SGX Market Update: Opportunities To Diversify Portfolios Amongst Top 40 Stocks

• The 40 largest listed companies on SGX represents as many as 20 different  subsectors. A subsector is a categorical term that seeks to define the business nature of a listed company.

• Among the 40 largest listed companies, the subsector represented the most, Real Estate Holding & Development, has also led subsector performances in the 2012 year-to-date.

• Investors can diversify stock portfolios by selecting stocks that represent different subsectors.  Investors have an upcoming opportunity to practice portfolio construction with ETFs and stocks in StockWhiz, SGX Online Investing Competition. Please register here.

Diversification is an investment term, and is often explained with the idiom of don’t put all your eggs in one basket. In an investment context, not putting all your eggs into a single basket, means to not put all your wealth into a single asset.

Investors can spread investment risk and potential return over different groups of assets, like stocks and property, in addition to spreading risk and return over different stocks or different property types.

The 40 largest stocks listed on Singapore Exchange (SGX) represent as many as 20 different subsectors according to the Industry Classification Benchmark (ICB). A subsector is a categorical term that seeks to define the business nature of a listed company. The ICB achieves this by allocating a listed company to the most relevant subsector as indicated by its revenue stream. More information on the ICB can be found here.

The 20 subsectors represented by these 40 stocks provides a diversified pool of stocks for investors to choose from. Diversification is an important method of investing, allowing investors to spread price risk over a number of stocks rather than concentrate this price risk and the potential return to a single stock.

The subsector with the largest number of stocks has also been the strongest subsector in terms of total return in the 2012 year-to-date. Seven of the 40 largest stocks listed on SGX represent the Real Estate Holding & Development subsector. These seven stocks have averaged a total return of 42.48% in the 2012 year-to-date. Performances of the seven stocks have ranged from

a gain of 31.21% for City Developments Ltd to a gain of 63.23% for Keppel Land Ltd.

Three of the largest 40 stocks listed on SGX represent the Oil Equipment & Services Sector and averaged a total return of 37.19% in the 2012 year-to-date. Four of the largest 40 stocks listed on SGX represent the Industrial & Office Real Estate Investment Trusts and averaged a total return of 36.81% in the 2012 year-to-date.

Of the subsectors relevant to the largest 40 stocks listed on SGX, the Food Products Sector underperformed with Olam and Wilmar posting total year-to-date returns of -4.69% and -35.19% respectively.

Portfolio Example

As detailed below, the 40 largest stocks have all performed differently in terms of total return in the 2012 year-to-date.

Assume for educational purposes, an investor had a portion of their savings, say S$20,000, to allocate to stock investment at the end of 2011 and wished to construct a diversified portfolio across three different subsectors.  If the investor constructed the portfolio purchasing 1,000 shares each of Wilmar (Food Products), Singtel (Mobile Telecommunications) and DBS (Banks) the investment outlay on 30 Dec 2011 would have amounted S$19,610 not including transaction fees.

If the investor decided to review and rebalance the portfolio on 23 Aug 2012,  the total return of Wilmar was a decline of -35.19%,  Singtel was a gain of 10.58% and DBS was a gain of 32.25%.

As a portfolio, these three stocks together produced a total return of 11.48% not including transaction fees. Including a dividend distribution of $681.00, the portfolio appreciated from S$19,610 to S$21,861.  

This portfolio provides only an example of how an investor might approach the market and past observations do not guarantee future results. In reality there are many more choices of stocks and products for constructing a portfolio and the above example should only be taken as educational reference.

Source: Bloomberg

Of the 40 biggest stocks listed on SGX, 30 stocks make up the Straits Times Index (STI) and 10 stocks make up one fifth of the FTSE ST Mid Cap Index. Together these 10 Mid Cap stocks constitute almost 50% of the weighting of the  FTSE ST Mid Cap Index