United SG Dynamic Income Fund: An Interesting Choice for Benchmarking

Earlier today, LG – the South Korean conglomerate known for home appliances and electric vehicle battery components – made a surprising announcement: its AI research division partnered with SoftBank-backed Qraft Technologies to launch the LG Qraft AI-Powered US Large-Cap Core ETF ($LG QRAFT AI-POWERED U.S. LARGE CAP CORE ETF(LQAI)$) on the New York Stock Exchange. This ETF will use a proprietary LG forecasting tool to focus on 100 large US companies, rebalancing every four weeks while seeking to outperform the S&P 500. The methodology hinges on the AI analysing a trove of financial and textual data to first exclude hundreds of would-be holdings based on downside risk and then reweigh the portfolio of approved stocks based on their perceived upside potential.

It can be assumed that AI will feature every now and then as playing a hand in enhancing the analysis of portfolio managers in the years to come. However, in the strictest sense, this has already happened in Singapore with the newly-launched “United SG Dynamic Income Fund” ( $UNITED SG DYNAMIC INCOME FUND "A" (SGD) INC(SGXZ24219693)$, an Excluded Investment Product (EIP) launched by UOB Asset Management.

Unlike LQAI, this Fund comprises of five asset classes, primarily in Singapore.

The securities are selected through UOB’s bottom-up security selection process by portfolio managers upon which an “AI-Augmentation process” – a collaborative approach that leverages both technology and human expertise – is applied.

By using a dynamic allocation process, the Fund aims to beat inflation and offer attractive regular monthly income, while weather-proofing your investments. Overall, the Fund hopes to achieve a regular monthly income of up to 6% per annum.

Of course, this cannot be guaranteed. What instead can be done is to look at trends in the asset classes being used by the fund versus their US-listed counterparts.

First come the REITs. While Singapore REITs generally have to stay within a 45% debt-to-assets ratio to remain eligible to continue to be REITs, US REITs come with a great deal of variability. As per Nareit – a global advocacy group for REITs and real estate companies with an interest in U.S. real estate – REIT total returns were negative in the third quarter of 2023. All equity REITs were down 8.3% for the quarter, and mortgage REITs posted a total return of -2.2%.

As of the second quarter of 2023, the average REIT leverage ratio was 34.6% and the weighted average term to maturity of total debt was nearly 7 years.

In contrast, while Singapore REITs have faced tailwinds as Developed Markets (DM) investors largely turned away from Emerging Markets (EM) instruments, they remain relative stable and are now considered undervalued.

Next come equity markets. It should be immediately apparent to long-time investors that US equities generally run overvalued and are largely prone to volatility. Particularly, over the course of the current year, a massive proportion of market movement could be attributed to the “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. This is apparent in the performance characteristics of the S&P 500 ( $S&P 500(.SPX)$) vs the STI ( $Straits Times Index(STI.SI)$):

The standard deviation of the STI in the Year Till Date (YTD) is 2.21 while that of the S&P 500 is more than twice that at 5.17.

Excluding the wide universe of Asian equities (which, if including India, runs into thousands of tickers) and money market instruments, the final piece to consider are government bonds. Overall, high inflation and affordability concerns have been running US Treasury Yields high. However, it does bear noting that Singapore Bonds tend to run in parallel with US Treasury, as is evident in trends seen over the past seven years.

In summary, while Singapore REITs and equities tend to be more stable than their U.S. counterparts, Singapore’s Government Bonds trend parallel with its US counterparts albeit with a slightly lower yield. The balance of the Fund’ outperformance over all similar competitors – be they AI-augmented or otherwise – rest on the capitalization of the massive opportunity set evident in the vast set of Asian (i.e. plus India) equities.

Now, given that US equities are more volatile, there are ample opportunities for tactical plays evident as numerous past articles have indicated. However, given the relative stability of two of the other asset classes and the relatively comparative performance of the government bond asset class, the Fund stands to be an interesting choice for “benchmarking” an investor’s portfolio. In other words, while a portion of an investor’s capital can be invested into the likes of the Fund as a passive income strategy, the balance of the investor’s capital can rest with their individual convictions, preferences and active management styles.

All in all, at $1,000 a pop (initial; later decreasing to $500), it’s entirely worthy of attention for Singapore-focused investors. Take a look and make a call, if you would like to.

For broader articles that deep-dives in business and culture in Asia, visit asianomics.substack.com. A recent post recounts a recent interview with AusBiz TV, Australia's only live streaming channel dedicated to business and finance news, regarding where markets might end up by the end of the year, geopolitics, crude oil and the upcoming “India’s Decade”.