Looking at StashAway Simple's lower projected returns.....

 

StashAway just announced that its cash management portfolio (Stashaway Simple) will be projecting a lower interest rate from Sept 1. 

The rate will change from 1.9% to 1.4%.

While some would be surprised, i was totally not surprised at all.

Back in end of May i took a look and i was not convinced with the product.

Its stated on the stashaway website that its stashaway simple invest in 50% LionGlobal Money Market Fund and 50% in LionGlobal SGD Enhanced Liquidity Fund SGD Class I Acc

Its clear that the top 10 holdings have a relatively short expiration as stated by how a money market fund works.

As lower interest rate kicks in, the proceeds from these bonds will have to be reinvested at a much lower rate.

As such, it was a matter of time before returns start to come down.

Above is an example of a bond issued by Danga Capital Bhd which expires on March 2021. It has roughly 7 months left and the yield if you held it at ask yield is 0.576%. This is definitely lower than the rate of 1.9% or 1.4%.

To quote another example, PUB bond that expires in about 23 Months has a ask yield maturity of 0.42%. 

This meant that should the funds decide to change their allocation from their PUB Proceeds that they obtain when the current bond expires on 26 October 2020, they would only receive an annual rate of 0.42%.  

Which is clearly insufficient for 1.9% or 1.4%

Now moving on to the Enhanced Liquidity Fund,

From a glance, its quite clear that there are more focus on companies rather than governments. The fund has done well by having some of its top 10 holdings have 0% coupon rates which reduces the reinvestment risk.

However, one of its holdings Lend Lease Retail Invest might not be doing well as Lendlease Corporation has reported losses and the credit rating is currently BBB-. This means that should performance continue to be bad, a lower credit rating would have to be given and the fund whose aim is a weighted average portfolio credit rating of A- will have to switch holdings and potentially face a lower rate.

Will they face another negative revision in rates? Well that depends on a couple of factors. For example, will china cut their rates? will there be a prolonged credit crisis as businesses fail to recover from covid-19? will usa enter negative rates and will negative rates be a norm in future? Well these are just a few reasons i can think off the bat but i believe there are much more.

The takeaway from this is that its always important to read what the robo-advisors invest into and always be prepared that rates might fall.(Which is why they are 'projected' returns)

End of the day, the lower interest rate environment should result in investors looking for alternatives.

This can be in the form of equities, higher yield junk bonds, properties or simply spending their money away as the opportunity cost of holding cash is lower.

As for myself, i feel that i would be better off investing in equities that pay dividend instead of such bonds. The reason being is that the opportunity cost of cash or money market fund is very low now. 

In addition, if i had liquid funds, i don't see a large difference putting it in a savings account that yields 0.5 to 1% compared to this fund. There are different choices out there as well and one could diversify into many different savings account (Cimb, Stanchart, Sing finance etc)