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Portfolio construction with Regular Shares Savings Plans

A Regular Shares Savings (RSS) Plan using six stocks representing six different industries in the Straits Times Index (STI) would have generated a total return of 7.9% over the past 12 months.

As noted last month in the six different sides of the Straits Times Index highlight, there are six types of stocks that make up the Straits Times Index (SGX: ^STI) – Consumer Goods, Consumer Services, Financials, Industrials, Oil & Gas and Telecommunications. Of the six largest capitalised stocks in each of these industries, four are available in Regular Shares Saving (RSS) Plans.

Together, the six largest capitalised stocks representing each of the six industries that are a part of the STI and currently part of RSS Plans are

  • Wilmar International (SGX:F34) [Consumer Goods]
  • Singapore Airlines (SGX: C6L) [Consumer Services]
  • DBS Group Holdings (SGX:D05) [Financials]
  • ST Engineering (SGX:S63) [Industrials]
  • Keppel Corp (SGX: BN4) [Oil & Gas]
  • Singtel (SGX: Z74) [Telecommunications]

RSS Plans allow investors to convert their savings into investments automatically, on a monthly basis. The key advantage of the RSS Plan is dollar cost averaging meaning investors determine the dollar amount to be invested regularly rather than the number of shares – this means investors will purchase more units at lower prices and purchase fewer units at high prices, creating dollar cost averaging.

Consider an educational example with an investor planning to invest S$100 per month in shares of Company ABC, whose shares are trading at S$10. In the first month the RSS Plan will buy 10 units. If the price of the Company fell to S$7.50 in the next month, the RSS Plan would purchase 15 units with the next S$100.  If in the third month, the share price of Company ABC rallied to $12.50, the RSS Plan would then purchase 8 units of company ABC with the S$100.

As noted above, the RSS Plans include companies that represent each of the six industries that are a part of the STI. Had investors invested S$100 monthly in each of these six stocks over the past 12 months, the portfolio would have been generally balanced, and the total investment would have amounted to S$7,200 over the past 12 months.

Using the last day of the month as the date of the monthly transaction, the theoretical return in terms of share prices and dividends received would have amounted to S$569.09. This would have represented a gain of 7.9% including dividend distributions that went ex-div in April, May, July, August, November and December 2013.

Although just two of the stocks gained in price over the 12 monthly instalments spanning the last trading day of February 2013 through to 21 February 2014, dividends and dollar cost averaging meant RSS Plan provided a return across all six stocks. For instance, the first transaction in Wilmar was made at a price of S$3.55 and most recent at the end of January at S$3.12 with the most recent close of Wilmar at S$3.37. Moreover, one third of the monthly purchases were made between S$3.15 and S$3.17 in June through August last year. This meant that in the case of Wilmar, S$1200 had been invested and 393 units would had been bought, which were worth S$1324.41 at the most recent close. There was also S$6.25 in dividends distributed.  RSS Plan returns on the six stocks ranged from 1.0% for ST Engineering to 11.5% for DBS Group Holdings.

The monthly dollar values of the six stocks discussed in the above example of the RSS Plan are tabled below. These six stocks were selected from the RSS Plans purely for the purpose of an educational example on portfolio diversification and the RSS Plan.

Please note the below tables are based on 12 monthly investments of S$100 starting from the end of February 2013 through to the end of January 2014. Thus, as shown in the table, in the case of Wilmar after two months, the S$200 of investing was worth S$197 based on the price of Wilmar shares at the end of March 2013.

Total dollar value S$

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Wilmar

100

197

292

386

473

573

SingTel

100

204

324

409

511

633

DBS

100

206

316

428

488

625

Keppel Corp

100

196

297

392

488

590

Singapore Airlines

100

200

304

394

472

579

ST Engineering

100

201

312

391

500

611

 

Total dollar value S$

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

21-Feb-14

Wilmar

678

782

953

1069

1139

1140

1330

SingTel

681

823

934

1019

1121

1183

1305

DBS

702

829

945

1069

1164

1222

1338

Keppel Corp

681

803

935

1075

1163

1182

1290

Singapore Airlines

643

808

907

1018

1113

1127

1294

ST Engineering

670

805

914

976

1056

1112

1212

Source: Bloomberg

The blue chip stocks that can be invested in are varied across the three providers of such plans. Note the above examples are based on the last trading day of the month for educational purposes only hence please check with RSS Plan providers which day of the month the monthly transaction is made.

For the investor looking to apply the plan to a diversified basket of blue chip stocks that make up the Straits Times Index (STI), all three of the plans also include an Exchange Traded Fund (ETF) that tracks the performance of the STI.