MY OPTIMAL SUPER PORTFOLIO

If given an investment choice to construct my own super fund portfolio for my savings, I will have 50% allocated to BSP and 50% to an S&P 500 Exchange Traded Fund (EFT). Something like this happens in Australia, called "Investment Choice" given they have well-educated super contributors. I have shared numerous times that literacy is not the same thing as education, so we have super laws and regulations in PNG the way they are to protect everyone (unfortunately for the few, majority rules).

BSP returns on average upward of 15% per annum and S&P 500 returns on average upward of 15% per annum. With an investment portfolio constructed in this manner, I could be making a compounded annual growth rate of 15%.

BSP fully incorporates and correlates to the full PNG economy as it loans out to the wider sector of the economy. While S&P 500 correlates to the US and global economy. That already fully accounts for portfolio diversification (for me).

If a little math and logic is required for persuasion, the USA, EU and UK economies combined are worth US$40 trillion. Include China’s, Japan’, India’s s and ASEAN economies total worth of US$26 trillion and it pushes out the power block nations’ total economic value out to US$66 trillion. An S&P 500 indexed fund carries a market cap worth US$39 trillion (60% of economic powerhouses of the world). For the purpose of portfolio diversification, that 60% coverage by an S&P 500 index fund provides sufficient coverage. This is to simplify market correlation calculations and not to overly complicate how it may look like.

Banks are both defensive and growth assets (for me). They built their loan book contracts over a number of years. Fly-by-night competition will not immediately, or in the short-term, erode a bank's income from the loan book. This is where a lion's share of bank profits come from, followed by exchange rate spreads. In inefficient markets, backed by big balance sheets, the spreads can deliver outsized profit margins. A further appeal is from capital gains from publicly listed banks.

On the back of that, one can expect the Kina to depreciate gradually over a number of years. This is not speculation. When the Kina goes to a free-floating exchange rate, once it bottoms out it will take a number of years if, and only if there is real economic growth, to gradually start clawing its way back up. I could do dollar-cost averaging against the Forex (buying a few forex at a time while Kina is still propped up) by sweeping fortnightly super contributions into my S&P 500 ETF.

On liquidating my ETF in 10-20 years' time, I will benefit both from using Forex to buy greatly devalued Kina and compounded annual growth rate (CAGR) of my ETF portfolio from dividend re-investments and capital gains.

With the level of regulation, this can leave little room for simplicity and common sense. Everything I read that teaches about success boils down to keeping things simple. Gurus of uncertainty from INSEAD have researched investments for the last 100 years. It shows that simplicity investing trumps investing based on complex mathematical models and rules.

Note: Value investing is about buying an asset for less than it's intrinsic value. BSP is such an asset trading below its intrinsic value against multiples of comparable banks on ASX. It's business fundamentals are equally as strong or better than its Australian counterparts. What is weighing heavily against it are emerging market risks as indicative of an S&P rating of "b". There are three factors that influence S&P ratings: (1) banking industry country risk assessment - BICRA. BICRA are macro factors that appraise a bank against economic and industry risks. This assessment acts as an anchor feeding (2) the stand-alone credit profile - SACP. SACP is a self-appraisal of the business fundamentals of a bank: business position, capital and earnings, risk position, funding and liquidity. SACP, the bank-specific factors then feed into (3) external support, if the bank is in shaky grounds and may need group/shareholder or government support. BSP is far away from being on shaky grounds. As you can see, the business fundamentals are not an issue for BSP, nor is it on shaky grounds to require external support. It is the emerging market economic and industry risks that are weighing heavily on BSP, reflected in its "b" S&P rating and trading below multiples of comparable banks on ASX.

Image: taken from Standard and Poors (S&P) website. It illustrates how banks are assessed and rated.

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Declaration: This article is my personal opinion and doesn't reflect the organisation I work for (CTSL). There are industry discussions about including Investment Choice in the superannuation reviews. However, the consensus is that, and I agree, it's very risky for the bulk majority of individuals with very little to no expert-grade financial literacy skills to make informed investment decisions. I am sharing for the purpose of broadening the perspective about the subject matter and why I think BSP is highly under-valued. About BSP, it is also my personal opinion from my own assessment and not an expression on behalf of any entities. CTSL the organisation I work for has K150m worth of equity in BSP and I am a member of CTSL.. I believe in information democracy and do some minimal research and share my thoughts in contributing to an informed and educated society.