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Three Important Investing-Things to Note for 2014

Three 3

2013 has proved to be a lacklustre year for the Straits Times Index (SGX: ^STI) in terms of returns. The index closed 31 Dec 2012 at 3,167 points and exactly one year later, it was back at – you guessed it – 3,167 points on 31 Dec 2013. Some might view it as a disappointment; some might think it’s okay if money’s not lost.

But whatever it is, 2014 can also represent a new start. And whether you’re an investor who’s just starting out or someone who’s been around the block, here are three important things to note.

1. What the market’s doing isn’t important

If you’re an investor in shares of individual companies, where the market would be going can often have no bearing on how your investments will do.

Singapore’s stock market, as represented by the Straits Times Index, was flat in 2013 – that’s true. But, try telling that to investors in infrastructure-related engineering services provider Boustead Singapore (SGX: F9D) or land transport outfit SMRT Corporation (SGX: S53). You’ll likely get a quizzical look or an angry glare, in respective order.

That’s because the former has had a great 2013, climbing 67%. Meanwhile, the latter has lost 31% of its value in the same time period. Over the last 12 months, Boustead’s profits have gained some 23% to S$80.6m compared to the corresponding period in the previous year. SMRT, on the other hand, has seen its profits drop 32% year-on-year to S$226m for its last 12 months.

The next time you hear prognostications on how well or badly the market’s going to do, take a step back and assess the corporate performance of the companies you’re invested in. That, along with the starting valuation at which you first invested in the company, will be the final arbiter of how well your investment will do, not where the market’s going.

2. The market’s fundamentals can be very different from that of an individual share

The SPDR Straits Times Index ETF (SGX: ES3), an index tracker mimicking the Straits Times Index, is currently selling for around 12.5 times earnings. Using that as a close proxy for the index’s actual valuation, we might say that the market’s not too expensive from a price-to-earnings perspective.

But, that says very little about how cheaply- or expensively-valued individual companies can be. Take for instance, paper and paper packaging products manufacturer UPP Holdings (SGX: U09), which is currently valued at 360 times trailing earnings. That’s a significant dislocation from the valuation of today’s ‘stock market’ as represented by the Straits Times Index.

Hearing talk of an ‘overvalued’ or ‘undervalued’ market means nothing if you’re an investor in individual companies. At any point in time, there can be big differences between the valuations of a company’s shares as compared to the market’s.

3. An investment into the Straits Times Index can mean either too much diversification, or too little diversification.

Firstly, an investment into the Straits Times Index through trackers like the SPDR Straits Times Index ETF or the Nikko AM Singapore STI ETF (SGX: G3B) can mean some significant geographic diversification.

That’s because the companies that make up the benchmark index do generate a big portion of their businesses from outside Singapore’s shores. In such instances, investors are also exposed to the economic happenings of the various countries in which the index constituents are doing business in.

So, an investor hoping to be exposed purely to Singapore might end up having too much diversification in terms of geographic exposure.

Secondly, even though the Straits Times Index is made up of 30 different companies, almost half of its movement is concentrated in the hands of just five companies.  As of 31 Dec 2013, the following five companies occupy 46.7% of the index:

Company Weighting in Straits Times Index
(as of 31 Dec 2013)
DBS Group Holdings (SGX: D05) 11.10%
Oversea-Chinese Banking Corporation
(SGX: O39)
10.33%
Singapore Telecommunications
(SGX: Z74)
10.01%
United Overseas Bank (SGX: U11) 9.29%
Keppel Corporation (SGX: BN4) 5.96%
Total 46.69%

Source: Website of SPDR STI ETF

If an investor’s stock portfolio consists of just an index tracker in the STI, he or she is actually holding a rather concentrated portfolio and might be much less diversified than initially thought. It’s also worth pointing out that the banking industry, represented by DBS, OCBC, and UOB, has an outsized impact on the STI’s overall movement.

An investor buying into the index should know what it entails. The investment is certainly not isolated from worldly-events given the vast geographic exposure the index constituents have. And, it’s also not as diversified as might be widely believed given how the index’s movement is dominated by just a handful of shares.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.