Sunday, January 9, 2011

Investment poser: ETFs or unit trusts?


Established unit trusts trailed STI ETFs for 12 months to Dec 5 last year

Many Singapore equity unit trusts trumped the ETFs over a five-year period
If you had left your cash in a unit trust of Singapore shares over the past year, you may have, sadly, backed the wrong horse.

That cash would have grown much more if it had been placed in a regular index-tracking exchange traded fund (ETF) instead.

Over the past 12 months, Singapore ETFs - which track the benchmark Straits Times Index (STI) and allow investors to buy into a range of companies through a single quoted share - have outperformed most actively managed Singapore stock funds.

Online unit trust distributor Fundsupermart looked at the 12 months to Dec 5, 2010 and found that established names like DBS Shenton Thrift Fund, HSBC Global Investment Funds - Singapore Equity, and UOB United Growth Fund all trailed the index. And their costs were higher than that for an STI-tracking ETF as well.

This is not a reason to ignore unit trusts, but for you to do your homework before investing and to understand that you should choose a manager based on long-term returns rather than short-term performance, said Fundsupermart.

Its data showed plenty of Singapore unit trusts trumped the ETFs over a five-year period.

Fundsupermart looked at streetTRACKS Straits Times Index Fund and DBS STI ETF, as well as the 10 single-country Singapore stock funds on its platform.

It then evaluated their performances over a cumulative one-year, two-year, three-year, four-year and five-year period based on Dec 5 prices for each of the respective years.

It assumed a $10,000 initial investment and factored in expenses for ETFs and unit trusts.

For ETFs, it used 0.275 per cent of contract value for brokerage charges, 0.04 per cent for Singapore Exchange clearing fees and 0.0075 per cent for trading access fees.

Goods and Services Tax, which went up over the years from 3 per cent to 7 per cent, was taken to be zero in order to simplify calculations for buying ETFs.

As dividends paid for ETFs are typically not re-investable, they were added to a 'cash account'. The portfolio value is the sum of both the equity value and the cash account (see table).

ETF trading is defined by minimum lot size. Given that some brokerages allow odd-lot trading, Fundsupermart calculated where odd lots can be purchased down to the nearest one share.

For unit trust expenses, Fundsupermart assumed a 1 per cent sales charge.

It considered two other scenarios - sales charges of 2 per cent and 3 per cent - but noted the end results were largely unaffected.

As the net asset value of the funds was used, the annual management fees were captured in the study.

Dividends paid by the unit trusts were re-invested and factored into calculations.

Investors who put $10,000 into DBS Singapore STI ETF (odd lots) on Dec 5, 2009, would have ended up with $11,640 as of Dec 5 last year, a return of 16.4 per cent.

Another ETF, the streetTRACKS Straits Times Index Fund (odd lots), fared just as well, posting a 16.2 per cent return to $11,623.

The best performing unit trust was Aberdeen Select Portfolio - Singapore Equity Fund with a 16.4 per cent return, while the worst performer was HSBC Global Investment Funds - Singapore Equity at 9.2 per cent.

But over five years, the ETF outperformance becomes less convincing.

Based on a cumulative five-year period, the top performer was the Schroder Singapore Trust Fund, with a 61.3 per cent return.

LionGlobal Singapore Trust Fund was next, on 61.3 per cent, and Amundi Opportunities - Singapore Dividend Growth Fund on 61 per cent.

StreetTRACKS Straits Times Index Fund (odd lots) came in sixth and streetTRACKS Straits Times Index Fund (normal lots) was seventh.

There were just nine funds and one ETF used in the five-year study because the DBS Singapore STI ETF, Aberdeen fund and Legg Mason fund were not in existence then.

Why did more actively managed funds outperform the ETFs?

Fundsupermart general manager Wong Sui Jau argued that while unit trusts have sales charges and management fees to contend with, the effect of these costs on fund performance becomes less tangible over time.

Meanwhile, the ability of good fund managers to add value becomes more apparent over a longer period, he said.

But Mr Frank Henze, State Street Global Advisors' head of SPDR ETFs for Asia-Pacific, contended that Fundsupermart's findings can be skewed by a 'survivorship bias'.

Survivorship bias, in this case, is the tendency for failed active funds to be excluded from performance studies because they no longer exist on the Fundsupermart platform.

Mr Henze said this bias causes the performance results of active funds as a group to skew higher because only the funds successful enough to survive are included in the comparison.

Fund managers who underperformed the ETFs over the short term say investors should remember that their funds' investment objective is to seek mid- to long-term capital appreciation.

'The slight underperformance over the one-year period was primarily attributed to the fund's underweight in the consumer sector which has outperformed the market,' said Lion Global Investors.

Mr Albert Tse, Schroder's head of intermediary distribution for South-east Asia, said the recent underperformance of the fund can be attributed to 'short-term negative stock selection', but it has 'outperformed the STI over the longer term'.

Mr Wong Kok Hoi, founder of APS Asset Management whose funds were not in the study, said there are 'certain institutional factors' that work against fund managers.

'The pressure for a fund manager to perform is unimaginably enormous. If his performance falters, his bosses will get to know it very quickly, and from that point the boss will demand to know (his performance) on a weekly basis and daily if he wants to,' Mr Wong said.

'If poor performance causes the firm to lose assets, the fund manager will likely have to take remedial measures.

'He will most likely sell the big losers, which in normal circumstances should be added on rather than sold off.'

The debate over which style - active and passive - produces better returns for investors over the long term has been going on since index-based funds appeared in the mid-1970s.

American economist Burton Malkiel has argued that active managers are on average unlikely to outperform the market and that passive funds are probably best for investors.

Consistency is one reason why financial advisory firm Providend has taken to buying ETFs for its clients over the past few years.

'Some might beat the market over a short period of time but on a longer term, a majority of the fund managers underperform,' said its investment specialist, Mr Mudit Goenka.

Index-tracking funds are said to be more effective in efficient markets like Britain and the United States, as the transparency of the financial systems makes it harder for active fund managers to seek out bargain stocks that have been overlooked.

'Most studies indicate that about 80 per cent of active fund managers tend to underperform index investing for the developed equity markets,' said Mr Leong Sze Hian, a former president of the Society of Financial Service Professionals.

At the end of the day, fund managers say it is not so much about one style versus another, but more about the individual's risk profile and view of the markets.

For instance, if you think that it is extremely difficult for an active manager to outperform a market, then you should opt for a passive fund for that section of your portfolio.

But if you want exposure to say, higher-risk developing markets where the fund manager can add value on a stockpicking level, then you may want to consider the active management route.

No comments:

Post a Comment