Sunday, August 26, 2012

Unit Trusts’ Price War!

As we were discussing in the last post, unit trusts charges slightly higher fees vs ETFs but it allows retail investors access to other asset classes outside equities.

Last checked there are about 400 unit trusts in Singapore with Asset Under Management (AUM) slightly under $40bn. The unit trust industry as a whole is not growing that much as alluded to before. When the market is not growing, the players need to grab market share in order to survive.

One of the bigger players here is again PhillipCapital. They have a good introductory site for unit trusts for those who are still not familiar.

In the past unit trust charges high fees and doesn’t really value add much since most of the fund managers never fulfill their mandate anyways (which is to beat their benchmark). With the pie shrinking, the players have resorted to lowering fees in order to gain market share. Hence, the fees have been coming down over time. It used to be 5% upfront, now it’s closer to 1-3%.

A couple of years ago, our beloved national paper Straits Times happily announced a Unit Trust Price War was under way when some players cut the fees to 1%. The same article also happily interviewed so-called seasoned investors who invested $300k in unit trusts and who didn’t mind paying when upfront fee was 3-5%. Bcos if the financial adviser gave good advice, it was worth it! Well with that upfront fee amounting to $15k, I hope that he really did receive golden advice. Meanwhile, I give free advice here.

So since then, the industry never looked back, fees are coming down, though still high compared to ETFs at less than 1% but it’s much better than 5%. We don’t even get salary increment of 5% right? How did these guys justify 5% upfront fees in the past? PhillipCapital has probably realized this dilemma for some time. How can fees be so high when investment return is only 5-8%pa over the long term. Even at say 2%, this still represents 25-40% of the annual return that you can get. So they upended the competition to bring fees even lower. Now Phillip charges 0.75% upfront fees and zero platform fees (see table below). Hence you save a lot of money over time. Like close to $2000 over 5 years, according to their calculations.

The table below compares their fees across the competition.

In fact, they are now having a promotion whereby you pay zero upfront fees for certain products. Of course there is still the management fee that each unit trust will charge, usually 1-2%. Sadly that’s still high in my opinion and that’s going to stay. Fund managers and analysts also have families to feed. We can’t expect them to eat their own research reports right?

Besides lower fees, Phillip also has other advantages such as zero cash deposit for investors who intend to buy (other competitors usually require some cash upfront). But if you choose to put cash with Phillip, then it is parked in a money market account that earns interest.

In fact, Phillip goes all out to grab market share.

They even offer this fund transfer service (usually FOC unless it’s StandardChartered or AIG, ie banks that are in trouble with regulators) whereby you can transfer your unit trust bought on other platforms or banks onto Phillip’s platform. And they give you $200 NTUC vouchers!

Last but not least, there is always the powderful online platform. For Unit Trust, you can read updated research published by the funds themselves, have a quick look at the funds information sheet and even screen for the top and worst performing funds. (See screen shot below)

As you can see, for 10 years, there are no funds except for this LionGlobal SGD Money Market. Maybe the history is still too short in Singapore. Or maybe any fund that get into the worst performing 10 year category auto shutdown so as not to lose face. Hopefully those seasoned investors did buy the Indonesia and Thailand funds, that would have made is $15k sales commission worthwhile.

Another interesting point is that this LionGlobal returned 15.66% over 10 years, which is like 1.4% per year. And we don’t know if this is before or after fees. So if the seasoned investor bought into this, his first 3-4 years of return would have been used to pay his financial adviser, who probably looked like Cecilia Sue.

In any case, at 1.4% return per year, you might as well buy Singapore Government Bonds (SGB), that’s risk free. Last checked, over 10 years it also gives 1.4%. Btw you can also buy SGBs over poems too! Well anyways, past performance is not a good indicator of future returns. So pls do not buy the top performing funds. Usually, that won’t work.

Next post, we discuss some tips in selecting unit trusts.

This is a sponsored post

Friday, August 17, 2012

Poems and Unit Trusts

I recently explored Poems in detail and was pleasantly surprised by all the upgrades done to its internet system. I must admit Poems (as in this one, by Phillip Securities) has one of the most powerful internet system for fundamental research. They might also have a good one for technical analysis but I am no expert here.

The current platform allows you to do screens, and access poems research database and look at past 5 year financials for all companies that you can trade on poems, which includes US, UK, ASEAN, HK/China and even Japan markets. Man, this is really powderful. I played with it for a while and concluded that this is probably one account that any serious Singapore investor should setup.

Go down to Raffles City today, they have an office at the Raffles City Tower and get the account done. Well you can actually do online, but they would need to snail mail stuff to you, get signatures and all the crap, so it might be easier to just make a quick trip down and settle stuff once and for all.

Oh and do remember to bring the relevant docs like IC, bank account book, CPF contribution history etc, do check their website for the documents required. It might also be prudent to bring your your PSLE and O Level certificate, a 300 words self-introductory essay, your Facebook photos with at least 3 friends and your next of kin or significant other, just in case. This is Singapore after all. We want to verify everything.

Ok, lets take a look at the system. I always intrigued by the stock screener. So I went in to play a bit. To access the research, all you have to do is to go to the top column, click stocks -> research. Then you can see a whole bunch of cool stuff like MyResearch, Singapore, Regional Market Focus, Dataline, News and at the right end -> Stocks Screener.

Here’s a screen shot:

Sadly I remember the old screener to be slightly better. The new one, you are given dropdown menu to choose. And to my dismay you can’t really get the dividend screen right. Bcos it only allows you to choose 0,5,10,…,50% dividend yield. Now most co. give only from 0-5% dividend yield. So how to sieve out say 3% and above? The answer is cannot… Here we have one of the most dividend hungry nation and our best brokerage house can’t get the dividend screen right. What the… But I believe they will improve this soon. Someone pls feedback.

Well you still can do PE, Debt to Equity and PB screens lor. And you can also screen overseas market.

But the coolest thing on Research is this thing called Dataline. Again to access go via Stocks->Research->Dataline.

Here once you get in, after agreeing that the info you get may not be accurate so pls use at your own risk blah blah, you can basically access the past 5 year historical financials for any companies that you can buy via poems. And you can also access analysts’ estimates and some snapshots of ratios and valuation. Well good enough for something that comes free with just signing up.

Below is a snapshot of F&N’s balance sheet. Amazing right?

So with this one account, you can do a lot of work without pouring through pdfs and paper copies of annual reports. Of course, this step is more for doing quick checks. When you do the deep dive analysis, you still need to read annual reports. Sorry bro, no shortcuts.

Besides the powerful research, I also explored Poems unit trust, or Phillip Unit Trust. For the longest time, I believed that most unit trusts take too high an upfront sales charge. In prehistoric times (ie maybe 10 or more years ago), it was like 5%! And investments only earn you 5-8% return per year… So you just gave 1 yr’s return to the distributor. But things are changing. As in the fees are coming down.

For the un-initiated, a unit trust, also known as a mutual fund, is an investment vehicle that allows retail investors to put money with a professional fund manager to help manage and grow the money. Usually the fund manager will be given a mandate, like to try to beat the S&P500 index, or the STI, or a commodities index.

Ok, for those following this blog long enough, we know that 80% of all fund managers never beat the index. Why put money with them? Just buy the index. That is true. Hence ETFs, or exchange traded funds has ballooned in recent years. ETFs charge much less management fees (usually less than 1%) and no upfront fees and you trade it like a stock. It’s so popular that the amount of money with ETFs would probably eclipse unit trusts within the next decade. Since I was at it, I estimated that the Asset Under Management (AUM) for Singapore ETF is probably around $4-5bn while that of unit trust is at $40-50bn. Yes, 10x difference now, but one is still growing fast while the other is stagnating. Btw, total AUM in Singapore is mind-boggling 1.3 trillion!

Ok, since ETF is so great, why buy unit trust then?

The answer is ETF has less offering for bonds and other asset classes (outside equities). As a normal retail investor, it is virtually impossible to build a bond portfolio by buying bonds yourself, esp in Singapore, where one bond has the face value of $200k. So unless your portfolio is like $10m, and you split $5m for stocks and $5m for bonds, then your bond portfolio can buy 25 bonds. For most of us, we struggle to buy 1 bond :)

So the alternative would be to buy a bond unit trust, which will have bonds of different companies in one offering. Yes, we then have to pay up the 1+% management fee. But in order to build a resilient investment portfolio, that might not be a bad option for now.

Next post, we discuss Phillip’s advantages and offerings of bond unit trusts.

By the way, PhillipCapital is hosting a Value Investing Conference with Mary Buffett attending. Do take a look!

PS: This is a sponsored post.