The first three Singapore Savings Bonds (SSBs) saw tepid subscription rates. The Monetary Authority of Singapore announced that $1.2 billion was available for each of the first three SSBs, but only $413 million worth of orders was placed for the first SSB, $259 million for the second and $41 million for the third.
Perhaps in view of this poor initial response, only $300 million was offered for the fourth SSB issue, with only up to $4 billion worth for the whole of next year.
We think the main reason for the poor market response is that many individual investors are not familiar with the concept of risk-adjusted returns and view SSBs as part of a total portfolio framework.
Without looking at risk-adjusted returns, SSB yields, which ranged from 2.44 to 2.78 per cent for the first three issues, are prima facie hardly attractive to individual Singapore investors more used to real estate investment trusts (Reits) with dividend yields ranging from 5 to 8 per cent.
Yet, comparing yield levels alone over-simplifies matters, as the products' risks have not been factored in. Reits' higher yields compensate investors for the higher risk of investing in real estate, a cyclical sector whose prices may fall drastically, like during the 2008/2009 Great Financial Crisis. Conversely, the SSBs' low yields reflect the virtually zero credit risk of lending money to the Singapore Government, a benefit of Singapore's sound fiscal position and AAA rating.
The SSBs' only downside is that they have no potential to rise in value, unlike typical bonds, whose prices rise as interest rates fall - but then again, investors are also unlikely to lose money on SSBs, since they can be redeemed before maturity without penalty.
A TOTAL PORTFOLIO PERSPECTIVE
From a total portfolio perspective, we should invest some part of our portfolios in instruments with higher expected returns that can beat inflation and grow our wealth over the long term.
Investors know this, and there is already active investing in higher-risk segments of the financial market such as stocks. Financial innovation is also taking place, and introducing expanded options to individual investors to construct their financial portfolios. For example, peer-to-business loans crowdsourced via the Internet can offer attractive fixed-
yield returns to investors while providing much-needed financing to fuel the growth of local small and medium-sized enterprises.
Investors should, however, be aware that these financial instruments come with a higher risk, and it is ill-advised to invest an entire portfolio in risky assets.
Every portfolio also needs a "risk-free" portion - that is, we should invest some part of portfolios in lower-risk instruments like SSBs, which do not offer as high returns, but are safer and hold their value when stocks suffer losses in market downturns, which inevitably happen. If an investor is indifferent towards liquidity, the SSB is quintessentially the superior risk-adjusted product vis-a-vis bank deposits - here, the sovereign guarantee is totally explicit.
Providing such articulated terms of reference could help drive the adoption of SSBs generally, as the investor's risk-free asset. One should also remember the role of the Central Provident Fund, where one's savings are risk-free, yet earn a credible return of 2.5 to 6 per cent per annum.
Our financial education efforts need to get creative - mobile apps, financial games or engaging seminars to drive home the message that different financial instruments have different risks and return profiles. Hence, we should allocate our monies into different "pots" that invest in different financial instruments, to meet different objectives.
An illustration of a well-diversified portfolio is a garden cultivating different types of plants. Some grow quickly, have nice flowers, but require more water and maintenance (for example, stocks).
Others are less luxuriant, but require less maintenance and do not die as easily (for example, bonds). This avoids situations where a dry spell wipes out all the plants; the low-maintenance plants will still survive.
Our SSB publicity drive could also be better streamlined, and target the population for whom SSBs may be most appropriate - older investors who have a shorter investment horizon and for whom stocks are not the most suitable since, unlike younger investors, they do not have time on their side to withstand the stock market's volatility in a bid for the higher expected returns.
For such older investors, the "Pioneer Generation Package publicity approach" could be adopted, where "SSB Ambassadors" reach out to them and explain how SSBs are beneficial - they provide regular payouts, are safe, yet can be redeemed at any time with no penalty - and a good option for their spare cash that is not needed for daily expenditure. The ambassadors could then help the older investor with operational aspects, for example, opening his Central Depository account if necessary, and walking him step by step through the SSB application process.
In summary, SSBs are the closest that any investor can get to having a "free lunch", and should be considered by every individual investor as a risk-free asset. But given that they may be most suitable for older investors, the authorities could consider targeted efforts to help this important group access this "free lunch".
• James Chia is co-founder of Innervative, a financial education games company.
• Lawrence Yong is co-founder of MoolahSense, a peer-to-peer business financing platform.
