Every time I look at the basket which makes up the STI Index, I ask myself.
What would I like to remove from this basket?
Cos well... I do think an STI ETF is a fairly ok investment for the long run.
So to me, when I look at the basket, I mentally classify the stocks...
Good stocks, stocks that I would like to include in my portfolio,
Average or "don't mind" stocks, aka stocks that I don't think are great but I don't mind holding them in the basket,
and Drag stocks, stocks which I DON'T want to own cos they will likely drag down the overall performance of the STI Index.
Now, I don't particularly mind buying the STI ETF, cos it's value weighted. Meaning, the larger cap stocks would make up the bulk of the ETF. And the drag stocks make up a smaller percentage of the ETF.
So maybe the drag stocks would take up 5% of the overall performance. Doesn't mean the performance will be less by 5%, just means that this 5% would perform weaker than the rest of the other component stocks. Resulting in a slightly lower average return.
Of course there are benefits to holding the STI ETF...
I don't have to manage and rebalance 30 different stocks.
I get a fair amount of diversification.
For people who don't have large AUM pools, they can get a fair enough diversification with just one ETF.
They are names which most Singaporeans know and trust.
Etc...
So just a couple of months ago... There was SPH that was one of the drags on the STI ETF...
It was a fairly good dividend stock last time... but that was really long ago... I used to own it and got a nice 5% dividend yearly... Wrote about that here.
Sold it long time ago so no love lost.
Anyway, SPH has been removed from the STI Index.
And so I look through the component list and once again I ask myself.
What's the next drag which would likely under perform the overall index?
Note, I tend to look at this long term... more than 5 years.
Meaning, which stock is a dying industry, and not just any under performing stock.
Example.
Yangzijiang is performing poorly currently, BUT, it's possible that in the future, ship building picks up again when things get better over the next decade or 2. Personally, I expect shipping to eventually recover, when relationships between China and US eventually improve, trade will resume eventually.
In the end, the lust for money always wins.
SIA and SATS are also currently under performing, and will continue to under perform until COVID is over AND people need to trust flying again... I think people won't want to fly for holidays unless they have sufficient trust that they won't come home with COVID.
However, in maybe 3 years, things may eventually pick up again...
So I think eventually, SIA and SATS will recover some day.
For me, I think the long term under performer will be ComfortDelGro.
ComfortDelGro has revenue streams of...
1. Running public transport for SG, UK, Australia (Approx $2,400m in revenue)
This segment is probably stable.
2. Taxis in multiple countries (Approx $1,200m in revenue)
This revenues stream looks at risk. With many people moving toward ride hailing, earning from this segment will likely be eroded significantly as the years go by, unless they make significant changes.
3. An engineering arm which maintains and services taxis (Approx $180m in revenue)
With the reduced demand for taxis, it's likely that they will continue to reduce their fleet size and this revenue stream will also be eroded.
4. VICOM & Other businesses (Approx $200m in revenue)
Small revenues which doesn't impact the overall business significantly.
With approximately 1/3 of it's revenue/profit which might slowly become obsolete, I feel that ComfortDelGro would be the drag company on the STI.
Note, this doesn't mean that ComfortDelGro will lose money or go bankrupt. It might just be a shrinking business. Like SPH just didn't manage to keep up with the times. CDG is still a company which employs many people. Just that I think this company might be in an industry which doesn't grow with the times.
Whereas I feel that the industry that SIA, SATS, YangZijiang are in, will continue to go strong, unless the companies themselves are mismanaged and have other management issues.
Once again...
These thoughts are my own analysis and thoughts, please do not use it as an indication to buy or sell. Please do your own research before making any decisions.
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