I bought STI ETF on 5th March 2008

About STI ETF


STI ETF is basically a minimally managed fund designed to track the STI index. Simply put, it is meant to mirror the market returns, not to beat it. More of it can be found in the following link.

Motivation behind the purchase

I bought the STI ETF using CPF instead of cash. My main reason was to beat the impending freeze on the first 20K of my CPF ordinary account on 1st April 2008, by diverting the idle funds to something more worth while. With more than 20 years before I turn 55, I am quite confident the ETF can give a better return than the risk free CPF interest rate of 3.5% (for the first 20K at least).

Valuation

(The following table is computed with closing prices on Friday, 15th March 2008)

*P/B ratio uses Net Asset Values (NAV) which includes non-tangible assets

By right, I'm supposed to do a full fledged valuation of each STI component that is equivalently represented in the ETF. By left, its too tedious if I'm just going to treat ETF as a idiot-proof, black box investment vehicle.

Hence, I simply calculated the weighted average Price-to-Book, P/B (estimated with Price-to-NAV) and Price-to-Earning, P/E ratio of the STI ETF basket of stocks. The values are taken from Shareinvestor to simplify and shorten the data mining process.

The weighted average P/B is 3.84 and P/E is 16.42.

For good business with good business prospects and run by good management, I had a set of self imposed criteria before further effort is dedicated for more thorough analysis.

My rule of thumb for P/B ratio is:

• P/B less than 2 implies chances of undervaluation
  
• P/B between 2 and 3 indicates possible fair valuation
• P/B more than 3 probably indicates over valuation, anything above 5 possibly means grossly overvalued
  

My rule of thumb for P/E ratio is:

• P/E less than 10 implies chances of undervaluation
  
• P/E between 10 and 20 indicates possible fair valuation
• P/B more than 20 probably indicates over valuation, anything above 50 possibly means grossly overvalued
  

I assume STI components, which are blue chips, to be classified as "good business" and hence subjected them to my rules of selection criteria. The conclusion, on the surface, is that its possibly fairly valued at current level, i.e. after several months of "correction" from a high of 3906.16, STI is still not willing to market itself with a discount.

Conclusion

On the basis of beating the impending CPF freeze and blind faith on the companies that can make it into the STI, I might just justify my purchase of STI ETF.

But according to the basic principles of value investing, i.e. margin of safety and diversification, I failed to meet the former.

Whether or not I'm right at this juncture, I'll know it in 20 odd years time when I turn 55.