Chocolate Finance Review – 4.2% yield, better buy than T-Bills and Fixed Deposits? (Chocolate Finance Referral Code)

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I’ve seen a lot of discussion about Chocolate Finance of late – which has just reopened for new sign ups.

What is Chocolate Finance?

Chocolate Finance is a new place for your spare cash where you can enjoy 4.2% p.a. return on your first S$20k and a target 3.5% p.a. on any amount thereafter.

See your returns every single day. No lock-ins, no complex criteria or hoops to jump through. What’s more, we take no fees and make no money until we deliver the target return.”

Chocolate finance basically pays you:

  • 4.2% yield on the first $20,000
  • After the first $20,000, target yield is 3.5% (will fluctuate just like a money market fund)
  • No lock up period – withdraw anytime

Just to be clear this is NOT SDIC insured – but we will discuss further below on how safe Chocolate Finance is.

But given that the latest T-Bills yield is only 3.74%.

And UOB One is only paying 4.0% these days.

This makes the 4.2% by Chocolate look pretty attractive.

But how safe is it, and is it worth the additional risk vs a risk free T-Bill?

Let’s find out.

 

Chocolate Finance is invite only (Referral Code below)

First off – Chocolate Finance for now is invite only.

But I have an account, so you can use the FH Referral Invite below if you need.

However I do suggest reading the article before deciding if Chocolate Finance is right for you.

https://share.chocolate.app/nxW9/ep4q7wxp

Introduction to Chocolate Finance? 4.2% yield on $20,000 cash?

The FAQs from Chocolate Finance do a good job of explaining what the product is.

I’ve extracted the key questions below, with emphasis (bolded) from me.

Chocolate Finance FAQs

Are you covered by the SDIC Singapore Deposit Insurance Corporation, for up to S$100,000?

Money in banks need SDIC protection because if the bank fails your money is at risk. As Chocolate Finance is not a bank, we operate as asset managers, we do not require SDIC insurance. With Chocolate Finance, your funds are segregated and held separately by our trusted and licensed fund managers’ custodians – HSBC and State Street. That said, we understand how important the security of your money is. That’s why, if we don’t make the target 4.2% p.a. for your first S$20k, the difference will be topped up so you enjoy the full target return during the qualifying period.

How does Chocolate Finance generate these great returns?

Your money is invested into a portfolio of fixed-income funds carefully selected to optimise risk-adjusted returns based on factors like duration, yield to maturity, credit quality and currency. This allows the portfolio to target a return of 4.2% p.a. for the first S$20k and 3.5% p.a. on any amount thereafter. We take no fee and make no money until we deliver the target returns. What’s more, if the portfolio doesn’t make the target 4.2% p.a. for your first S$20k, the difference will be topped up so you enjoy the target return during the Qualifying Period. Does it get any better than that?

Is Chocolate Finance legitimate?

Yes, Chocolate Finance is absolutely legitimate! Chocolate Finance is a brand of Chocfin Pte Ltd (202347190R) and is a private limited company incorporated in Singapore. Chocfin is a Capital Market Services (CMS101452) licence holder regulated by the Monetary Authority of Singapore.

What happens if Chocolate Finance gets acquired, goes public or closes?

Nothing happens to your money! It’s safe and segregated. We understand that the security of your funds is of utmost importance. As a regulated fund manager, and to ensure that your money is safeguarded, we are required to keep it entirely separate from our own finances, and segregated. Whether your funds are in the form of cash or securities, we use the services of al licensed custodian banks to hold and manage them. This means that if anything happens to Chocolate Finance, your money remains separately custodised (ringfenced) and you can still withdraw it anytime.

Are the funds invested globally and am I exposed to FX risks?

The underlying funds of the Chocolate Managed Account are invested globally to optimise returns. Any investments in global currencies are hedged back to SGD to protect against FX risk.

How quickly can I access my cash with Chocolate Finance, and what is the withdrawal processing time?

You can withdraw your money anytime. Most withdrawals are instant (speed is our middle name 😎):

  • For withdrawals up to S$20k (or multiple withdrawals adding up to S$20k within any 1 given day) – You will receive your money instantly!
  • For withdrawals over S$20k (or multiple withdrawals adding up to more than S$20k within any 1 given day) – You will receive your money in the next 1-5 business days.

TLDR – Chocolate Finance 4.2% yield, but not SDIC insured, instant withdrawal below $20,000

To sum up the key features:

  • 4.2% yield on $20,000 (after $20,000, target yield is 3.5%)
  • Instant withdrawal below $20,000 a day (1 – 5 business days for more than $20,000)
  • Held in a segregated account
  • No minimum account amount required
  • NOT Risk Free – Not SDIC insured or backed by the Singapore government

How safe is Chocolate Finance? Any risk of capital loss?

So where does Chocolate Finance park the funds?

As it turns out:

The Chocolate Finance managed account is a new portfolio of fixed-income securities comprising of a collection of funds. The portfolio is currently made up of:

  • Dimensional STIG SGD
  • UOBAM United SGD Fund
  • Fullerton Short Term interest rate fund (SGD)

These may change at the sole discretion of the portfolio manager. In your app you will be able to see the information on each fund and the percentage of money allocated to them.

What is the exact asset allocation used by Chocolate Finance?

I funded $1000 into a Chocolate Finance account previously just to see what the underlying asset allocation was.

Here’s what was allocated to me:

At a high level:

  • Dimensional Global Short-Term Investment Grade Fixed Income Fund SGD – 43%
  • Fullerton SGD Cash Fund – 24%
  • UOBAM United SGD Fund – 32%

Let’s dig a bit deeper into each of these fixed income funds.

Dimensional Global Short-Term Investment Grade Fixed Income Fund SGD – 43%

I’ve extracted the key metrics of Dimensional Global STIG Fund below.

43% of the money goes into this Fund, so this is the key one to look at.

You’re looking at:

  • 2.8 years average duration
  • ~5% yield to maturity
  • 40% allocation to US bonds

Interestingly – this Fund only has a 13% allocation to AAA Bonds.

It has a 30% allocation to A rated Bonds.

And a 45% allocation to BBB rated bonds (just one level above junk).

UOBAM United SGD Fund – 32%

Here’s the metrics for UOBAM United SGD Fund – where 32% of the money went.

You’re looking at:

  • 1.2 years average duration
  • 6% yield to maturity
  • 21% exposure to China (followed by 18% to Singapore)

Fullerton SGD Cash Fund – 24%

And finally, 5% goes into Fullerton SGD Cash Fund.

I’ve covered Fullerton SGD Cash Fund in the past, so do check out my article for the full review.

Basically this is a low risk money market fund that deposits your money in <4 weeks fixed deposits.

What are the risks associated with Chocolate Finance’s Asset Allocation?

If you want to earn a higher yield on cash – there are 2 options:

  1. Take on more credit risk
  2. Take on longer duration (lock up period)

That looks like what Chocolate Finance is trying to go for here.

The only short duration money market fund they’re using is Fullerton SGD Cash Fund at 25% of the asset allocation.

The other 75% goes into longer duration bonds of 1-2 years duration.

And they’re also not risk free, so there is credit risk in exchange for the higher yield.

There are 2 key risks with this approach:

  1. Default risk (of the underlying assets)
  2. Duration risk (if interest rates go up)

Default risk (of the underlying assets)

The biggest allocation (43%) goes to Dimensional Global STIG Fund, of which 75% is allocated to A / BBB rated bonds.

Let’s say some of the underlying bonds default.

It’s not impossible to see capital losses for the Dimensional Global STIG Fund.

In that scenario Chocolate Finance guarantees your 4.2% for the first $20,000, so I suppose the question is whether Chocolate Finance will be able to cover the loss (we’ll discuss this below).

Duration risk? Asset Liability mismatch?

The next risk – is duration risk.

Also known as Asset Liability mismatch.

The most extreme example of this came with Silicon Valley Bank earlier this year.

If you recall:

  • Silicon Valley Bank used customer deposits to buy long-term US Treasuries
  • When interest rates went up, US Treasuries dropped in price
  • This meant a mark to market loss (but no problem as long as the Treasuries were held to maturity)
  • The problem came when depositors started to pull their funds en masse
  • This forced Silicon Valley Bank to liquidate the Treasuries at market price (to meet redemptions), thereby crystallising the loss, and impairing their balance sheet

Can the same thing happen with Chocolate Finance?

For the record, this was especially bad with Silicon Valley Bank because they bought US Treasuries at close to 1% yields and held them all the way up to 4%+ yields which meant a 20%+ capital loss.

Given that Chocolate Finance is buying 1-2 year bonds, and how we are already close to peak interest rates here – the impact from rising interest rates *should* not be as large.

I’ve extracted the price chart for Dimensional Global STIG Fund below.

You can see how the peak to trough loss during the 2021 – 2022 period was only around 8%.

And don’t forget that was a period where Fed Funds Rate moved from 0% to 5.5%.

You’re unlikely to see a similar magnitude of move going forward.

But I mean, never say never.

 

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So… what is the risk here?

I suppose the risk here.

Is that due to credit default, or rising interest rates – the value of the underlying bond funds purchased by Chocolate Finance drops.

Customers with funds in Chocolate Finance start to withdraw.

In that scenario how does Chocolate Finance react?

Do they sell the underlying funds and lock in the loss?

Or do they pay out using the difference using their equity / cash on hand?

How long can Chocolate Finance “Guarantee” these returns?

And if there are losses.

The fallback is that Chocolate Finance will guarantee any potential losses, to ensure that the returns you get are 4.2% (for the first $20,000).

Which raises the question on what is Chocolate Finance’s creditworthiness.

Are they good for the money?

How much equity does Chocolate Finance have on hand?

So I looked a bit more into Chocolate Finance.

It turns out they just raised $19 million in funding in 2022

Led by Sequoia India too, which is pretty impressive:

Singapore-based fintech startup Chocolate Finance raised $19 million in Series A funding. Led by Sequoia India, this round witnessed the participation of Prosus Ventures, Orion Advisors, Credit Saison, Global Founders Capital, Dara Holdings, Ion Pacific and ChocVen.

So they do have some funds to cover the losses (if required).

How long does this promotion last?

In any case, the 4.2% promotion period only lasts until 31 Dec 2024 or when they hit $500 million in AUM.

If you work backwards, that’s about 25,000 accounts of $20,000 each.

I suppose you could argue that this 4.2% is a promotional thing to attract customers, and the $19 million they raise *should* be sufficient to cover this assuming no big losses in the underlying investments.

My Views on Chocolate Finance?

To sum up everything we discussed above.

Chocolate Finance basically takes the cash and invests it in 3 different short duration bond funds / money market funds.

The money is held in a segregated account which provides some comfort if they do go under.

Whatever returns you get on the underlying investments, Chocolate Finance will top it up to 4.2% on the first $20,000.

After the first $20,000, it’s based on market interest rates, but the target is 3.5%.

Will I leave my money with Chocolate Finance?

In the spirit of full disclosure, I have a Chocolate Finance account – which I funded with $1000 about a year back to test it out.

They’re still around today, so I suppose that is a good sign.

The 3 bond funds that Chocolate Finance has chosen are low risk, but definitely not zero risk.

There is some duration mismatch, because the underlying bond instruments are about 1-2 years on average, whereas Chocolate Finance offers instant liquidity on the first $20,000.

But saving grace is that Chocolate Finance will cover all the costs associated with the above, to cover the 4.2% returns, and the instant liquidity.

All in, I would say Chocolate Finance is probably low risk, but it is most definitely not zero risk.

If you want zero risk buy a government backed T-Bill, or a fixed deposit that is SDIC insured.

Is it worth the risk for the 4.2% yield at Chocolate Finance?

The million dollar question then – would I park my own funds with Chocolate Finance?

I don’t think there’s much point putting any more than $20,000, since the only attractive part is the 4.2% on first $20,000.

Anything more than $20,000 and there are better options out there.

Would I park $20,000 with Chocolate Finance?

Frankly I haven’t decided to be honest.

The logical part of my brain tells me this is low risk.

But a nagging feeling also tells me that you cannot rule out tail risk events sometimes.

Do I necessarily want to take on this risk for a cash product?

When I can just park the cash in a T-Bill and get 3.70% risk free, with peace of mind?

For now I have only parked a small amount in Chocolate Finance to test out the account, while I think about whether to top it up further.

I would love to hear what you guys think though. Is Chocolate Finance safe and worth funding more?

Chocolate Finance is invite only (Referral Code below)

Chocolate Finance for now is invite only.

However you can use the FH Referral Invite below if you need:

https://share.chocolate.app/nxW9/ep4q7wxp

 

This article was written on 5 July 2024 and will not be updated going forward.

For my latest up to date views on markets, my personal REIT and Stock Watchlist, and my personal portfolio positioning, do subscribe for FH Premium.

 

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2 COMMENTS

  1. How is the 4.2% guaranteed when there is no SDIC guarantee, or insured? Else there is no visible risk with just $20K at most invested in it?

    • It is guaranteed by Chocolate Finance (ie. Credit risk of Chocolate Finance). How credit worthy that is, well I leave it up to readers to reach their own conclusion.

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