The iShares MSCI Singapore ETF: Singapore Revisited

| About: iShares MSCI (EWS)

Summary

Singapore has one of the largest petroleum port and oil storage facilities on the planet.

Because of its well-designed business environment, Singapore is a hub for major corporations.

Singapore does face challenges as a result of the regional economic contraction.

An ideal ETF would have an advantage in every market cycle. It would also be concise, composed of strong companies with international exposure. It would be particularly advantageous if local industry had a unique niche market. If that seems to have 'investment appeal' then there's a good choice from BlackRock's (NYSE:BLK) portfolio of single country focused funds: iShares MSCI Singapore ETF (NYSEARCA:EWS).

When it comes to conciseness, this fund fits the bill. It has a mere 30 holdings, allocated over just five sectors with a small cash position. The fund is well established having first listed in March of 1996. What's impressive is the sizable net assets of $564,027,777.00 (US Dollars) which speaks well of its total returns since inception. As is usual for iShares ETFs, the management fees are 0.48%, just a bit above the industry average of 0.44%. The ETF shares are currently trading at a 0.70% discount to net asset value and the daily average volume is either side of 500,000 shares. The P/E ratio, currently at 11.27, is well below the S&P average and the portfolio is trading at 1.19 times its book value. The beta is virtually in line with the market at 0.99 and the fund's returns deviate from its three year average by no more than ±15% Importantly, the annualized distribution yield is 2.97%; the trailing 12 month distribution yield is 4.07% and the 'after expenses' SEC yield is 3.92%. All very respectable numbers, particularly if the investors automatically reinvest dividends.

To be sure, Singapore has been affected by the regional economic contraction. The economic contraction in China and the ongoing Japanese growth recession has reverberated through Australia, New Zealand, Korea, and Southeast Asia; all are major Sing trading partners. However, 2015 Q4 GDP, reported on 3 January, was a surprising 5.7%, well above expectations although full year GDP was reported at 2.1%, down 80 basis points from full year 2014, 2.9%. The decline may be attributed to a slowdown in manufacturing, reflecting a decline in regional growth. However, Singapore is a major financial hub, second only to Tokyo, and domestic spending has remained strong. Lastly, Singapore's petroleum industry has been affect by supply and demand issues on one hand, but demand for its petroleum storage and port facilities offsets the decline in demand for Singapore's refined petroleum products. The table below demonstrates the weakness in the Sing economy over the past few years. However, it is important to put this into perspective with the return over the longer ten year period.

Average Annual Returns

1 Year

3 Year

5 year

10 Year

From 3/12/1996 Inception

Total

-21.55%

-5.55%

-1.39%

6.65%

1.97%

Share Price

-21.25%

-5.40%

-1.46%

6.46%

1.96%

MSCI Index

-21.25%

-5.15%

-1.04%

6.92%

2.30%

Click to enlarge

Data from iShares

It's reasonable to expect the Sing economy to rise or fall proportionally with the major regional economies, but it needs to be emphasized that the Monetary Authority of Singapore has managed its affairs as well as might be expected. The MAS employees a unique strategy developed years ago and specifically designed for the Sing export economy. Instead of relying on a 'base policy rate' to strengthen or weaken the Sing Dollar as do most advanced economy central banks, the MAS intervenes in currency markets directly keeping the Sing Dollar within an optimal band versus the currencies of its major trading partners. Hence, there is a near term currency risk, but one that should balance out by MAS policy over the longer term.

The fund tracks the MSCI Singapore Index which is designed to

...measure the performance of the large and mid cap segments of the Singapore market. With 28 constituents, the index covers approximately 85% of the free float-adjusted market capitalization of the Singapore equity universe...

It should be noted that the fund passively tracks the index and the allocations do not vary much from the fund's sector allocations as may be compared with the table below the ETF allocation pie chart.

Data from iShares

MSCI Singapore Index Sector Allocations

Financials

Industrials

Telecom Services

Consumer Discretionary

Consumer Staples

Percentage of Index

56.25%

18.07%

15.12%

6.84%

3.71%

Click to enlarge

Data from iShares

So the question becomes that of how great an impact will the regional economic contraction have on the Sing economy and consequently on fund's holdings. Recent analysis varies from a decline of 100 basis points to 140 basis points for every 100 basis point decline in China's GDP, however, Singapore has proven time and time again it can adapt and weather economic storms. Since the fund has only thirty holdings, it's not too difficult to take a closer look and gauge the individual risks.

Financials 55.06%

Ticker

Fund Weight

Market Cap (USD Billions)

Yield

Payout Ratio

5 Year Dividend Growth

P/E

Price to Cash Flow

Total Debt to Equity

DBS Group Holdings Ltd

OTC:DBSAY

12.7753%

$29.125

3.67%

35.16%

0.70%

9.50

8.90

98.56%

Oversea Chinese Banking Ltd

OTC:OVCGF

11.3002%

$25.358

4.15%

19.50%

5.47%

9.55

8.35

72.22%

United Overseas Banking Ltd

OTCPK:UOVEY

10.638%

$21.870

4.45%

25.22%

3.13%

9.92

9.15

67.58%

CapitaLand

OTCPK:CLLDF

3.9453%

$9.851

2.77%

33.3% of EPS

10.35%

12.21

7.61

93.36%

Global Logistic Properties Ltd

OTCPK:GBTZF

3.0332%

$7.077

2.67%

35.16%

NA

13.39

7.95

46.27%

Singapore Exchange Ltd

OTCPK:SPXCF

2.8035%

$5.814

3.79%

14.71% of EPS

0.73%

22.20

19.10

NA

CapitaLand Mall Trust

OTCPK:CPAMF

2.2579%

$4.897

4.79%

81.98%

0.38%

12.99

13.25

44.75%

Ascendas REIT

OTC:ACDSF

2.1784%

$4.102

6.62%

89.01%

-1.48%

13.84

13.99

56.58%

Suntec Units Trust

OTC: SURVF

1.804%

$2.81

5.40%

69.76%

-2.63%

11.54

10.59

59.34%

City Developments Ltd

OTCPK:CDEVF

1.5209%

$4.894

1.05%

5.13% of EPS

NA

9.69

6.55

70.79%

UOL Group Ltd

OTC:UOLGF

1.4331%

$3.433

2.47%

20.5% of EPS

8.45%

8.35

7.11

36.54%

CapitaLand Commercial Trust

SI: CACT

1.3745%

$2.796

5.32%

63.75%

-0.05%

10.12

9.92

24.91%

Sector Averages

4.59%

$10.17

3.93%

41.10%

2.51 x-NA

11.94

10.21

60.99%

Click to enlarge

Data from Reuters, YaHoo! Finance

The fund is heavily weighted in the Financial Sector; more than half of the fund's total. The first point to note is that of the 12 holdings, 8 are real estate investment companies accounting for about 17.5% of the fund's total holdings and almost 32% of the financial sector allocation. There's a bit of overlap in the fund's CapitaLand holding. CapitaLand is the holding company for the CapitaLand Mall Trust as well as CapitaLand Commercial Trust. Hence, CapitaLand really accounts for about 7.58% of the fund's total and about 13.76% of the financials. Lastly, CapitaLand focuses on commercial properties such as shopping malls high-rise managed commercial and residential properties in China and ASEAN markets.

Industrial 18.79%

Ticker

Fund Weight

Market Cap (USD Billions)

Yield

Payout Ratio

5 Year Dividend Growth

P/E

Price to Cash Flow

Total Debt to Equity

Keppel Corp Ltd

OTCPK:KPELF

4.4371%

$8.393

7.37%

11.88% of EPS

6.80%

6.45

4.86

72.94%

Comfortdelgro Ltd

OTCPK:CDGLF

3.0153%

$4.545

2.85%

28.57% of EPS

9.25%

21.58

8.69

33.54%

Singapore Airlines Ltd

OTCPK:SINGF

2.8207%

$9.45

2.43%

36.34%

12.89%

23.82

6.06

11.82%

Singapore Technologies Engineering

OTCPK:SGGKF

2.2887%

$6.49

3.07%

29.41% of EPS

2.16%

17.31

12.72

56.21%

Hutchison Port Holdings Units Trust

OTCPK:HCTPF

2.1064%

$3.24

9.34%

NA

NA

NA

NA

78.71%

SembCorp

OTCPK:SCRPF

1.4512%

$3.866

5.25%

12.50% of EPS

1.30%

7.63

4.17

100.47%

Yangzijiang Shipbuilding Holdings

OTC:YSHLF

1.0143%

$2.925

5.12%

29.41% of EPS

7.71%

4.26

5.36

37.30%

Noble Group Ltd

OTCPK:NOBGF

0.9036%

$2.031

2.27%

NA

-27.93%

NA

23.90

107.50%

Sembcorp Marine Ltd

OTCPK:SMBMF

0.7561%

$2.631

6.76%

39.68%

3.40%

8.80

6.48

95.10%

Sector Averages

2.09%

$4.84

26.83%

1.95%

12.84%

12.836

9.03

65.95%

Click to enlarge

Data from Reuters, YaHoo! Finance

Singapore's economy spans centuries. Its reputation as a financial hub is its most recent addition, but its oldest tradition has always been as a gateway, trade port. It's only natural that Singapore's strategic position at the juncture of the Malacca Strait, Java Sea, Gulf of Thailand and South China Sea has made trade a mainstay of its economy. Further, Sing industry has kept pace with the economic expansion of the Asia-Pacific region over the past half century. Singapore has the most extensive oil port and storage facilities in the region and ranks among the largest in the world. For instance, Keppel Corporation is one of the world's leading marine engineering firms, in marine transport, offshore rig design, onshore port facilities, construction, repair as well as energy infrastructure management and logistic solutions servicing over 30 counties. It's a good investment on its own. Six of the nine industrial holdings are marine industry related. There's only one airline and one land transportation company. There's a bit of overlap in the sector with both Sembcorp Marine and its parent company Sembcorp, listed separately and together account for 2.207% of total fund and 11.75% of total industrials.

Telecom 14.5409%

Ticker

Fund Weight

Market Cap (USD Billions)

Yield

Payout Ratio

5 Year Dividend Growth

P/E

Price to Cash Flow

Total Debt to Equity

Singapore Telecom Ltd

SGTCF

13.2157%

$42.52

4.65%

29.17% of EPS

4.27%

18.51

9.94

44.06%

Starhub

OTCPK:SRHBF

1.3252%

$4.40

5.57%

22.40%

1.03%

16.15

9.41

360.33%

Sector Averages

7.27%

$23.46

5.11%

25.79%

2.65%

17.33

9.68

202.20%

Click to enlarge

Data from Reuters, YaHoo! Finance

The telecom holdings are dominated by one company Singapore Telecom Ltd.; over 90% of the telecom holdings. The fund's telecom holdings are pretty much standard telecom service companies and dominate the domestic market.

Consumer Discretionary 7.2853%

Ticker

Fund Weight

Market Cap (USD Billions)

Yield

Payout Ratio

5 Year Dividend Growth

P/E

Price to Cash Flow

Total Debt to Equity

Singapore Press Holdings Ltd

OTCPK:SGPRF

3.2044%

$4.462

3.82%

100.36%

-1.28%

20.87

14.59

26.18%

Genting Singapore PLC

OTCPK:GIGNF

2.225%

$6.51

1.32%

70.34%

NA

53.86

14.08

17.23%

Jardine Cycle and Carriage Ltd

OTCPK:JCYGY

1.8559%

$9.778

3.35%

33.20%

7.94%

12.58

4.44

101.26%

Sector Averages

2.43%

$6.92

2.83%

67.97%

3.33%

29.10

11.03

48.22%

Click to enlarge

Data from Reuters, YaHoo! Finance

Media is the leading holding. Singapore Press Holdings Ltd, a leading regional publisher whose brands include The Straits Times, Straits Times Press, Online classifieds, commercial property holdings and events management. A word needs to be said about Jardine Cycle and Carriage Ltd. Its main business is consumer vehicle transportation, but is also diversified into financial services, agriculture, heavy equipment, mining and IT services. Hence, by its main business it's technically 'consumer discretionary' but in a broader sense it's difficult to classify by the standard definitions. It might just as well be considered a diversified industrial holding company. It is one of the top tier companies in the ASEAN region.

Consumer Staples 3.8919%

Ticker

Fund Weight

Market Cap (USD Billions)

Yield

Payout Ratio

5 Year Dividend Growth

P/E

Price to Cash Flow

Total Debt to Equity

Wilmar International Ltd

OTCPK:WLMIF

2.8075%

$13.08

2.78%

12.00% of EPS

0.54%

11.59

6.96

145.44%

Golden Agri Resources Ltd

OTC:INDFF

1.0844%

$0.665

1.13%

100% of EPS

NA

57.95

5.07

72.86%

Sector Averages

1.95%

$6.87

1.96%

56.00

of EPS

0.54%

34.77

6.02

109.15%

Click to enlarge

Data from Reuters, YaHoo! Finance

Consumer Staples is the least of the holdings and both are essentially farm-to-retail companies: agricultural plantation property holdings, palm oil and sugar production, oilseeds, grains, along with merchandising and distribution.

There are advantages and disadvantages in holding a small, well-functioning economy of single country focused ETF. First, the retail investor can easily track news and understand the holdings, the country, the economy and the risks as opposed to holding a fund with hundreds of holdings. Further, the overlaps are more easily identified; the investor may then research the company further and then determine whether the overlap is an advantage or disadvantage. Also, it's easier to get an idea of any geopolitical risk and something needs to be said about that. In the case of Singapore, it is ranked first, globally in ease of doing business and governed constitutionally by a parliament. Politically, Singapore is still moving towards more liberal policies than in past decades and embracing modern norms of government. In the region, the city state is an asset for the ASEAN market and far removed from any disputes or conflicts or threats.

Click to enlarge

Lastly, holding a fund with a mere five sectors is equivalent in many ways as holding five stocks, one in each sector. The averages included in the table are intended to be a guide as if the sector were indeed a single entity.

To sum up, the fund has a bit of a regional economic risk but its currency risk is mitigated by the MAS policy of maintaining a trade weighted parity of the Sing Dollar. Further, the government has minimized its fixed capital investment bureaucracy, consequently attracting global industry leaders such as Intel (NASDAQ:INTC), Motorola (MOT), IBM (NYSE:IBM), Sanofi-Aventis (NYSE:SNY), Novartis (NYSE:NVS) and scores of others. Lastly, the global oversupply of oil might actually benefit the Sing economy as Singapore has extensive oil storage facilities and a port which can handle up to 1000 commercial vessels at any given time, thus contributing to government revenues, much of which is reinvested into the Sing economy.

This is an excellent fund for the long term investor. The strategy would be to establish an initial position, reinvest dividends and dollar cost average on a regular basis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.