Wolf Money(portfolio update for end Oct 2023) part 1
My thoughts and prayers to those families who had lost their loved one in the Palestinian and Israeli conflict. A lasting peace deal between the two is long overdue. It is my hope to see all the big powers showing leadership and chipping in for world peace. May God bless those in their times of need. 🙏
Equity or Debt? Cashare!
I chanced upon Howard Marks’s interview with Bloomberg’s David Rubinstein. I find it beneficial to know Marks’s view on the current market situation. He was asked, Is Equity or Debt a better investment currently? Below are a few interesting pointers from Howard Marks.
1.) Return on Investment in debt or credit market is likely to offer better return based on a risk reward basis given the high and longer interest rate narrative by the Fed.
2.) One can get close to equity like returns on debt and credit instruments with the advantage of a higher hierarchy of claims. As an equity holder, you are left with crumbs when a company goes into bankruptcy.
3.) He sees the normalisation of Fed fund rate to be around 2-4% over the long term and the 0% rate which the market enjoys from 2008-2015 is unlikely to come back as it was seen as an emergency tool used to fight off GFC.
Given what I heard, I find his view sound. In Singapore, a company with a good credit history had to borrow at around 5% for 2 years in SGD term. Given our current 2 years SGS bonds are trading at 3.74%. Usually there will be a spread of 75 bases to around 125 bases above 2 years for investment grade companies in Singapore. With the many choices in the debt market, equity returns become less attractive, especially those companies paying no or little dividend. Competition for investment dollars will intensify for many years to come. The higher borrowing rates is a conduit to rethink investment thesis in hard asset like property or even REITs which had served investors well in the past decade. I am undertaking a new strategy of holding more cash and buying shares in companies with a lot of cash sitting in their books. The companies must also have good operating cash flow and most importantly their willingness to share the fruit of labour through good appropriation of dividends to shareholders.
I have taken interest in shares which I coined as “Cashare”, those companies with large amounts of cash which form a substantial part of their capitalisation. I have no record how well and how badly those cash companies have done in the past, since the era of high risk free rates and high deposit rates are new to me. I have taken a small position in portfolio companies to back test the quality of my thesis, no Big Bang theory yet. It will be interesting to see how the performance of my “Cashare” theory with my portfolio of Boustead Singapore, Valuetronics and SBS transit.
To be frank, I have no interest in investing in debt. I find the notion of investing in cash rich companies more appealing to me. Boustead Singapore, SBS Transit and Valuetronics are some typical companies which had a large part of their capitalisation in cash and cash equivalents which I had invested. For example, Boustead Singapore has 67c cash per share vs 84c stock price which is close to 80% of their capitalisation. SBS Transit has $1.10 in net cash, close to 40% of their market capitalisation. Valuetronics with 42c in cash, close to 82% of its share price. Those companies could literally sit on their cash and enjoy the tailwind of rising deposit interest. SBS Transit has more than $180m of free operating cash flow flowing back into their books. The first half 2023 result shown interest income alone amounted to $6.3m vs 550k last year. If I do a mirror image of the interest income for the second half, total interest income for the year will be around $12.6m or 4c eps per share that is roughly 18% of their last year earnings. The power of having cash can’t be underestimated, beside cash gives the shareholders a piece of mind and it acts as a significant contributor to the companies’ earnings. Cash is King has some truth in this environment. “Cash is not trash” as Ray Dalio points out.
To be continued…
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