On Friday, my bank confirmed the execution of $439,000 into two different funds. It’s a fairly significant sum, and I haven’t deployed this amount of money for quite some time.

Capital is from the sale of my Temasek bond and a cash injection of ~$30,000. Had sold Temasek mostly due to its likely decline in pricing as it ages and thus the loss of my capital appreciation. This latest move can be seen an re-organisation and re-optimisation of my existing funds and credit line, increasing both risks and returns.

Allianz Income and Growth

$219,000 was deployed into Allianz Income and Growth, at a price of $9.86. Financing provided was $114,000, and $105,000 was paid in cash. Total loan-to-value was about 52%, with leveraged yield at ~13.5%.

The Allianz fund is made up of about 30% American equities, 30% high-yield bonds, and 30% in convertible bonds. I consider this as a riskier investment as the stock market has been going up fairly relentlessly, and probably due for pullback anytime. Most analysts regard Sep as historically the worst month for equities.

However, I don’t want to agonize about the entry point. The risks of waiting and staying out of the market are high. My consolation is that bonds are less volatile, and not as susceptible to the swings of the stock market. So my price now shouldn’t be overboard either.

American holdings are familiar to me, and I trust in the overall strength of the economy, as well as their regulations in place to protect investors like me. I’ve also feel comfortable with their top holdings like Alphabet, Microsoft, and yes, even Tesla. In addition, 50% leveraging is pretty low, and getting margin called should be very unlikely.

China Bond Fund

Another $220,000 was added to Blackrock China Bond Fund at $9.79. This is on top of my existing investment of $178,000. Total invested is now at $398,000, at 72% leveraging.

Total cash used was $110,000, with $288,000 on loan from the bank. Blended leveraged yield of about 15.8%.

My views on China are relatively nuanced. I believe that while they are cracking down on tech and selected sectors, their overall goal of stability will be achieved. From a bondholder’s perspective, this is good. We are looking for stability, not frenetic growth. Exuberance always comes crashing down eventually. The tech crackdown shouldn’t have much impact on bondholders, especially those which are invested in the “old” industries like banks and oil. The Communist party going after these guys is like robbing their own pockets since many are state-owned enterprises. They won’t do that. Better to grab from Jack and Pony Ma. I also like Chinese bonds because its fairly uncorrelated to the American stock market, which I’m heavily invested in.

Risks that I do see are related to long-term demographics like an ageing population and shrinking birthrates, which are very negative to the strength of China overall. Rising interest rates also pose a threat to bond pricing. But I don’t think that’s going to happen meaningfully anytime soon. Even if I take a hit on my principal, the payouts should still more than compensate. My buy price is pretty low too, and not that far from crisis pricing of ~$9.60 in early 2020. The downtrend is pretty strong though. My guess is that the trend can still go down for a while. I can wait it out, since I’m getting paid to do so.

Probably the best way to have passive income

Total net passive income now is about $6,000, up from $5,000 previously. I estimate that my share of household expenses, plus my own personal expenses, are about $4,000 per month. It’s nice to have more excess, and perhaps I will have funds left over each month to invest.

I guess this is my unlikely path to wealth. Investing in growth stocks, funneling the gains to fixed income, and earning the spread between what the bank can lend to me and the investment product.

My thoughts 3 years ago was that earning the spread was like getting free money. I wasn’t sure of it at the time because I had never heard of it before. No one was writing or talking about it.

3 years later now, I think the logic is still sound. The spread can be easily 3-5%, which is considerable given the 6-7 digit sums involved.

I have found this to be a far superior way of generating passive returns, especially when compared with property ownership. My transaction costs are 1%, no taxes (at all), and easy liquidity. I don’t have deal with tenants or agents. Honestly I would get anxiety about raising rent or dealing with crazy tenants.

Funds carry more risk of margin calls since they fluctuate more, but really only in drastic black swan events. 99% of the time, a carefully chosen bond fund will do just fine.

I have privately told my friends and family who I think are able, to pledge $250,000 of their liquid assets to the bank, so they can enjoy the same free money at privileged banking. Nobody has really listened to me, but instead followed real estate salesmen. Those who had the means have invariably chosen to buy another property. They are mostly complaining of cashflow problems now. They might win out in capital appreciation though, especially in this environment. But I would bet that after all the taxes, commissions, time, and hassle, they won’t earn as much as they think. In the meantime, I’m earning >10% easily and without much stress.

By 40, I should have about $10,000 in passive income if things go well. I’m already on track for $7,000 by 2025 when my annuity matures. It’s admittedly satisfying.

As my subscriber, I do hope this article has given you food for thought, and that you can do the same too.

6 thoughts on “[Premium] Deploying ~$440,000 towards Passive Income

    1. Best to buy through privileged banking for the leverage. Not all banks may offer this specific fund, but fairly sure they would have something similar.

      If can’t go through that avenue, FSM has it too. Base dividend yield is about 5%.

      Hope that helps!

  1. Can u describe which bank you use to create this arbitrage ? I have tried asking DBS treasures and engineer this similar structure with my DBS custody stocks but I think the RM/sales staff just don’t get it and give me BS.

    1. Try CIMB or Citi. I generally found that local bank wealth management services charge more and ask for more in collateral.

      Another reason could be that they want it in cash and not stocks. I found it impossible to collateralize my US stocks.

      Otherwise, getting a line of credit for investment into mutual funds is pretty standard and all banks should offer it

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