Why Even a 0.5% Difference in Fees Matters

DEAR INVESTOR JUAN

Dear Investor Juan,

Your blog is really a good find and very helpful for educating newbies. Thank you very much! Now I am seeking some opinion from you. While checking the UITFs of BDO, BPI and Metrobank, I came to know that BDO have the lowest fee - 1% while Metrobank charges the most at 2% plus others. Am I correct in this or I am missing something?

Regards,
Jovy

Dear Jovy,

Perfect timing, I've been planning to discuss the effect of differences in fees in investment returns. Maybe this illustration can help convince you that even a "small" difference in management fee matters.

Say there are two equity funds (UITF or mutual fund), A and B. The returns of the two funds, before management fees, in years t = 1, 2, 3... are as follows:

Fund A:

rA1, rA2, rA3, ...

Fund B:

rB1, rB2, rB3, ...

So that after 1 year, an investment in A will have grown by 1 + rA1 times, in 2 years by (1 + rA1)(1 + rA2) times, in five years by (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5), and so on.

If A charges an annual management or trust fee of 1%, then the after-fee value of an investment in A after 1, 2, and 5 years are:

After 1 year: (1 + rA1)*(1 - 1%) = (1 + rA1)*0.99
After 2 years: (1 + rA1)*0.99*(1 + rA2)*0.99 = (1 + rA1)(1 + rA2)*0.99^2
After 5 years: (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.99^5 = (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.95

Which means that if you invest in the fund for 5 years, 5% of the value of your investment would go to management fees. And if you invest in A for 30 years, your investment will have the following value at the end of the period:

(1 + rA1)(1 + rA2)...(1 + rA30)*0.99^30 = (1 + rA1)(1 + rA2)...(1 + rA30)*0.74

Let's say B charges a 1.5% management fee. A 30-year investment in the fund would result in:

(1 + rB1)(1 + rB2)...(1 + rB30)*0.985^30 = (1 + rB1)(1 + rB2)...(1 + rB30)*0.64

Assuming that the performance of an equity fund does not depend on the skill of the fund manager so that the long-term return (e.g., 30 years) of two equity funds on any given year is the same,

(1 + rA1)(1 + rA2)...(1 + rA30) = (1 + rB1)(1 + rB2)...(1 + rB30)

This means that compared to a fund that charges 1% per year, investing in one that charges 1.5% results in a 14% loss in value (0.64/0.74 - 1) over a 30-year holding period.

The table below compares the effects on value of different combinations of fees and holding periods.

Holding period	1.00%	1.50%	2.00%	3.00%	4.00%	5.00%
5	.9510	.9272	.9039	.8587	.8154	.7738
10	.9044	.8597	.8171	.7374	.6648	.5987
20	.8179	.7391	.6676	.5438	.4420	.3585
30	.7397	.6355	.5455	.4010	.2939	.2146

So to answer your question, for a 30-year investment, a 2% fee will reduce the value of the fund to 55%, compared to 74% for a 1%-fee fund. It means if you invest in the 2% fund, you'd be losing 26% more (55/74 - 1) of the value of your fund.

I hope this answers your question.

4 Steps in Using Lipper Leaders to Choose Investment Funds

(Thanks to Anonymous for sharing this.)

Lipper Leaders is a free online service under the Thomson Reuters brand that lets users screen and sort investment funds (e.g., UITFs and mutual funds) in various markets. In this post, I will take you through Lipper Leaders, how you can use it to choose a fund that best suits you, and some of its limitations.

1. Choose a fund type and classification

"Universe" pertains to market or country, so for most of us it's the Philippines. 

Under "Asset Type," we have the common types of investment funds: equity, bond/fixed income, balanced (under "mixed assets"). Please note that there are no "alternative" or "commodity" listed funds for the Philippines.

"Classification" refers to sub-types under main fund classes, such as different currency denominations for bond funds and geographic reach for equity funds.

The main "Asset Type" and "Classification" combinations that you should be interested in are the following:

Equity - Equity Philippines = for (peso-denominated) funds that are comparable with the PSEi
Bond - Bond PHP = for peso-denominated bond funds
Bond - Bond USD = for US dollar-denominated bond funds
Mixed Assets - Mixed Asset PHP Balanced = for peso-denominated balanced funds

"Fund Family" lets you choose funds offered by a particular bank. If you're looking for the "best" fund in an asset class, it would be best to leave this as "Any Fund Family."

2. Select a time period

Choices are 10 years, 5 years, 3 years, and Overall. "Overall" means since the introduction of the fund. Since UITFs have only been introduced in 2005 (or thereabouts), you'll only get limited results for "10 years." In choosing a time period, I suggest looking at the results for both "5 years" and "3 years" for consistent top performers.

3. Choose "Lipper Leaders" that match you goals

"Lipper Leaders" is just a fancy term for "selection criteria," or fund characteristics that investors should look at in selecting investment funds. Funds are rated in terms of these Lipper Leaders using a scale of 1 to 5, with 5 being the best for investors.

The five Lipper Leaders are:

Total Return = the total (accumulated) percentage change in the NAVPU of the fund over your chosen time period. A score of 5 indicates a high Total Return.

Consistent return = returns adjusted for volatility or risk. A score of 5 indicates consistently high returns

Preservation = ability of the fund to prevent loss of capital. A score of 5 indicates high capital preservation

Expense = a reflection of the fund's cost structure. A score of 5 indicates low fees and costs

Tax Efficiency = involves effects on taxes, but is limited to US funds

In choosing the "best" fund of a particular asset type, you can just leave the Lipper Leader boxes as "Any" and just sort the results later

4. View and sort results

After configuring the options mentioned above, click "Display Funds" to view the results.

The default view is sorted alphabetically by fund name. You can click on any column header to sort by that criteria. Clicking on the "3 Year Return" header, for example, will sort the funds from the lowest to highest return in the chosen period. Clicking it again will sort the funds from highest to lowest, like this.

You can also get more details about a fund by mousing over the fund name:

One limitation of the system is that it does not have information for fund costs, so you would have to get the information manually from monthly fund reports. In choosing a fund based on performance, please don't forget to consider costs because they do matter (remember that front/back sales loads are not reflected in the NAVPU).

Another feature that I would have loved is the ability to download historical NAVPUs, which are necessary in portfolio construction/asset allocation (UITF.ph is not working anymore, anyone know alternative sources?).

Despite these limitations, Lipper Leaders is still a great way to choose funds from the multitude of offerings in the market. I'm sure that in choosing a fund, you may have other considerations than the ones listed above, such as convenience, customer service, or brand strength; still, looking at total returns is a good way to start.

JUST REMEMBER: Lipper Leaders screens and sorts funds based on past performance, and past performance is not indicative of future results.

Philequity and BPI's Stock Index Funds: An Objective Comparison

Thanks to the person who made this comment for inspiring this post (unfortunately, it has already been removed by the poster):

There is a passive fund in the Philippines -- its called PHILEQUITY PSE INDEX FUND (Bloomberg Ticker PHILPSE:PM). Unlike the actively managed fund, the starting investment is P 50,000. This fund is not actively traded.

First let me clarify that currently no fund in the Philippines is traded--actively or not. Mutual funds and UITFs are not traded, and investment shares or units may only be sold/redeemed through the fund provider. But that's a story for another day.

Before seeing this comment in my inbox, the only stock index (i.e., PSEi) fund in the Philippines that I was aware of was BPI's Philippine Stock Index Fund. But even if I'm biased for passive investing, as some of you may know, I avoided talking about that fund too much because I thought the minimum investment requirement was too high and the management fee too steep. So maybe you can imagine my *excitement* upon finding out that another index fund was available in the country.

After only a few minutes of cursory online digging, I've uncovered some VERY interesting information about which I can only say... WOW (non-judgmentally, but maybe a wee-bit sarcastically).

As a result, I've come up with a 100% (best effort) objective comparison between Philequity's PSE Index Fund (Bloomberg Ticker PHILPSE:PM) and BPI's Philippine Stock Index Fund (Bloomberg Ticker BPIPHID:PM).

All the information below can be found on Bloomberg; try clicking on the above links or refer to this guide that I posted a while ago.

Minimum and Additional Investment Requirement

	Minimum Investment	Minimum Subsequent Investment
BPI	50,000	10,000
Philequity	200,000	50,000

Fees

BPI

Philequity

Current management fee is the percentage of the investment value deducted annually for management and administrative expenses.

Front load is the percentage of the investment amount deducted at the beginning of the investment period. If you invest 100,000 pesos in a fund with a front load of 5%, you will only receive 95,000 pesos worth of units/shares.

Back load is the percentage of the investment value deducted at redemption.

Both the front load and back load fees are supposed to go to the fund agents, brokers, and salespersons.

Redemption fee is the percentage of the investment value deducted when units/shares are redeemed before a predetermined minimum holding period.

Performance vs. the PSEi (PCOMP:IND)

In the past (1) year, BPI has slightly outperformed the PSEi.
In the same period, Philequity has underperformed the PSEi.

In the past 3 years, both BPI and Philequity have closely tracked the PSEi
without any discernible difference in performance.

In the past 5 years, Philequity has significantly outperformed both BPI and the PSEi

Given the following information, which of the two funds above is more attractive to you?

***

I'm sorry, I know I promised to be objective in this post, but I hope you would allow me this one insinuation.

Looking at the Philequity webpage for its index fund, we see the following comparison against the PSEi.

For the life of me, no matter how I look at the data, I just can't reconcile this implied discrepancy in performance between the Philequity index fund and the PSEi, and the Bloomberg comparisons that we saw earlier. Something's amiss, most definitely. And whatever it is, at worst it is irresponsible, unethical, and unconscionable.

A Closer Look at VULs: Philam Life's Family Secure (Part 2)

DEAR INVESTOR JUAN

Dear Azeotrope,

First, let me clarify. The point of these past two posts is neither to encourage nor dissuade readers from buying the product. My main objective is to help you and other readers/potential buyers make an informed decision whether to buy the product or not.

Okay, now we end the dilly-dallying and go straight to the heart of the matter.

What is Family Secure? As Philam Life clearly illustrates in its brochure, Family Secure is a combination of a term life insurance policy and a mutual fund. It follows, therefore, that getting these two products separately from any provider should produce the same, or at least comparable, results.

One way to choose between Family Secure and a "do-it-yourself VUL" is to have an idea how much each alternative costs and make a comparison. Fortunately, Philam Life provides us with enough information that could serve as basis for such an analysis.

From the example in the brochure, we see how an annual premium of 30,000 pesos could be allocated between the insurance component and the investment component; according to the graphic, if you make the proposed allocation, you will have accumulated 2,507,062 pesos over 35 years, at an assumed annual return of 8%. One way to estimate the cost/value of the term life policy is to subtract the aforementioned value from the future value of the premiums if the entire amount is to be allocated to the investment component. Using the "FV" function of Excel (or Google Spreadsheets), and entering the following arguments: rate = 8%, NPER = 35 (number of payments from age 30 to 65), PMT = 30000 (payment at the end of every year), we get 5,169,504 (ignore the negative sign). This number tells us that as per Philam Life's proposed allocation, 5,169,504 - 2,507,062 = 2,662,442 pesos or more than half of the value of your premiums will go to insurance coverag. But remember that this is the value of your premiums after 35 years; to make better sense of it, we have to can convert it to present terms. This time using the "PV" function of Excel, enter rate = 8%, NPER = 35, PMT = 0, and FV = 2,662,442, and you'll get 180,073 pesos--the cost, in today's peso, of getting the same insurance coverage as the one indicated by the gray areas in the brochure example.

So how can we use these results in making a decision? Go to a term life insurance agent (even one from Philam Life such as your aunt) and ask for a quotation for the coverage in the example. If the present value of quoted premiums is greater than 180,073 pesos, then Family Secure is a good deal; if it's less, then maybe you'd want to consider the cheaper option.

Of course, Family Secure does have qualitative advantages that you may also want to consider. Well, to me one advantage: convenience. So even if this product is more expensive, but you don't want the headache of reading posts like this or using Excel or shopping around for the cheapest deal, then it may well be worth it.

There is one important disadvantage to getting Family Secure, of course: you lose flexibility since the plan is essentially a long-term commitment. While you are free to allocate your premiums from time to time, you do have to make regular premium payments for a predefined number of years, which implies penalties if you fail to make payment (I'm not sure about this, so you might want to ask your aunt). You're also limited to choosing a Philam Life mutual fund, and I don't think you can change the kind of fund after your initial choice.

So these are the things that you have to consider in deciding whether to get Family Secure or other Variable Life Insurance products. Whatever alternative you're leaning towards, don't hesitate to ask your agent questions, such as the points raised in the past two posts. Good luck, and I hope you find these posts helpful. :)

A Closer Look at VULs: Philam Life's Family Secure (Part 1)

DEAR INVESTOR JUAN

Dear Investor Juan,

Last night, my aunt (a Philam Life agent) just offered me their latest VUL offering, the Family Secure. I don't know if you're aware of this but let me show you these links for some info:

http://www.youtube.com/watch?v=4U7-GTWyj4k
http://www.philamlife.com/en/individuals/products-and-services/protection/unit-linked-protection/

I read that you are against this type of insurance. But I'm quite convinced by this Family Secure due to its flexibility to turn insurance into investments as we (the parent's-to-be) retire. I don't have a family yet ('cause I'm still 23!).

Maybe I just find it hard to look on the other side of the fence. In your opinion, is this worth a take? Or find an affordable term life insurance and invest in other things?

By the way, I want to take the ETF. It interests me more than of UITF. Thanks!

Azeotrope


Dear Azeotrope,

As I briefly discussed in this post about life insurance, the most important drawback of varaible life insurance products is cost: that you can get the same results for cheaper if you just get a low-cost term life policy and investment fund (i.e., mutual fund or UITF). That said, I haven't been able to show how this works, exactly, given the lack of actual information about specific products. That is why I would like to thank you for giving us this opportunity to better understand hybrid insurance-investment products like Philam Life's Family Secure.

For this "desktop analysis," we will use the information and assumptions on Family Secure's brochure and a few things we've learned about time value of money from previous posts (like this one).

So how does Family Secure work? You, the policy holder, pay a premium every year; each year, your premium is allocated between a term life insurance policy and your choice of investment fund (from Philam's mutual fund offerings), depending on your "need." Presumably, when you're younger, you need more life insurance since your dependents have more need of your earning power, so you pay more for higher insurance coverage and only a small portion of your premiums will go to the investment fund. As you get older, this dependence would decrease (as your children grow up and start their own families, for example) and you would need less insurance, therefore you can start investing a bigger portion of your premiums in the investment fund.

Taking a look at this graphic from the brochure, we see how premiums are allocated between the life insurance component and the investment component over the course of the policy holder's coverage. The gray areas indicate Philam Life's proposed life insurance coverage (the policy holder makes the actual decision), high from age 30 to around 50. From age 50 onwards, the part of the premium that goes to life insurance significantly decreases in favor of the investment component, whose value (at an assumed return of 8% per year) is represented by the red area. While Philam Life has actually done a good job clearly making a distinction between the two components of products in this graphic, they have also--perhaps inadvertently but definitely irresponsibly--misled readers that the amount of life insurance coverage and the value of the investment are comparable--in other words, that a peso of life insurance coverage is the same as a peso in the investment account (the graphic clearly implies that the differences in the heights of the bars mean something; another indication is how a red area is stacked on top of a gray area). This is not the case! The value of a life insurance coverage is the amount the policy holder pays for it, not the coverage amount: from the graphic, the insurance coverage of 3,135,000 pesos at age 30, only for that entire year, is worth 30,000 pesos--the premium for that year--and not 3,135,000 pesos! On the other hand, at age 65, the investment value of 2,507,062 pesos is worth exactly that (in that year): 2,507,062!

So how should have Philam Life presented this graphic so that casual readers will not make erroneous conclusions? First, they should not have stacked the investment value on top of the life insurance coverage amount anywhere in the graph. And second, they should have included a separate, clearly defined axis for the investment value on the right.

And in my opinion, they should fire whoever's responsible for this. This is very embarrassing, an amateurish mistake (?) for a company that's as big and established as Philamlife. It would make for a very good example in Statistics class, though, on how not to use graphs in presenting data; or maybe how to effectively misrepresent data?

Sorry, Azeotrope, this... discussion... went on for longer than I had hoped. I know I haven't answered a lot of your questions yet. Unfortunately, my answers would have to wait for Part 2 next week, where I will show things that we can learn about variable life insurance from the Family Secure brochure and discuss some questions that you can ask your aunt about this product.

Have a happy weekend everyone!

Managing Your UITFs and Mutual Funds, Part 2: Dissecting Bloomberg's Portfolio Tracker and Fund Snapshot

This post is a response to the request of one of our readers, Anonymous.

Continuing from where we left off in Part 1, we now take a closer look at the contents of the Performance tab of Portfolio Tracker.

SYMBOL NAME - List of Bloomberg ticker symbols of the contents of your portfolio. Please note that these are different from the symbols used by fund providers and the PSE (in the case of stocks).

The following four quantities fall under the TODAY header of the display and thus pertain to the current or latest trading period.

PRICE - The last reported price of the components of your portfolio. The NAVPU and NAVPS of UITFs and mutual funds are quoted only once per day, unlike stock prices which are quoted in real time (delayed by 15 minutes).

CHANGE -  The change in the per unit or per share value of the fund or stock in the current or latest trading period.

LAST TRADE - Dates (and times for stocks) of the last quoted prices.

GAIN/LOSS - The monetary gain or loss for each portfolio component in the current or latest trading day, excluding transaction costs for stocks.

The succeeding quantities fall under the SINCE PURCHASED header and pertain to the period from when you bought a portfolio component up to the current or latest trading date.

SHARES - The number of units or shares of each component that you own. You specify this when you construct and edit your portfolio.

PRICE PAID - The price you paid for each unit or share of your portfolio components.

PURCHASE DATE - I'm sure you'll be offended if I even try to explain what this means.

GAIN/LOSS  - The monetary gain or loss for each portfolio component from the Purchase Date up to the current or latest trading day, excluding transaction costs for stocks.

% CHANGE - The percent change in the value of each portfolio component from the Purchase Date up to the current or latest trading day, not reflecting transaction costs for stocks.

% PORT - The weight of each component of your portfolio based on the last quoted price.

VALUE - The total value of each component and the entire portfolio based on the last quoted price. 

Clicking the link of a fund will take you to its "snapshot" page which contains information that we may or may not be familiar with. As per Anonymous' request, I will identify and describe some of the more important features of this page.

A. BLOOMBERG TICKER SYMBOL of the fund, as described above

B. PRICE, same as above

C. CHANGE and % CHANGE, same as above. A "down" arrow and the color red indicates a decrease in the per unit/share price from the previous trading day, while an "up" arrow and the color green means an increase.

D. PRICE CHANGES for the indicated periods. Year To Date means from January 1 of the current year up to the current/latest trading day; 1-Month, 3-Month, and 1-Year for the total price change in the past month, three months, and 12 months, respectively; 3-Year and 5-Year for the annualized change (geometric change per year) in price in the past three and five years, respectively.

E. 52-WEEK RANGE - the lowest and highest prices in the past 12 months

F. BETA - a measure of the volatility (in financial theory, also systematic or market risk) of the fund relative to a relevant benchmark (e.g., the PSEi for equity funds and stocks). A beta that is greater than one means that the fund is more volatile than the benchmark; a beta that is less than one (but greater than zero) means that the fund is less volatile than the benchmark.

And for this section:

NAV - same as PRICE above

FRONT LOAD - Percentage of the investment amount that you must first pay to buy the fund

BACK LOAD - Percentage of the total value of your investment that you must pay upon redeeming/selling units/shares

CURRENT MANAGEMENT FEE - Also know as TRUST FEE, the percentage of the fund value that you pay every year for the professional management of your capital

REDEMPTION FEE - specifically early redemption fee, it's the percentage of the fund value that you pay if you redeem/sell units/shares within the minimum holding period (differs per fund/fund type; please see this post for examples)

12B1 FEE - This. Usually not quoted for Philippine funds anyway.

EXPENSE RATIO - The fund's annual operating costs (including the management fee) relative to the fund's total value

Do Mutual Funds Have a Tax Advantage Over UITFs?

DEAR INVESTOR JUAN

Dear Investor Juan

You didn't mention the tax on mutual fund vs uitf

In my case, Im comparing metrobank equity uitf and metrobank equity mutual fund.
Both of them have the same annual management fee, the difference would be:

1) mutual funds have entry sales load fee of 2%

2) uitf have 20% tax on profit.

My Conclusion: Assuming that the fund manager invest in the same portfolio, it is better to invest in mutual funds in the long run. Because the longer you invest (3-50 years) the more TAX you will have, while sales load fee is fixed.

Please clarify.

Anonymous


Dear Anonymous,

Thanks for your question.

It is true that any gains from the redemption of mutual fund shares are not subject to further taxes as stated in the National Internal Revenue Code of 1997. And since UITFs, which were only created through a BSP circular in 2004, are not explicitly covered by this provision, some speculate that gains from redeeming UITF units are subject to withholding tax on top of taxes paid on income earned by the fund's underlying assets.

First, even if UITF unit holders have to pay withholding tax upon redemption, what you suggest, that "the longer you invest (3-50 years) the more TAX you will have," is completely inaccurate since a unit holder would only have to pay withholding tax only when he or she chooses to redeem units and the tax amount is therefore independent of how long the unit holder's chooses to hold on to his or her units.

Second, according to this press release by Punongbayan and Araullo--one of the country's biggest public accounting firms--gains on UITF redemption are NOT subject to withholding tax. And I quote:

Our understanding of the nature of UITFs is that they are considered as revocable trusts since the beneficial ownership in a UITF is maintained with the trustor-beneficiary, and considering that in case of death of the trustor, the UITF participation forms part of the trustor’s estate subject to estate tax.

As revocable trusts, UITFs should be treated as one and the same taxable entity as that of the trustor.  Following the rules promulgated under BIR Ruling No. 003-05, if the applicable taxes have already been paid on the UITF investments, there should no longer be a need for the trustees of UITFs to withhold a 20% final withholding tax on the gains upon redemption of UITF participation.  Thus, proceeding from the above discussion, it is maintained that there should be no need for separate tax to be imposed upon redemption of UITF participation since the proper taxes have already been collected through the final withholding tax system. (Emphasis is mine.)

So to answer your question--NO, mutual funds do not have a tax advantage over UITFs, and given the same management fees, typical UITFs are more inexpensive than front- or back-loaded mutual funds.

I hope you find this helpful. Good luck!

Managing Your UITFs and Mutual Funds, Part 1: Bloomberg's Portfolio Tracker

Step 1: Create an account

Go to http://www.bloomberg.com/, and click the "portfolios" link under the "personal finance" menu. Set up an account, or use your Facebook or Twitter account. Sign in, and you'll be taken to the Portfolio Tracker page.

Step 2: Identify your funds

Look for the UITF or mutual fund that you own on Bloomberg's list of Philippine investment funds and take note of the Bloomberg symbols of the funds. For example, SNLFMNY:PM is for Sun Life's Prosperity Money Market Fund, BDOPBF:PM is for BDO's Peso Bond Fund, and BPIEQUI:PM is for BPI's Equity UITF (all throughout this post, we'll use the following funds to illustrate Bloomberg's features). Also, notice that clicking any fund link on the Bloomberg list will take you to the detailed information page of the fund; this can help you compare funds and decide which fund(s) to buy.

Step 3: Create your portfolio

Go back to the Portfolio Tracker page and click the "create portfolio" link. Enter the details (i.e., Bloomberg symbol, number of shares you own, purchase price per share, and purchase date) of each of your funds. You can also include individual Philippine stocks to your Bloomberg portfolio; note that the fourth entry, JFC:PM, is Jollibee Foods Corporation. Click "save changes" to finalize your portfolio.

Step 4: Keep track of your portfolio's performance

Successful creation of your portfolio will take you to the "performance" tab of Portfolio Tracker. Here you'll see how your investments, both individually and as a whole, are doing. The page presents information about daily gains and losses, and percentage and peso gains and losses since you purchased the funds; you'll also see the current value and weight of each investment in your portfolio, and the total value of your portfolio.

Step 5: Enter buy and sell transactions

To buy and sell fund units or stocks, click "edit" while on the "performance" tab. To add a new fund or stock to your portfolio, just enter the details on a new line, just like what you did in Step 3. To sell a fund or a stock (your entire holding or just a portion), select "sell" from the drop down box of the fund or stock, and enter the number of units or shares that you want to sell, the selling price per unit or share, and the transaction date. Click "save changes" to finalize.

Step 6: Keep track of realized gains and losses

Click the "realized gain-loss" tab to see realized gains and losses. In our example, selling 50 shares of JFC on the given date and at the specified price resulted in a gain of 29.23 pesos. Take note that Bloomberg does not allow for the entry of transaction fees, so you'll have to be careful in making buy or sell decisions for stocks based on data from Portfolio Tracker since an expected gain may actually be a loss if you consider fees (this does not apply to funds since quoted NAVPUs are already net of all fees).

Answers for Thursdee, Part 1: First Metro Save and Learn Equity Fund

DEAR INVESTOR JUAN

First Metro Save and Learn Equity Fund, Inc.(FMSLEQT:PM, red) outperforming BDO's Equity UITF (EPCIBEQ:PM, green) and the benchmark PSEi (PCOMP:IND, orange) in the last 12 months

Dear Investor Juan,

First and foremost, let me just say how very informative your blog is to those of us who can't understand investment language.

My family has accumulated modest savings this year which we initially intended to invest in a time deposit account and a balanced fund. I've been doing my research, but sadly, my math-averse brain can only take so much information. It's so difficult for me to understand the banking world's jargon. Thankfully, I came across your blog before my math-averse brain crashed. So now, we've decided to invest 50,000 pesos in an equity fund, most probably in BDO. I still have several questions to ask though.

[questions printed below]

I do hope you'd reply to my queries to save my overworked brain from further damage. Thanks again and may you be blessed for helping us who can't afford to pay financial advisors!

Thursdee


Dear Thursdee,

Thanks for the compliment. I live to serve. :)

Now, on to your questions.

1. Before reading your blog, I was actually "studying" the NAVPS performance table on the Investment Company Association of the Philippines (ICAP) website. I noticed that First Metro Asset Management, Inc.'s (FAMI) First Metro Save and Learn Equity Fund has the highest percentage returns among all the other funds. And also, the funds managed by banks are not listed there. Is it advisable to invest directly with FAMI than through a bank? How do I go about doing that?

FAMI's equity fund has indeed been significantly outperforming other mutual funds in its class, and actually even UITFs and the PSEi, in the past five years.

This kind of sustained "strong" performance is rare in the fund management industry, where success is attributed to luck, as several noteworthy studies in the US show. And while I would tend to agree to the idea that past performance matters little in choosing investment funds, I may have to make an exception with FAMI's equity fund: significantly outperforming the benchmark and other funds in the same class continuously for five years does point more towards skill than luck.

And don't think FAMI does not know that.

In discussing UITFs in previous posts, we often talked about management, trust, or custodian fees that could serve as one basis in choosing a fund. While mutual funds and UITFs are basically the same, one important difference is that the former charges sales load fees on top of the basic management fee, making mutual funds more expensive than UITFs. 

Take FAMI's equity fund as an example. It charges a front-end sales load of 0.5 to 2% of the invested amount, on top of a 1.75% per year management fee. Of course that extra fee may be well worth it if the fund can give you 50% higher returns, but as I always say, nothing in making investments is certain.

The funds listed on the ICAP website are all mutual funds, and you won't find any UITFs there. UITFs are offered by banks, and mutual funds by other financial institutions like insurance companies and bank affiliates, although some funds like the ALFM funds of Ayala Life can also be purchased from BPI. Also, while UITFs may only be purchased from the bank of your choice, you can buy mutual funds also through authorized agents or sales representatives.

If you're really interested in investing in FAMI's First Metro Save and Learn Equity Fund, you would have to accomplish some forms and follow these instructions from the company's website.

By the way, if you want to compare the performance of different funds with graphs (and without the math), just like I do here, you can go to Bloomberg.com and use the site's interactive chart. You can find the "Bloomberg ticker" of the fund using the search bar at the upper right corner of the page.

Part 2 for your other two questions in my next post.

Past Performance Does Not Matter

Yes, it sounds like something from the mouths of market efficiency fanboys. Yes, it’s something one would expect in this space, given this blog’s recent proclivity to bash the art of active fund management and the oft-maligned school of technical analysis.

We’re all guilty of it, at one time or another: using what happened in the past to predict, or at least have some idea of, what will happen in the future. In school we learned how to use historical sales to forecast a firm’s future demand, how to use past data to assign probabilities to events that can happen in the future, and how technical analysis is based on the premise that historical stock prices produce patterns that are bound to repeat in the future.

In the real world, we are confident that we’ll earn big from investing in the stock market because we know more than a handful of people who’ve done it before. Also, we base our investment decisions on how well a particular fund has performed in recent years, despite reading this qualification in the fine print of fund reports, something that’s required by law for mutual funds, UITFs, and other similar instruments.

A new study from Standard & Poor’s presents stronger evidence against fund managers who try to lure investors with the implied promise that a strong recent performance will happen again in the future. The study looks at top mutual fund performers over three-and five-year periods, how the funds performed each year in those periods and whether a top-performing fund in one period was able to repeat the same performance in the next period.

The major findings of the study include:

• Very few funds manage to consistently repeat top half or top quartile performance. Over the five years ending March 2010, only 1.7% of large-cap funds, 2.2% of mid-cap funds, and 4.6% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.
• Looking at longer term performance, 18.5% of large-cap funds with a top quartile ranking over the five years ending March 2005 maintained a top quartile ranking over the next five years. Only 12.7% of mid-cap funds and 25.0% of small-cap funds maintained a top quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.

It must be said, though, that these results against actively-managed funds like mutual funds and UITFs greatly favor S&P since it’s in the business of selling passive index funds. But still, the numbers present very strong evidence that, indeed, it would be foolish to base investment decisions solely on past performance.

Luck Is The Key To Success For Most Top Mutual Funds

IN THE NEWS from Forbes.com

A new study by Eugene Fama and Kenneth French shows that actively managed funds are not able to consistently outperform passive market indices, and that these actively managed funds consistently result inferior returns for investors because of their high fees.

The study shows that the reason why some funds outperform benchmarks sometimes is not because fund managers are highly skilled, but because of luck. The article further points out that since there are thousands of actively managed equity funds, even if all fund managers were randomly picking their portfolios by throwing darts at a stock page, a large number of funds would still soundly beat market averages.

The main point of the article is that it does not make sense to pay professional fund managers to construct a portfolio that will not even consistently beats the market, and that investors would be better off investing in passive, low-cost index funds instead.

What does this mean for Ange and her ilk? Does this mean their crusade to beat the market is futile and all for naught? We’ll, here’s a ray of sunshine for the steadfast believers among you, something you can hold on to for a little bit of hope: Fama and French are pioneers of market efficiency, and while I have yet to see the full text of their study, I’ll bet that it is founded heavily on this school of thought. There are strong arguments against the efficiency of the US stock market set forth by advocates of behavioral finance like Robert Shiller and Richard Thaler, and I’m pretty sure that the evidence against the efficiency of the Philippine stock market is significantly more damning. So if the Philippine stock market is far from efficient, then maybe there’s a way to consistently beat it.

So Ange and your ilk, let’s see you guys do it. Or at least try to. Before I burst your bubble in my next post where I show further evidence against consistently beating the market. :P