11 December 2020
Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning discuss the latest global events and their impact on the markets.
In this episode:
How would a drop in the US dollar affect investments? [0:16]
Understanding how ETFs with similar holdings work for your portfolio[2:56]
Is there a real risk of the delisting of Chinese stocks from the US exchanges? [7:37]
00:03 | Philipp
Hello and welcome everyone to another weekly market commentary from StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Hey Freddy!
00:11 | Freddy
Hello, everyone. It's good to be back here again. Philipp, good to see you.
00:16 | Philipp
Yeah, good to see you as well and we've got so many questions today. So Freddy and myself thought actually to make it a little bit more interactive, we try to get to as many as possible, especially with the markets not having too much new news since our last video, right? I think we're still seeing the markets melting up, so to speak, on coronavirus vaccine advancements, the first vaccine being given to a person in the UK a couple of days ago. So, I think with that being said Freddy, let's go to the questions, because we do want to address as many as possible. We do want to still keep the video and the podcast quite precise and concise. So, let's go with a question that was asked by Bradley Ford. And for Shaun Lim, just so you know, we're kind of packaging the two of you together because you kind of have roughly the same question. But Freddy, Bradley Ford says, "Can you discuss the future of the US dollar? In particular, the impact the drop in US dollar will have on our StashAway investments? And maybe should the ETFs move to those that are not US dollar based?".
01:29 | Freddy
Well first thing, you may see that a lot of the ETFs are denominated in USD and they are listed in the US exchanges, but it doesn't mean that they are exposed to US Dollars. In fact, in our last re-optimisation in mid-May this year, we have explicitly reduced US dollar exposure for most portfolios close to zero, and for some portfolios, there's still some residual exposure that's very small. So, for example, if you buy Asia ex-Japan, it's listed in the US, quoted in US Dollar, but the Yuan will actually drive the value of the ETFs. And if the US Dollar is not moving, the Chinese stocks and the underlying Chinese stocks, which is 40% of that, would also drive the value of the ETFs. So, it's actually just for quotation purposes and for liquidity reasons we are there. So, we'd like to just clarify that actually as a firm because of the fact that in the last re-optimisation, we ramped up Gold, which is a short-Dollar exposure, we ramped up international bonds and others, even like Chinese tech rather than US tech, we have actually brought US dollar exposures to a minimum.
02:50 | Philipp
Yeah, thanks Freddy. And I think this is great information on our portfolio for people that have not listened to us that often. So, Shaun had the same question, but then he had a follow-up question we wanted to address, right? And he's saying, "StashAway's USD portfolio has been a drag due to currency movements. How has the relative performance been for its GBP and USD portfolio over the last 12 months? And does the team expect the portfolio to still closely mirror each other, given the vast differences in geographical exposures?".
03:22 | Freddy
Well, firstly, like I said in the answer, in the first part, they are actually not exposed to Pound or US Dollars. They just quoted them. Some of the portfolio may have a little bit of exposure, but the key for our algorithm is to take into account the implied currency exposure, manage it, make sure it's very diversified. And in fact, with all the money printing, we have consciously made an effort to make sure we stay away from too much US Dollar exposure. Now, in terms of difference between the Malaysia DRB portfolio versus a global portfolio, they are fundamentally different because the Malaysian version, this version of it, is to help our user comply with the domestic Ringgit requirements. It's also to help the Islamic community get access to a 50% Sharia-compliant investment universe. And it's actually quite exciting. And you can call that a bit related to ESG in the same spirit, in the sense that we are actually trying to empower users by giving them access to invest while keeping in mind their personal goals or beliefs, right? So they are fundamentally different but both of them are not exposed to the US Dollar or Pound only.
04:46 | Philipp
Yes, great explanation there. Let's move on then from the US Dollar questions and move over to the question asked by Alex. He's saying, "Hey StashAway team, I would like to ask why you are triple dipping into the same top China companies in the 36% risk portfolio, with companies like Alibaba, Tencent, Taiwan Semiconductor Manufacturing being present in the SPEM, KWEB, as well as the AAXJ ETFs, collectively taking up a hefty part of each of the ETFs, was this intended or due to some other reasoning?".
05:20 | Freddy
Well, you know, it's a multidimensional thing when you construct a portfolio, you don't actually dip into each and really think this way. The correlation metrics would take care of it, right? If you have a lot of common names, a lot of double counting or whatever, and all the ETFs would be highly correlated, the algorithm, by design because of its use of the correlation metrics before it optimises portfolio, it would take that into account, right? However, I have a table here just to be a lot more clear on this point. Here I have a table where I've highlighted in blue cells and white fonts, the specific ETF weights in this particular portfolio that Alex has mentioned. So SPEM is emerging markets equities. It has 7% in SRI 36% and KWEB is KraneShares's China Innovations ETF and we have a big one, it's 20% and Asia ex-Japan (AAXJ) is a super diversified ETF and we have about around 6% of the portfolio in it. So, these three together collectively represent 33% of the portfolio, right? Now, if you look at Alibaba, for example, its share in SPEM is nearly 6%. It has an 8.5% share in KWEB and 7.4% in AAXJ. So, Alex is exactly right, it seems like you're triple dipping and that's sort of like, wow, common names are showing up, right? However, if you actually work the math out, right? Multiplying the blue cells with the white cells to get to the portfolio level, Alibaba, yes, it does have a larger than usual sort of single security weight in the portfolio, but it's still only about 2.6% of the portfolio. It's actually very tiny. But Alibaba, due to its sheer size, and Tencent, they're such an important part of the Chinese ecosystems that their market value is that big but yet when you add them together, you're talking about 5.7%-5.8% of the portfolio in the tech leaders of China. So, that's not a lot, actually.
07:37 | Philipp
Thanks for sharing that overview, Freddy, it was actually quite interesting even for myself to take a look at. So yeah, great explanation there. And obviously, hopefully this answers your question Alex. So Freddy, we do have a few more, but I think maybe we'll take one more question here, right? Maybe kind of builds up on the question we had before. It is from David Chang, "What are your thoughts on the US Congress passing a bill that could delist Chinese stocks from the US market? How would it affect the risk of having Chinese ETFs in the portfolio? It seems like a remote possibility now, but maybe it's materialising to kind of play into that role.".
08:19 | Freddy
Yeah, it's a great question and I'm going to assume, let's say it happens today, right? I'm going to, actually let me do an exercise, let's say it happens tomorrow and however, is often misunderstood. And you look at the headlines in the media, it doesn't tell you a lot. There's a process for it. So what it means is, the Congress will pass a bill that requires Chinese companies listed in the US exchanges to sort of declare that they are not under any foreign government interference or inference, and also that they will agree to regular audits like, there's quarterly or semiannual audits where the government will send someone in. Details are still very loose, but they will send auditors in to audit the firms. And if they found that there's accounting irregularities or activities that's suspicious and it's not addressed for a period of three years from the first flag, then the companies would be delisted from the US exchanges. So, we are really talking about a pretty lengthy process, even if it happens. And also the companies do have avenues to not fight back, but respond, right? They'll issue corrective notices and then they will, through proper auditing standards rather than Trump standards. And Trump is out. So, the proper standard demonstrating that they are complying, that will be resolved. You have a window of 3 years. So, I don't know why we are so worried about this headline rather than going to the details. So, I'm actually not concerned about it.
09:57 | Philipp
Yeah, and I think we discussed this as well before I think, on a couple of prior weekly market commentaries before also. Thank you Freddy and thank you everyone for sending in so many questions. So, if we didn't get to yours, we'll probably try to get to it next week. Otherwise, for everyone new watching or if you have follow-up questions, feel free to put them in the comments section below, as well as sending us a message to firstname.lastname@example.org as well. We'll definitely pick those up. And with that being said, before we let you all go, there's a couple more webinars coming up and one that's probably very exciting if you like the market commentary, you'll definitely like the event we have next week. So for all our Singapore listeners, we have a webinar called StashAway Market Outlook 2021, I assume already that's going to be you. So, that's on the 16 December, 7:00 pm to 8:30 pm. So, if you want to sign up for that links are in the notes below, as well as on our website. And for our Malaysian audience, we have a webinar called An Inside Look into StashAway, also on the 16 December, 6:00 pm to 7:00 pm. Links, again as always, in the show notes below, If you want to learn more about personal finances or entrepreneurship, you may also take a look or listen to our podcast, which is called In Your Best Interest. Again, there will be links in the show notes below. Otherwise, Freddy and myself will be back with you next week and we're looking forward to more questions and more engagement from the audience. So, thank you so much again and have a wonderful rest of your week. Bye-bye.