is this bond guaranteed by Temasek Holdings?
The short answer is NO.
The issuer of Astrea V is a subsidiary of Temasek Holdings (Astrea V Pte Ltd) and not Temasek Holdings. That makes a lot of difference. Granted, Temasek has its own reputation to protect, but this is a product with no guarantee in the first place, which is clearly stated on the first page of the prospectus.
To draw a comparison, you can take a look at the Temasek T2023 Bond, which was really guaranteed by Temasek.
I recall when people bought the Hyflux bond last time, many also mistakenly believed that Temasek had skin in the game.
If you think about it, a bond is similar to a single premium endowment plan in nature. But endowment plans are guaranteed by the insurance company and protected by the Policy Owner Protection Scheme. Examples of such products are
- Aviva’s MySecureSaver
- NTUC’s Capital Plus
- China Taiping’s i-Save
- China Life’s Special SaveGrowth
I will not be surprised that the underlying instruments for the endowment plans are such bond instruments.
#2. Isn’t it good to diversify into Private Equities (PE)?
The Astrea V PE Bonds are asset-backed securities backed by cash flows from a US$1.3 billion portfolio of investments in 38 PE Funds, as described in the Prospectus.
But cash flow is projected future income, not an asset which you already have. To help you understand the concept of a bond and projected future income, answer this question, “Would you like to own the projected rental income from a real estate investment or from the actual property itself?”
Yes, Astrea IV (launched last year) claimed to be “the world’s first private equity bond with a tranche aimed at retail investors”. But if you invest in bonds, aren’t you a conservative investor and you want to invest in conservative instruments? Is there a need for you to venture into private equity in the first place?
You need to understand that PE funds are not available to retail investors for a reason. Institutions or accredited investors are sophisticated investors. Therefore, PE funds are a good way for them to diversify their stocks and bonds portfolio and obtain non-correlated returns, but it is seldom their core holdings.
Private equity investments are unpredictable in nature and the amount and timing of their cash flows are uncertain. That is why big players are probably only willing to invest 5% to 10% into PE in their portfolio.
But if you are going to invest your retirement fund, you probably need to think twice.
#3. Isn’t 3.8% an attractive yield with an A+ rated bond?
Astrea V is expected to be rated A+ (sf) by S&P, calling it a “very strong” credit rating, and the 3.8% headline yield looks very satisfactory to some people.
But if you go back to our previous 2 points, there is no guarantor and your underlying assets are merely cash flow predictions from PE funds. You need to ask yourself, “Are your risks are well compensated?”
People somehow treat this kind of offer as Godsent, and they forget these offers are just business and not a charity act. You are essentially lending money to PE companies to run their business. Therefore, the PE fund will try to pay you as low an interest rate as possible. If there is a crowd of people queueing to buy their bonds, why should they offer you a higher interest rate?
I talked about this in my discussion about Singapore Savings Bonds in December 2018. I predicted that the interest rate would be lower in 2019 due to high demand. True enough, the 10-year average interest rate dropped from 2.45% to 2.16% now.
Why do I say this? Because most Singaporeans have borrowed a lot for their properties, and the Sibor rate determines your funding cost.
On the other hand, you pay interest for your mortgage loan; on the other hand, you get the interest from your Income Generate Assets such as the Astrea V PE Bond. Shouldn’t you find the financial instruments that pay you higher returns when your funding costs are higher?
When you invest in bonds, you need to understand a basic of finance which is the time value of money. Future money is generally worth less than the money today.
If you consider the Astrea IV A1 bond an investment grade bond, you can draw a comparison to Nikko AM Investment Grade ETF. According to the latest fund factsheet, the ETF’s average bond duration is 4.77 years and the average yield to maturity is 3.11%.
The top 10 holdings are solid banks or quasi-government issuers like LTA. Yes. 3.85% looks good. But backed by cash flow from Private Equity funds? I need to think about it…
Will 3.8% still be attractive if your bank deposit also earns the same in the future?
#4. Will you hold the bond until maturity?
This is a bit technical so I don’t want to go into too many details. You can skip this if you like. As I mentioned earlier. If you are a professional investor, you don’t need me to explain these.
Further to point #3. When the baseline interest rate increases, bond prices fall. That is why most bond fund managers are trying to tilt their bond portfolio duration to the short term now.
Don’t forget Astrea V is a 10 years bond, even if there is a high chance that it may be redeemed in 5 years (Mandatory Call). Anything can happen in 10 years’ time. I am not saying that the bond will default, but what is the chance for the interest rate to hike another 2% to 3%? Can your investment return cover your funding cost?
I want to share with you two charts. The first chart is Astrea IV A1 Bond price (Retail class), the second chart is Astrea IV A2 class (mostly professional investors). Do you see any difference?
When a retail investor looks at the bond, he only looks at the headline yield, which was 4.35%. But when you pay $106.2 (the latest price) for a $100 bond, your real yield is only 3.465%.
You may notice someone even paid $108 for this bond. Really unfortunate for that investor.
#5. Isn’t it a good sign that these bonds oversubscribed?
I think what got people really excited was that Astrea IV was 7.4 times oversubscribed. That may have even surprised the issuer, too. That is why the new tranche offers a lower yield (because the latest Astrea IV price in the chart above shows that people are already very happy with 3.465% yield)
But you may want to know the troubled Hyflux’s perpetual bond used to be oversubscribed four times too, by institutional investors!
I am not saying the Astrea bond will become another Hyflux bond. My point is that the level of popularity today has little relation to the future returns of a financial product. People choose what they are familiar with or what their friends are talking about. Bitcoins and technology stocks are perfect examples.
They made money for many people and burned a lot of investors too.
Parting thoughts: diversification is the ultimate solution
Every investment option has its merits and shortfalls. I always say that there is no permanent portfolio and no single financial instrument can solve your retirement puzzle, not even CPF life.
The real magic, as simple as it sounds, is diversification.
If a bond fund manager lost $1million due to a bond default, the impact on his portfolio may be negligible. But if it is your retirement fund, how much can you risk for one product?
And if you are an Accredited Investor, why should you settle with A1 class? Is an A2 or B class more suitable for you?
It is important to have a retirement or financial freedom plan before you jump into any investment, and think about how this will affect your overall income portfolio.
What is your option on the Astrea V PE Bond? Comment below and l would love to hear from you.
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