The people at BigFatPurse found the article titled How to invest if you have $20k or more, published on The Sunday Times (19 Jul 2015), rather disturbing. This post is to respond to the very biased responses from so-called experts in the financial industry, who supposedly have the best interests for you than their own pockets.
Who am I to respond to experts? Because I am a retail investor myself whom the experts are peddling these instruments to me. I am sure I am on the same side as you.
WITH $20,000 – 100 % Unit trusts. Seriously?
This was the conclusion from the article. If you have $20k, put EVERYTHING in Unit Trusts.
I agree with the point that with $20k, it is difficult to achieve diversification by buying the stocks directly. Hence, it is easier to invest in a fund to achieve the diversification and lower the risk.
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But my point is, why is Unit Trusts the only consideration? Why not invest in cheaper index Exchange Traded Funds (ETFs)?
It just reinforced my opinion that Unit Trusts fund the Maserati’s and Ferrari’s for the financial industry.
Let’s compare the cost structure between a typical unit trust versus a typical ETF:
Let me explain the fees to you.
When you buy a unit trust, you will normally have to pay an upfront fee known as the sales charge, and it can go up to 5%. Of course you wouldn’t really need to cough out the fee in cash, as the company will just deduct the amount from your investment. If you put in $20k and the sales charge is 1%, your actual invested amount will be $19,800 instead of $20k.
For ETFs, the sales charge is essentially the brokerage fee which you incur when you buy or sell stocks. The market rate is 0.28% with a minimum of $25.
There is an ongoing management fee that you need to pay for both unit trusts and ETFs. However, the former is much higher than the latter, usually by a few times.
The fee for an actively managed unit trust is around 1.5% per year while an ETF like the Straits Times Index ETF is at 0.3% per year. This means the unit trust is 5 times more expensive than the ETF. Talk about compounding costs, this will erode a sizeable profits over the long run.
All collective investment schemes should have separate trust accounts to hold clients’ money apart from the company’s funds. As such, the Trustees who custodise clients’ money must also be paid for the service. This is usually a small amount but nonetheless a cost. The custodian fees are similar between unit trust and ETF.
The switching fee may be incurred when you switch between unit trusts. This fee may not be incurred by some companies. For ETFs, take it as you sell one ETF to buy another. Either way you incur the normal brokerage charges of 0.28%
Let’s say you would want to sell your unit trusts, some companies charge you a redemption fee that can be as high as 5%. Some do not charge this fee so you must be very clear before you commit to any investments. For ETFs, selling means incurring brokerage fee of 0.28%.
To summarize, the ETF definitely beat unit trusts in terms of costs.
Are Unit Trusts Worth the Extra Costs?
The next question is to ask is that since unit trusts are expensive, are they worth the money? Can they deliver higher returns?
In the U.S. where financial data is very well collected, we have enough evidence that most unit trusts (or mutual funds as U.S. calls them) under-perform the benchmark they are trying to beat.
You can go on to read the works of John Bogle and Burton Malkiel.
I did a short study on the 10-year performance of the Unit Trusts that invest in Singapore, versus the STI ETF, as at 28 Feb 2015, and the results are as follow (performance excluding costs, data from Fundsupermart):
- Aberdeen Singapore Equity Fund: 8.3%
- STI ETF: 8.1%
- Schroder Singapore Trust: 8.0%
- Amundi Spore Dividend Growth: 7.7%
- Deutsche Singapore Equity: 7.7%
- Nikko AM HIF Spore Div Equity: 7.2%
- LionGlobal Singapore Trust:6.2%
- Nikko AM Shenton Thrift: 6.0%
- United Singapore Growth: 5.9%
STI ETF beat 7 unit trusts based on a 10-year performance. And the difference between STI ETF and the top fund is only 0.2%. If I were you, I would not bet my dollar on which fund will beat the STI ETF in the next 10 years because you and I both have a high degree of getting it wrong!
So if you ask BigFatPurse, we would put our money in low-cost index ETFs, in particularly a mixture of STI ETF and ABF Singapore Bond Index ETF in the portfolio. Period.
This just reminds me of the parable from Where are the Customers’ Yachts?
“Once in the dead dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at the anchor. He said, “Look, those are the bankers’ and brokers’ yachts.” “Where are the customers’ yachts?” asked the naive visitor.” – Ancient story.
And if you haven’t had enough, go on to see Dilbert’s comics.