DBS SHOULD BE CRITICIZED FOR SELLING HIGH RISK SWIBER BONDS TO RETAIL INVESTORS

I previously wrote that no amount of regulations can protect greedy High Net Worth Individual accounts. Here I critique DBS for selling these High Yield bonds (the correct term for “junk bonds”) to individuals.

The high yield bonds are a specialist segment of the bond market and as such invested by specialist fund managers who are familiar with the characteristic of these bonds. One cannot simply invest in HY bonds as if they are normal bonds. HY bonds are meant to be invested as part of a highly diversified HY bond portfolio by the specialist fund manager.

The idea is that the higher risk of default needs to be mitigated by diversification in which the probable percentage of default in the portfolio firstly will not wipe out the entire portfolio and secondly in combination with the high yields, provide a superior total rate of return (so long as the percentage of default is not excessive).

All of that means HY Bonds are not meant to be sold to individual investors who neither have the specialist skills nor the means to build a diversified HY portfolio. Should individuals wish to invest in the HY sector, then like most individuals in the US and Europe, invest in those specialist HY bond funds.

One can argue that there may not be any S$ denominated local HY bond fund to invest. If so, this is an indictment of the depth and diversity of the Singapore as a financial center. Individual investors getting torched by HY bonds are not uncommon in countries with excessively high savings ratio and an unhealthy fetish for interest bearing securities.

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