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The Lesson of Hyflux: What water and diversification have in common

March 25, 2019

34,000 individual investors have lost a lot of money in Hyflux Perpetual bonds. But there are very important lessons that all of us must learn...

The lesson of Hyflux: What water and diversification have in common

34,000 individual investors have lost a lot of money in Hyflux Perpetual bonds(“Perps”). When they were first introduced in 2011, they looked fantastic. It offered a high yield of 6% from a household name we thought we could trust. The company had signed huge long-term utility contracts with governments around the world. The founder, Olivia Lum, was a homegrown Singaporean rags-to-riches story, and as the EY World Entrepreneur of the Year, she was a well-respected leader in the business community. Most importantly, she made a product we all needed and knew well - water.

The investment was attractive enough for most individual investors, but private banks sweetened it for their clients by offering cheap leverage to juice up investor yields, letting you buy $2 of Hyflux Perps for every $1 you had. What could be better than double-digit returns every year from Olivia Lum selling water to you? The result of leverage and the lack of any financial covenants for the Perps means that these investors have been effectively wiped out.

Tariff rates on which Hyflux based their Tuaspring facility changed dramatically due to adverse market conditions, leading to spiralling losses and the company eventually filing for bankruptcy protection. As things currently stand, investors in Hyflux Perps will recoup a tiny fraction of their original investment in a restructuring scenario but will be wiped out if the company is liquidated. This is because perpetual bonds and preference shares are subordinate to senior debt and other bonds.

It is an astonishingly humbling and sad end to what was for a while an incredible success story. Following hard on the heels of the downfall of commodities trading company, Noble group, this leaves us with yet another lasting and painful impact to individual investors in Singapore. There is no silver lining for the investors who await the final outcome of the restructuring of the company, but there are very important lessons that all of us must learn from this unfortunate saga, particularly about what to do and not do when we are investing:

1. Investors like to invest in things we (think) we know.
It seems so much less risky. Ms Lum and Hyflux were household names - a sure bet. We tend to place an oversized weighing on the importance of familiarity in our investment decision-making process. This is called familiarity bias. However, familiarity alone does not turn something into a good investment. 

2. Overestimation of our own ability.
Somehow everyone thinks they know how to pick stocks and bonds when very few of us have the necessary tools or training to make the right choices and to make them consistently over time. In this case, it was too easy to overlook some of the important characteristics of perpetual bonds which made it more risky for individual investors. For example: You do not ever get your principal investment back as the bonds never mature. There are no covenants to protect you so even if the company does not pay interest, it is not considered default. The bonds are considered subordinate debt, so if anything goes wrong, you are last in line for recouping anything. To add leverage as some did was to pour fuel to the fire.

3. Putting your eggs in one basket is called concentration risk.  
The painful and unfortunate outcome for Hyflux and its investors is also a cautionary tale of the importance of diversification. Investing your life savings in Hyflux Perps lost you everything. Any other diversified investment in public markets during that time would have fared much better. More importantly, let us consider the worst case outcome. For example, an investor in a diversified Endowus bond portfolio, at the peak of the Global Financial Crisis, would have lost at most 12% in 2008, which now sounds much more palatable compared to the outcome of the Hyflux bonds. What is more, the average 12-month rolling return over the past 16 years for the Endowus bond portfolio has been 5.72%. That's almost as good as the original Hyflux bond with much less risk of losing your money

4. Investing is not about profit maximizing or chasing yield.
Investing over the long-term is really about how we manage risk through the investment life cycle. Return and risk are two sides of the same coin and have a positive correlation. Higher risk, higher return. Lower risk, lower return. In the case of Hyflux Perps, the risk was much higher than the returns warranted. Especially when you supercharge it by using leverage.

At Endowus, we believe investing in globally diversified portfolios of thousands of securities and across asset classes will insulate you from one bad egg ruining your whole portfolio basket. Thereby protecting you from permanent capital loss while giving you the only free lunch in town - diversification.

Diversify, diversify, diversify. It is as essential to our well-being as water.

If you enjoyed reading this article, you can subscribe to Endowus Insights, follow us on LinkedIn or connect with us on Facebook.

The world in view

Business

How hedge funds get rich (Of Dollars and Data)

Go with the (cash) flow: The race to create a global payments giant is shifting up a gear (The Economist)

Airbnb sold some common stock at a $35 billion valuation, but what is the company really worth? (Recode)

Markets

When the evidence is solid and the returns aren’t (Bloomberg)

Don't fall for a good story (Morningstar)

Singapore

Singapore gets first guilty plea in S$8 billion penny stock scheme (Bloomberg)

Fat cats or top dogs: Is the Singapore CEO overpaid? (Business Times)

Why Hong Kong and Singapore should tax wealth more (SCMP)

Longform

Death of the calorie: Why counting calories could be making you fat (The Economist)

Podcast

Lessons learned from Chinese education startups (Andreessen Horowitz // 31 mins)

Good to know

Investors are losing millions on overpriced Chinese art (Bloomberg)

Warren Buffett says your greatest measure of success at the end of your life comes down to 1 word (Inc)

No sleep, no sex, no life: tech workers in China’s Silicon Valley face burnout before they reach 30 (SCMP)

Why urban millennials love Uniqlo (The Atlantic)

 Finland again is the happiest country in the world (World Happiness Report)

Good enough to eat? The toxic truth about modern food (The Guardian)

The very annoying efficient market hypothesis and how to beat it

March 11, 2019

Over US$400 billion is traded daily on the global stock markets. All of that money is trying to find a deal and set new prices, constantly.  

10 March 2019 | By Gregory Van

Have you ever tried to sell something on Craigslist or Carousell? It could have been a pair of pants, a piece of furniture, a bicycle, or something completely random. The item itself is not important: if you try to sell it for too high a price, it does not move. If you set the price too low, you will get a ton of inquiries and be kicking yourself for underpricing. Naturally, we are always trying to get the highest price possible, that the market (a buyer) will accept.

Let’s now shift this concept from selling used items to the greatest market on the planet: the financial markets. In 2017, there was over US$400 billion traded on average per day on the global stock markets. All of that money, irrespective of who was behind it (a sovereign wealth fund, a college student, a high-frequency trader, a billionaire), is trying to find a deal and set new prices, constantly.

We are all participating in a market where the value of goods and services is relative and constantly on the move.

It is annoying - we can seldom get a great deal. 

But it is also comforting to know that you will seldom get terribly ripped off. You will likely walk away with a ‘fair’ deal, most of the time.

Eugene Fama, 2013 Nobel Laureate, is credited with developing the Efficient Market Hypothesis, on which intelligent investment decisions can be made.


The efficient market hypothesis simply states that:

- Current prices incorporate all available information and expectation.
- Current prices are the best approximation of intrinsic value
- Price changes are due to unforeseen circumstances
- “Mispricings” can certainly occur, but not in predictable patterns


It absolutely does not state that:

- All investors are rational
- Prices are always right
- Prices should be stable

Let's not ignore market pricing

The markets are living, breathing, and reflecting data constantly. Prices move around as people and institutions act on their convictions. At any point in time, a price is an amalgamation of the aggregate human view. Prices can absolutely be wrong- you can spot this and act on it, and feel pretty good when the markets move in your direction.

Unfortunately, it is almost impossible to beat prices persistently and consistently.

Professionals who look at the market all day and night cannot beat the market. Morningstar, one of the most well-known fund rating companies, rates on a one to five-star system. The number of five star rated funds that will remain five stars just three years later is a meagre 14%. The persistence of returns over the market is non-existent, and playing that game is a low confidence endeavour.

Read more: The Morningstar Mirage (WSJ)

In fact, the number of people who do beat the market is less than that due to random chance - a depressing statistic on the human condition.

The next time you hear friends say “it is so obvious that this stock will go up,” pause and think of the market, and the $400 billion transacted per day looking for the right price. Your friends may be right, but they are betting against the market which has already incorporated their view and that of all of the other participants.

We also often hear people say “Asia is different,” or “Only the US markets are efficient.” Even if it is true that some markets are more ‘efficient’ than others, unless you are getting a steady stream of insider information and acting on it (which is absolutely illegal) why would you operate and make decisions in any other way?

Now, the market is great - but can we beat it systematically?

Academic research and efficient implementation over the last few decades has told us that it is possible.

Watch: In pursuit of the perfect portfolio: Eugene Fama (38 mins by MIT Labs)

Systematically building a portfolio that buys more small-cap, cheap (value), and profitable companies can lead to out-performance over the long-run. This phenomenon is persistent across longer time frames and markets. This out-performance does not happen consistently every year, but rewards investors patient enough to sit out the volatility, and maintain their course.
 

Small, Value & Small+Value versus the Market

We have written on these factors before, in case you are interested: Money business part I, Monkey business part II, Choosing the right rocks, Who doesn’t like good value?

Dimensional Fund Advisors, an asset management firm founded in 1981, systematically pursues these anomalies. Their long-term benchmark-beating track record demonstrates that these anomalies can be exploited and captured through broad diversification in a cost-efficient manner.

Let prices work for you. There is no need to bet against the market to beat the market.

If you enjoyed reading this article, you can subscribe to Endowus Insights, follow us on LinkedIn or connect with us on Facebook. If you would like to stop receiving our insights, you can unsubscribe here.

The world in view


Business

Fintech firms like SoFi and Robinhood offer “free” stock trading. What’s the catch? (Quartz)

Google finds it’s underpaying many men as it addresses wage equity (NY Times)

Facebook and Telegram are hoping to succeed where Bitcoin failed (NY Times)

The MBA myth and the cult of the CEO (Institutional Investor) 


Markets

Taleb was right. We’re still fooled by randomness (Bloomberg)

Averages are clean but actual results are messy (A Wealth of Common Sense)

How did the US market get so old? (Bloomberg)


Singapore

What took Singapore so long to scrap streaming in secondary schools? (SCMP)

Mahathir Mohamad: ‘I’m pro-Malaysia, not anti-Singapore’ (SCMP)


Longform

These women have been breaking barriers in business for 150 years (Bloomberg)


Podcast

TED: Luck, fortune, and chance - What makes someone lucky? Can luck be controlled, is it random, or is it based on something else entirely? (NPR)


Good to know

The Bill Gross you didn’t know: Taxes, deficits and Asperger’s (Bloomberg)

Warren Buffett's investment advice helps NFL Ndamukong Suh choose teams (Fortune)

Why the sleep industry is keeping us awake at night (The Guardian)

10 breakthrough technologies in 2019 curated by Bill Gates (MIT Technology Review)

It’s time to pay attention to the other Cabernet (Bloomberg)

How much leisure time do the happiest people have? (The Atlantic)

True giants of the investment world: Buffett, Templeton, Booth, Bogle, Swensen

February 16, 2019

There are many famous investors around the world, but only a few good people over the past century who we can call the true giants of the investment..

The true giants of the investment world
What Buffett, Bogle, Booth, Templeton, and Swensen have in common

There are many famous investors around the world who have achieved great returns, or made it big by betting it right during the financial crisis, or have gained notoriety through lavish billionaire living habits.

Heck, there’s even a TV series called “Billions” about one of them.

But there are a few good men over the past century (yes century not decades), who we can call the true giants of the investment world. They didn’t just make a lot of money for themselves; they made a deep lasting impact on future generations of investors because of the contributions they made to the industry and to the broader society.

Through their investment methods and companies, they fundamentally changed the way we think, invest, grow and preserve wealth. They have also influenced and inspired Endowus to be who we are. We stand on their shoulders.

Jack Bogle, founder of The Vanguard Group, passed away last month. He is a legendary figure in the investment world and a true giant of the industry, revolutionising the way individuals and institutions will invest forever. In tribute, we wanted to highlight his impact and that of the true giants of the investment world:

Warren Buffett (born 1930)
"Investors should remember that excitement and expenses are their enemies.”

When people talk about great investors, the first name that rolls off their tongues is often Warren Buffett. The fact that he was for a long time the richest man on earth contributed to this revered position. Now ranked third in the world with a net worth of US$84.4 billion as of November 2018, Buffett has already cemented his position as one of the greatest stock pickers of all-time with his many investments through Berkshire Hathaway. The diversified holding company, that encapsulates the best of value investing, and the marriage of private and public markets investing, has risen on average more than 20% per year for a total gain of over 2,400,000%. For reference, the S&P 500 had an annualised return of 9.9% over the same period, for a total gain of 15,508% including dividends.

Read more: Berkshire Hathaway 2017 shareholder letter

Now 88 years old and counting, he famously pledged that he will give away 99% of his total fortune to philanthropic causes. His excellence in performance is matched by his generosity and his conspicuous frugality. Interestingly, while he attributes his investing framework and philosophy to Benjamin Graham (the father of value investing), he became a major advocate of low-cost index funds later in life. He made a well publicised million dollar bet for charity with some hedge fund managers who he beat hands down by just investing in a passive market index fund. He believed (and was proven right) that a low-cost way to track broad, diversified stock market returns would outperform high-cost actively managed funds. Thus re-emphasizing the simplest of truths often forgotten in investing - lower cost directly leads to higher returns, and it compounds over time.

John Templeton (1912-2008)
“Never forget: the secret of creating riches for oneself is to create them for others.”

Although from another generation, another name that is often mentioned in the same breath is Sir John Templeton, who Money magazine named “arguably the greatest global stock picker of the century”. He is a more traditional contrarian investor and made his name in the 1930s when he famously bought every stock under $1 during the Great Depression and again during World War II. Needless to say, those investments turned out pretty well, demonstrating the success of being diversified, and staying invested at times of extreme pessimism.

He entered the mutual fund industry in 1959 and founded Franklin Templeton, a leading global fund management house. By mutualizing his funds, he allowed a broad base of retail investors access to his and his team’s investment expertise and superior returns. Others who have made such an impact on the development of the mutual fund industry during the last century include the likes of Jon Lovelace at Capital Group, Ned Johnson at Fidelity, Thomas Rowe Price at T. Rowe Price, and Walter Morgan at Wellington who Jack Bogle worked for before he left and founded The Vanguard Group.  

Sir John and his company, Franklin Templeton, became synonymous in the industry with fundamental investing, value investing, and emerging markets investing. Sir John passed away in 2008, but his legacy lives on through his company and his generous donations. Sir Templeton was a multi-billionaire but was also one of the most generous philanthropists in history, giving away over US$1 billion to charitable causes during his life, and setting up important foundations and awards for future generations.

David Swensen (born 1954)
“If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

A name that may not be so well known by the general public is David Swensen, the Chief Investment Officer of Yale Endowment who took over the university endowment in 1985. He has generated an  annualized returns of over 12% over the past 30 years, growing the endowment’s money by over 34x.

Read more: That’s why I chose Yale (April 28, 2018)

He invested by applying a type of modern portfolio theory now known commonly in the investing world as the “Endowment” (or “Yale”) Model or the “Swensen Approach”. It is a systematic and diversified asset allocation methodology that is now widely adopted by asset allocators around the world. What really stands out in his approach was how he embraced diversified asset allocation methodologies and invested in global markets, alternative assets classes, illiquid investments such as private equity, as well as low-cost index funds.

The name “Endowus” originally came from our desire to provide this type of sophisticated endowment-style asset allocation to all of us, the individual investor. We do this by accessing institutional quality products at institutional costs, just as a university endowment, sovereign wealth fund or major pension fund would be able to do.

He was a big critic of the high and excessive fees of mutual funds, which limited the ability to generate good returns for their investors. In his book,  “Unconventional Success: A Fundamental Approach to Individual Investing”, he confesses that he did not fully appreciate how difficult it might be to replicate the Yale model at the level of individual investors, and argues that the for-profit mutual fund industry consistently fails the average investor. From excessive management fees to the frequent "churning" of portfolios, the relentless pursuit of profits by asset management companies harms individuals. Instead, he advocates for a contrarian investment alternative that promotes well-diversified, equity-oriented, "market-mimicking" portfolios that reward investors who exhibit the courage to stay the course. Swensen suggests implementing his nonconformist proposal with investor-friendly mutual funds and passive investments.

David Booth (born 1946)
“The number of managers that can successfully pick stocks are fewer than you’d expect by chance. So, why even play that game? You don’t need to.”

In 2008, The University of Chicago Graduate School of Business received the largest donation to a school to that date, US$300 million. In honour of the donor, the school was renamed the Booth School of Business. The donation was made by alumni David Booth, the founder and Chairman of Dimensional Fund Advisors (DFA).

Dimensional was founded in 1981 and currently has over US$500 billion in assets under management. Unlike other asset managers, it surprisingly did not have net withdrawals during the financial crisis of 2008 or the dot-com bubble in 2001.

The company is founded on the idea of implementing the great ideas in finance for its clients and boasts many distinguished academics and Nobel Laureates, such as Eugene Fama, Kenneth French, Robert Merton, and Myron Scholes as its advisors or directors. Embracing the efficient market hypothesis and the belief in the power of markets, DFA adopts a systematic and evidence-based approach to investing—an approach that the company can implement consistently and investors can understand and stick with, even in challenging market environments.

Dimensional utilises the proven factors of returns that are persistent, pervasive,  and can be harvested in a cost-efficient manner. DFA pioneered the factor-based investment model almost 40 years ago - the industry is playing catch-up,  with the recent proliferation of “smart beta” investing.

Endowus is aligned with DFA in pursuing an evidence-based approach to investing. Instead of trying to time the market, we focus on the science and empirical evidence that is rational and allows for a higher probability of outperformance over time. While these factors may not exhibit themselves through outperformance of the benchmarks year on year, over time the proven factors of returns (value, small, profitability) will assert themselves and lead to better performance.

We must take a broadly diversified position in the markets for the long-term in order to capture the full benefits of factor-based investing.

Despite Booth’s large donation to the University of Chicago and other philanthropic efforts over the years, he is still a billionaire but remains down to earth and out of the limelight. Dimensional remains humble with the same mission as when it was started in David’s apartment 38 years ago.

Dimensional famously never gives rebates or trailer fees to distributors, such as banks or brokers for selling its products. This not only keeps fees lower for investors like you and me, but it also ensures that its products are not being sold by distributors with misaligned incentives. Just like Vanguard, they believe upfront sales charges and hidden fees lead to misalignment of interest and errant behaviour by financial institutions who will try to maximize their own returns at the expense of their client’s returns, by taking higher fees from individual investors.

Endowus is a firm believer in keeping costs as low as possible and working with fund management companies that share our philosophies and values, such as Dimensional.

David Booth (second from left) with the Endowus team, Dec 2018

Jack Bogle (1929-2019)
“The miracle of compounding returns  has been overwhelmed by the tyranny of compounding costs.”

Today’s note is completed by a hero of the investment industry, the late Jack Bogle, founder of Vanguard.

Vanguard pioneered the “index”, “tracker” or “passive” fund. Bogle’s conviction was based on empirical data that most investors cannot consistently beat the market over the long-term. We would do better buying and holding a low-cost fund that gives us exposure to the total market return, rather than succumbing to emotional impulses or biases in a futile effort to beat the market.

The concept of index funds is attributable to Professor Samuelson, from whom Jack got the idea to start Vanguard and passive investment products. When Bogle established Vanguard in 1975, he created a unique structure called mutualization so the company is owned by its fund investors, cutting out fees from the middlemen. He effectively set it up as a nonprofit with no outside shareholders. Removing the accrual of profits to the parent fund management company allowed a further lowering of cost for all, directly benefiting all individual investors who invested through Vanguard.

Warren Buffet famously said:

"If a statue is ever erected to honour the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds.

In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing of added value. In his early years, Jack was frequently mocked by the investment management industry.

Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."


It is incredible that Jack never tried to amass a personal fortune or pursue a family legacy, as so many in the finance industry did and still do.  Vanguard is truly the most value-driven company in the industry and a benchmark for all who seek to do good in the investment industry. Thank you, Jack, for your courage in pioneering a new way for the industry and for the contributions to all of us. May you rest in peace.

Conclusion
By learning from these great thinkers and practitioners, we can bring together the best of Swensen’s asset allocation methodologies, remove unnecessary market timing like Buffett, provide unique access to the individual investors through the mutualization of fund investing like Templeton or Bogle, and rely on scientific evidence and empirical data backed up by sound academic rigor like Booth.

Endowus seeks to stand on the shoulders of these giants. There is no need to reinvent the wheel or try to do things we know just do not work over the long-term, such as trying to outperform markets through timing or stock picking.

All these men worked hard to give back intellectually through their investment acumen and efforts to find new, more effective ways of investing, especially for the individual investor. They have also given back financially through innovative ways to share the overall pie or by sharing their wealth directly through philanthropic efforts and donations.

Endowus shares the same values and philosophies and is strategic in our relationship with many of the companies associated with these leaders. We provide individual investors access to the best investment products for each asset class, but we are agnostic to the types of products we use. Whether they are funds or ETFs, whether they are passive or smart beta factor strategies.

We focus on evidence-based, systematic investing through diversified asset allocation and sophisticated fund selection. We are not beholden to anyone as an independent advisor, as nobody pays us other than our clients. Any rebates or fees we receive from fund producers will go back to our investors and will not be kept by us. Above board and transparent in all our ways, and always aligned to the best interest of our clients.

Like Jack, we may forgo some of the economic upsides as a company. However, our mission is to level the playing field and allow the individual investors a greater chance of achieving meaningful long-term returns that major institutions and the best investors in the world have been able to generate.

This thereby allows all of us to have a better chance of reaching our important personal financial goals, whether it is for our children’s college funds or retirement income. We are constantly striving to narrow the gap that exists currently between the individual and institutional investors, using technology and innovative ways to access sophisticated products and bring down costs.

This is also how we plan to further the legacies of these true giants of the investment world, who have inspired us to be who we are.

If you enjoyed reading this article, you can subscribe to Endowus Insights, follow us on LinkedIn or connect with us on Facebook. If you would like to stop receiving our insights, you can unsubscribe here.

The world in view


Business

Bridgewater's self-obsession actually ... works? (Bloomberg)

Can Vanguard remain alone? (Morningstar)

Trump era’s biggest winner Is Jeff Bezos, presidential nemesis (Bloomberg)


Markets

Even God couldn’t beat dollar-cost averaging (Of Dollars and Data)

Jack Bogle led this investing fee war (ETF)

Who owns all the stocks and bonds? (A Wealth of Common Sense)


Singapore

The incredible shrinking Singapore stock market (Bloomberg)

Face it, Hong Kong: Singapore is Asia’s world city (SCMP)

Gojek fields bank pitches amid US$3b funding drive (Business Times)


Longform

Crude awakening: The truth about big oil and climate change (The Economist)

Confessions of a content marketer: Asset managers and banks produce an astounding amount of white papers, sponsored content, and “thought leadership.” Here’s how the sausage is made. (Institutional Investor)


Podcast

Brilliant vs. boring: Warren Buffett's bet, John Bogle and index funds (NPR // 28 mins)


Good to know

Warren Buffett: “Really successful people say no to almost everything” (Accelerated Intelligence)

To get better at managing your time, borrow a training strategy from elite athletes (The Cut)

They really don’t make music like they used to (NY Times)

Ashton Kutcher-backed meditation app Calm valued at US$1 billion (SCMP)

Time for happiness (Harvard Business Review)

Twitter CEO Jack Dorsey: The Rolling Stone interview - sometimes 280 characters just aren’t enough. (Rolling Stone)

Legal weed gets a luxury makeover (The Atlantic) 

On surge pricing, institutional share classes, and sales incentives

January 20, 2019

Mutual fund investing is similar yet different to surge pricing. We get the same experience but could pay drastically different fees. 

Institutional shares classes: What investors need to understand about different share classes before investing in mutual funds

I hate surge pricing. It is the most brutal when I most need that ride, or when I’m drenched from head to toe from the sudden downpour.

Surge, or dynamic pricing, has become pretty efficient for all modes of transportation. If you have not yet booked your Chinese New Year getaway, that flight to Phuket is now 4x the normal price, not to mention the surging hotel prices too.

We live in an increasingly efficient world, where we can pay huge premiums for the same experience because of the almost immediate reflection of the laws of supply and demand in price.

It seems rather unfair, but it works in our capitalist world.

Mutual fund (unit trust) investing is similar yet different. We get the same experience but could pay drastically different fees.

Even more annoyingly, this is due to sales incentives rather than the laws of supply and demand.


You could be investing in the same fund as your friend, but paying different fees because you’ve invested in different share classes. The funds’ objectives and underlying investments are the same across all the share classes and managed by the same fund manager, but each share class has a different fee (expense ratio) and perhaps minimum investment requirement.

To make it even more confusing, the bank or broker that you buy the fund from may also only be able to offer you certain share classes, depending on the distribution agreement that they have with the fund house, or their internal rules to maximise on sales commissions (trailer fees).

Read more: A guide to getting ripped off: a dictionary on mutual fund fees

Mutual funds commonly have several share classes, but these can generally be categorized into retail or institutional share classes. For example, let's say there is a mutual fund called Singapore’s Money Making Fund (MMF) with the following share classes:

  • Class A is a retail share class with a minimum investment amount of $1000, and a total expense ratio of 2%.
  • Class B is a retail share class with a minimum investment amount of $5000, and a total expense ratio of 1.7%. 
  • Class I is an institutional share class with a minimum investment amount of $10,000,000, and a total expense ratio of 0.5%.

There is no naming convention for mutual fund share classes in Singapore, so you need to read the Prospectus and Product Highlight Sheet carefully to get a better understanding of which share class you are investing in.

The institutional clean share class carries the lowest fees (total expense ratio) of the different share classes of the same fund. Why is there a significant fee difference between the retail share classes and the institutional share class?

The answer lies in sales incentives. One of the key differences between institutional and retail share classes is the trailer fee, which is embedded in the total expense ratio of a retail share class. This is essentially a sales commission that is paid on a recurring basis by the fund manager to the distributor/banker/broker that sold you the fund. This includes popular online fund distribution platforms.

Because of its lower fees, the institutional clean share class inevitably generates the highest returns of the different share classes. Unfortunately, there is usually a high minimum investment amount required to invest in the institutional share class, which is typically around $10,000,000. The institutional share class is usually targeted towards pension funds, hedge funds or large family offices.

Fees matter, a lot: a reminder that a difference in fees of 1% equates to over 300% of return difference after 30 years (assuming a global stock market return).

At Endowus, we believe that all investors deserve access to the best investment products at the lowest cost possible. This is why we built our portfolios on best-in-class institutional share class funds, which are now available to retail investors with a minimum investment of $10,000.

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
THE WORLD IN VIEW

Business 

Goldman Sachs’s tactic in Malaysian fraud case: Smear an ex-partner (NY Times)

MacKenzie Bezos could become world's richest woman with divorce (Bloomberg)

Why China rents out its pandas (The Economist)

Markets

John Bogle made investors richer — and the financial industry poorer (Washington Post)

The U.S. and China are making Davos a mess for everyone else (Bloomberg)

Four Chinese tycoons just transferred US$17 billion of their wealth to trusts as government toughens up tax regime (SCMP)

Singapore

Insurers tap startup platforms to open new distribution channels (Business Times)

Singapore home sales face a billion-dollar litmus test (Bloomberg)

CapitaLand's S$11b buy is big, but will it be beautiful? (Business Times)

Longform

Amazon ruined online shopping (The Atlantic)

Podcasts

TED: Approaching with kindness (PlayerFM // 52 mins)

Good to Know

The biggest technology failures of 2018 (MIT Technology Review)

Triathlons, ultramarathons and ambitious baking: why is modern leisure so competitive? (The Guardian)

How Hong Kong can solve its waste crisis and become the Silicon Valley of recycling (SCMP)

Our pets: the key to the obesity crisis? (BBC) 

Nike's new self-lacing basketball shoe is actually smart (Wired)

The real cost of cheap groceries (Fortune)

US shutdown: Canadian air traffic controllers send pizza to US workers (BBC)

These are the biggest risks facing our world in 2019 (World Economic Forum)

SUBSCRIBE TO THE KNOW

Mutual fund investing: How to read a mutual fund factsheet

January 10, 2019

By understanding the information displayed on a fund factsheet, you will be able to quickly assess how each fund operates. 

 In a previous article, we wrote about what Singapore-based investors need to understand about unit trusts (also known as mutual funds) before they start investing. We highlighted several characteristics, such as investment methodology, asset classes the fund is investing into and who the fund manager is, that investors need to know when they are considering investing in a fund.

The good news is that most of this important information can be easily found in a fund factsheet. Every mutual fund has a factsheet which is updated on a regular basis. By understanding the information displayed on a fund factsheet, you will be able to quickly assess how each fund operates. Factsheet formats tend to vary between different fund managers, but they will contain similar information.

As an example, we will go through a fund factsheet from PIMCO’s Emerging Markets Bond Fund SGD. PIMCO is one of the world's leading fixed income investment managers managing $1.77 trillion in assets. Note that this is a retail E share class fund, and Endowus uses the institutional share class (which has lower fees) to build our portfolios.

 

Let’s look at each of the individual sections: 
1) Fund Manager and Name
The fund name can generally be broken down into the fund manager (PIMCO), the geographical region (Emerging Markets) and asset class (Bond Fund). You should do your own research or ensure that your investment advisor has done due diligence on the fund manager, as you are entrusting them to make the right investment decisions on your behalf. Look at the fund manager’s investment philosophy and methodology, track record, and assets they have under management.
2) Fund Description
This outlines the fund’s investment objective (what the fund is aiming to achieve) and investment strategy (how the fund is designed to potentially achieve it). Class E refers to the Fund’s share class. Each fund will have various share classes with different fee structures and minimum investment amounts.
3) Key Fund Facts

ISIN: The ISIN (International Securities Identification Number) is an unique identifier and the best way to identify your fund across different platforms. Ticker symbols can sometimes vary.

Inception Date: The date that the fund started trading. Generally you should look at funds with a longer track record, but you can also take into consideration if the Fund Manager has run similar strategies in the past.

Unified Management Fee: An annual fee the funds will charge for fund expenses, including management fees, administrative fees, and operating costs. This is deducted from a fund’s net asset value (NAV), and accrued on a daily basis.This is more commonly referred to as Total Expense Ratio (TER) or Ongoing Charges Figure (OCF).

Fund Type: This is the fund’s country of residence, and is important to note because of potential tax implications. This can sometimes be referred to as Domicile.

Total Net Assets: The total amount of assets in the Fund.

Accumulation / Income: Accumulation share class means that any dividends or interest received will be reinvested back into the fund, with no additional charge or fees in reinvesting. Income share class means that any dividends or interest received will be periodically distributed by the Fund Manager to the investor.

4) Performance

This shows the fund’s performance compared to its benchmark during various time periods. Understanding the benchmark is key when comparing performance data - look at how closely the fund tracks its underlying benchmark in terms of underlying investments. For example, you should expect a low tracking error for ETFs compared to its underlying index.

Returns are typically shown over a 1-year, 3-year, 5-year and/or 10-year time frame, and you will often see fund performance shown by calendar year as well. It’s important to look at returns over longer time periods, and remember that past performance is not a guarantee of future returns.

5) Characteristics

Fund Statistics: This shows some of the key statistics of the Fund, such as effective duration and average credit quality. For equity funds, some of the more common statistics shown would be beta, standard deviation and Sharpe ratio.

Holdings: Most factsheets will show the Fund’s top holdings. Given PIMCO’s diversified bond portfolio, you can see here that the largest holding (Sberbank bond) makes up ~ 1.5% of the total market value of the Fund.

Sector Allocation: This shows a breakdown of how the Fund is allocated in terms of different sectors. For equity funds, it’s more common to see sector exposure by industry of the Fund’s underlying investments.

Top 10 Currency Exposure: This shows a breakdown of the largest currency exposures of the Fund. For equity funds, it’s more common to see geographical exposure of the Fund’s underlying investments.

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A (lack) of forecast for 2019

January 5, 2019

It’s that time of the year, when investment strategists all over the world perform an annual ritual of predicting where the markets will go...

“Those who have knowledge, do not predict. Those who predict, do not have knowledge.”
- Lao Tzu, 6th-century Chinese philosopher

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
-Warren Buffett, 20th and 21st-century investor
TAKEAWAY OF THE WEEK

You have probably received a dozen articles on 2019 predictions. It’s that time of the year when investment strategists all over the world perform their annual ritual of predicting where the markets will go in in the upcoming year. They put on their thinking caps and evaluate everything from the global economy, political instability to interest rates. Full of confidence and bravado, they predict what stocks to buy, year-end targets for market indices, and when the markets will tank.

Memories are short and there is naturally little mention of the nearly universal failure to predict with any precision. Their forecasts and clairvoyance are, for the most part, exercises in futility. Predicting the future does not seem to be a strong suit of the investment world.

We looked back at predictions made a year ago for the S&P 500.

In 2018, the S&P 500 returned -4.38%, including dividends, closing out at 2,506.

Of the Wall Street bigwigs, JP Morgan and Credit Suisse were two of the more bullish banks and forecasted the S&P 500 to end the year at 3,000. They were only off by about 20%. Morgan Stanley was the least far off but had predicted a gain of 2-3%, so they still missed the target by over 6%.

2017 was no different - not a single strategist at the top banks saw the S&P 500 Index rising as much as it did. The average gain predicted was 5.5%, versus the actual gain of over 21%.

Isn’t it strange that we never see anyone refer to their prior forecast at the end of the year? Despite all the effort they put into making and promoting it?

A caveat to this statement: In the rare case that the forecaster is accurate (or even just closest), we will hear it paraded in the news for weeks as he or she goes around town, chest pumped, spitting forecasts of the future.

Most of the time, strategists at investment houses will forecast high single-digit returns for the S&P 500, even though the index has fallen outside of the range of most forecasts almost all years. Historically, the US stock market has indeed averaged high single-digit annual returns over decades, so these forecasts do make sense but are clearly meaningless on shorter time horizons.

Most years, returns are not near to the long-term average. Though the long-term average is a good indicator of what to expect in the long-run, few single years fall anywhere close (Read more in our article here).

Career risk also stops the investment gurus from making outlandish forecasts (this is not the case in the Bitcoin world for example, where it was predicted by some to hit US$100,000 in 2018).

Central banks surprisingly do no better in their forecasts. A Brussels economic think-tank Bruegel has shown that ECB forecasts for inflation and unemployment rates have proven to be systemically incorrect over the past 5 years.  Core inflation has remained broadly stable at 1%, despite their prediction of increases since December 2013, when these forecasts were made publicly available for the first time. Other central banks have made similar erroneous forecasts.

It’s safe to say that short-term predictions are fairly worthless, and paying attention to forecasts is a wasted effort. As economist John Galbraith once put it:

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

With a healthy dose of humility, we need to admit that we all have little clue of where the markets will go over the next year.  

Historical data provides a good understanding of the behaviour of asset classes over the long-term. Global equities, for example, have produced a real return of around 7%. But any near-term price movements of 1, 5, or even 10 years are merely noise for the long-term investor. If you believe in the long-term economic progress of the world, then you should own the market through ups and downs, and ignore the noise, or any ‘gurus’ who claim to offer psychic advice.

Just for fun, here is a summary of predictions for 2019:

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THE WORLD IN VIEW

Business 

A phoneless vision: Masayoshi Son floats part of SoftBank to help pay for his huge tech bets (The Economist)

Embracing Apple's boring future (The Atlantic)

This is why economists are increasingly studying sports (World Economic Forum);

Markets

Ray Dalio: To help put recent economic & market moves in perspective (Linkedin)

The worst-performing endowments have these things in common (Institutional Investor)

For hedge funds this year, $1 billion is the loneliest number (Bloomberg)

Singapore

Tesla's Musk says Singapore government has been unwelcoming (Bloomberg)

Banks partner fintechs in quest for digital dominance (Business Times)

Longform

How much of the Internet Is fake? Turns out, a lot of it, actually. (NY Mag)

Podcasts

How to be happy: Secrets of Denmark's happiness epidemic (Freakonomics // 37 mins)

Good to Know

1 woman, 12 months, 52 places (NY Times) 

Amateur buyers of fine Burgundy fear a speculative bubble (The Economist)

Lab-grown meat is coming, whether you like it or not (Wired)

99 good news stories you probably didn’t hear about in 2018 (Medium)

Japan’s sushi king shells out record US$3 million at Tokyo’s new year fish auction (SCMP)

Where to go in 2019 (Bloomberg)
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“Hindsight is 20/20” - we all love to say

December 15, 2018

Trying to asset allocate tactically by market is not easy. Passively’ owning the S&P 500 only this actually an active decision that forgoes...

TAKEAWAY OF THE WEEK
Let’s rewind to the early 70s:

Nixon was President.
Mao was Chairman.
Elvis was on tour.
The first pocket calculator was released.
Japan’s stock market was the darling of the investment world.

From 1970 to 1979, Japan’s stock market was up 396% versus the US, which was only up 77%.

Then the 80s happened:

Michael Jackson released Thriller.
E.T. was the highest grossing film of the decade.
The War on Drugs began.
Apple Computer introduced Macintosh.
Japan’s stock market remained the darling of the investment world.

From 1980 to 1989, Japan’s stock market was up 1,143% versus the US, which was only up 404%.  

Japan’s stock market grew so big that it accounted for 45% of the global stock market cap. The US followed at 33%. Eight out of ten of the largest corporations in the world were Japanese.

And the 90s were interesting too:

The World Wide Web arrived.
Friends and Seinfeld ruled TV.
We all bought a Discman.
Microsoft hit its stride.
Global warming became a concern.
Japan’s stock market lost itsluster.

From 1990 to 1999, Japan’s stock market was down 7% versus the US, which was up 433%.

The 2000s were globalising:

The iPod showed up, then the iPhone.
9-11 shocked the world.
Euro was adopted.
Google and Facebook connected all of us.
The global financial crisis.

From 2000 to 2009, Japan’s stock market was down 30%, the US was down 9%, and emerging markets led the pack, up 162%.

Decade-by-Decade Returns of Global Markets (USD)

Over the course of 20 years from 1970 to 1989,
Japan market rose over 6,100%,
US market rose 890%,
and the rest of the developed world rose just over 1,100%.

How would you have positioned your investments for the future at that point in time? It would have been easy to say Japan was overheating after the 1970s, but you would have missed another ten years of Japan’s dominance.

In the following 27 years from 1990 to 2017,
Japan returned a pathetic 120%,
The US returned 1,374%,
and the rest of the developed world rose 1089%.

Trying to asset allocate tactically by market is no easy feat. Some investors say they want to ‘passively’ own the S&P 500 only, but this is actually an active decision that forgoes most of the world.

We prefer to own a truly globally diversified portfolio - one that we can stick with through geopolitical, economic, and pop culture shocks.

It will likely not be the best performing portfolio at some points in time, as it will be dragged down by its level of diversification. But that being said, it will avoid the far bigger evil: periods of missing out on stock market growth in other parts of the world.

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THE WORLD IN VIEW

Business 

How the 0.001% invest (The Economist)

This San Francisco investor wants to revolutionize private equity. Is he crazy? (Institutional Investor)

A surprising push by the invisible hand: Why more companies are doing better by being good (Forbes)

Startups aren't cool anymore (The Atlantic)

Markets

2019 forecast: Predictions will be wrong, random or worse (Bloomberg)

Why do so many people fall for financial scams? (The Economist)

Singapore

Laws of attraction, dating and factor-based investing (Business Times)

Singapore's US$200k starter salaries: Why education pays the price (SCMP)

All together now: The growing co-living scene in Singapore (Business Times)

Longform

Jeffrey Sachs: The war on Huawei (Project Syndicate)

Uber is headed for a crash (NY Mag)

Podcasts

TED: What does everyday courage look like? (NPR // 12 mins)

Good to Know

How Tim Cook, CEO of Apple – who buys his underwear in sales – spends his US$625 million fortune (SCMP)

Real crazy rich Asian wedding to cost $100 million (Bloomberg)

Why are we still so fat? (NY Times)

The joy of no-gift Christmas (The Atlantic)

2018 wasn’t a complete horror show. Here are four things that probably got better. (Vox)

Researchers found one way that long-term marriages get happier (Qz)

Your apps know where you were last night, and they’re not keeping it secret (NY Times)
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When you can’t see the forest for the trees

November 30, 2018

Sometimes you need to take a step back to see the bigger picture. Money, or rather our investments and life assets are no different. 

TAKEAWAY OF THE WEEK
A holistic approach to asset allocation

Water Lilies (1914-26)
Source: Joy of
Musuems

The paintings can look like an abstract blur of colour from up close. But when you take a few steps back, the seemingly random strokes transform into water lilies and the reflection of the clouds above, capturing the constantly changing light and its interplay with the landscape. There are benches placed at MOMA several feet away from the paintings so that visitors can view and appreciate this monumental triptych in its entirety.

Sometimes you need to take a step back to see the bigger picture. Money, or rather our investments and life assets are no different. We tend to put things in buckets. For example, when we think of our asset allocation, we focus on the split between stocks and bonds in our investment portfolio. But anything of value can be considered an asset - from traditional public market securities like stocks and bonds, to cash deposits at the bank, to private investments such as real estate or your wine collection. We should think about our overarching allocation of wealth in a holistic manner across all our assets.

Most of us have cash in one or two bank accounts, some unit trusts with one brokerage, a mix of stocks and bonds with another brokerage, a CPF account with a mixture of cash and CPFIS investments, restricted shares from a former employer, some real estate or private business interests that should all be taken into account. Because in reality, we have one investment portfolio that is just divided into separate buckets. In aggregate, the buckets form one portfolio with its own risk and return characteristics. But it’s difficult to understand what these are when we focus only on the separate buckets.

Let’s say, for example, that your total net worth is $1 million with:

  • $250,000 in deposits at the bank;
  • $100,000 with Broker A, where 50% of your portfolio is in cash;
  • $100,000 with Broker B, where 10% of your portfolio is in cash;
  • $200,000 in CPF, where 30% is sitting in your OA; and
  • your property makes up the bulk of your remaining net worth.

Do you want to have a 37% ($370,000) allocation to cash? Is this overall allocation in-line with your investment goals and risk tolerance? You may not even have realized this.

Being a financially efficient person means allocating your wealth holistically so it works towards your goals. It does not matter if your investment portfolio did great last year if you had a huge over-allocation to cash.

Taking a holistic approach to your portfolio means looking at all your assets as part of a whole, rather than viewing them as separate buckets.  When you only focus on the details of each ‘bucket’, it’s easy to lose sight of the forest for the trees.

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
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THE WORLD IN VIEW

Business 

The $200 trillion gold rush that has reshaped private banking (Bloomberg)

How the geography of startups and innovation is changing (Harvard Business Review)<

How a Chinese robotics company made Segway (almost) cool (The Economist)

Markets

The stock market doesn't care about you (A Wealth of Common Sense)

Why you would not have invested with Warren Buffett (Behavioral Value Investor)

A guide to China's $9 trillion shadow-banking maze (Bloomberg)

Singapore

Singapore's next leader Heng Swee Keat: Media's love affair only tells half the story (SCMP)

Go-Jek president outlines plan to break Grab’s dominance (Channel News Asia) 

Longform

Applying artificial intelligence for social good (Mckinsey)

Podcasts

Malcolm Gladwell: What does spaghetti have to do with happiness? (NPR // 18 mins)

Good to Know

The 'Geno-Economists' say DNA can predict our chances of success (NY Times)

The life-changing art of asking instead of telling (Quartz)

China's 'most beautiful criminal' turns herself in (SCMP)

The 100 greatest innovations of 2018 (Popular Science)

Stories behind some of the world's most iconic candies (NY Times)

The miseducation of Sheryl Sandberg (Vanity Fair)

Secret luxury homes: how the ultra-rich hide their properties (FT)

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What Singapore-based investors need to know before investing in unit trusts or ETFs

November 25, 2018

-

 When it comes to investing, Singapore investors have plenty of options to explore since our country is one of the leading financial hubs in Asia. Experienced investors can choose to invest in a diverse range of stocks or bonds, directly on the Singapore Exchange (SGX).

Investors who prefer a more hands-off approach can also invest via their financial advisers, who will normally recommend unit trusts, also known as mutual funds, for them to invest into. Some financial advisers and more recently, “robo-advisors” may also recommend investing in a portfolio of ETFs.

Unit trusts and ETFs are funds that pool together money from different investors for a fund manager to invest, on behalf of the investors, in assets that they believe generate a return for the investors.

Before you decide to park your money in a unit trust or ETF, it’s important that you first understand some of their key characteristics. Doing so can help you identify the right funds to invest in.


Investment methodology
Every fund has an investment methodology. This methodology should communicate the approach that the fund managers will take for their investment decisions. For some funds, this could be something relatively straightforward, such as investing in the equities of the biggest 30 companies in a particular country or region or tracking a certain index.

Other funds may have their own investment philosophies, such as traditional active stock-picking, or systematic strategies.

For example, Dimensional Financial Advisors (DFA) is a global investment manager that believes that the market is already able to do what they do best – reflect all available information into prices. DFA takes a systematic approach to investing and focuses its efforts on creating more value for its clients through its evidence and financial science-based construction of portfolios, delivered in a cost-efficient manner. They systematically tilt their portfolios to buy more stock of companies with certain characteristics, such as smaller size, value, or profitability. They do so because scientific research has shown that they are the only three proven factors of return that improve returns over the long term. They also believe this is an approach they can stick to, even during challenging market environments.

When you invest in a fund, it’s important that you know and understand the investment methodology of the fund and the track record of the fund managers running it. This methodology has to resonate with you. Otherwise, you will be investing in something that does not make sense to you, and when markets become volatile, you may struggle to stay invested

What the fund is investing in
There is a common misconception among new investors that investing into a unit trust or ETF means you are automatically building in broad diversification for your portfolio. This is not always true. You need to have an overview of what your fund is going to invest in. Typically, this can be segmented into a few key areas:

Location: The area or region the fund invests in. For example, the fund could invest globally or in only developed markets, or focus specifically on regions such as the US or Asia, or just single countries like China or India.

Sectors or themes: The industries the fund can invest in (i.e. technology or healthcare) or thematic funds (i.e. ageing or automation). 

Asset classes: Some funds invest strictly in equities only. Some funds invest in bonds or commodities. Others take a balanced portfolio approach, with a mix of both equities and bonds for example.

These are just a few broad areas that you should consider before investing in a fund. You should invest in unit trusts and ETFs which hold assets that you are comfortable owning.

You choose the fund, but the fund manager chooses the underlying investments
This simple statement is one that defines what investing in a fund is all about.

When you invest in funds, what you are essentially doing is choosing the fund managers, instead of the actual individual investments. The fund managers then choose what to invest your (and all the other investors’) money in. Even fund managers managing passive index-tracking ETFs will make active decisions in choosing a sample portfolio of securities to best replicate the underlying benchmark, because it may be too costly to mimic underlying indices entirely.

It’s ironic that many new investors do not pay enough attention to who is managing their money. If people who invest directly are already doing so much research on the assets that they are putting their money into, shouldn’t we be doing as much research on the individuals whom we are entrusting our money to?

When you park your money with fund managers, don’t take it for granted that all funds are equal. You should try to find out as much as you possibly can about the fund and the fund managers. Remember, they are the ones responsible for investing your money and making a return for you.


The fees you are paying
You invest because you want to generate a return and grow your wealth. However, if you invest through a unit trust or ETF, you will also incur an annual management fee (also known as the fund’s total expense ratio). Naturally, these fees eat into your investment returns.

New investors sometimes ignore small differences in management fees, thinking that the difference of 0.5% or 1.0% per annum doesn’t really matter. This is wrong.

Consider the example of an investor who invests $100,000 today and earns a return of 7% per annum for the next 30 years. Here’s how his returns will be impacted by just a small increase in fund management fees:

  • Scenario 1: Fund A charges him a management fee of 1.0%. After 30 years, his portfolio is worth $574,349. He would have paid a total fee of $84,801.
  • Scenario 2: Fund B charges him a management fee of 1.5%. After 30 years, his portfolio is worth $498,395. He would have paid a total fee of $116,129.
  • Scenario 3: Fund C charges him a management fee of 2.0%. After 30 years, his portfolio is worth $432,194. He would have paid a total fee of $141,521.
The management fee is just one type of fee that you pay. For unit trusts, other common fees include initial sales charges, payable when you first invest, wrap fees, as well as redemption charges, which may apply when you redeem units. For ETFs, you will be charged a brokerage fee when you buy or sell. All these additional costs will eat into your investment returns.

In the example above, you can see that a difference of 1.0% per annum in management fee works out to be more than $142,000 difference in returns over a 30-year period. This is based on an initial investment of $100,000 and a return of 7.0% per annum. If the investment is larger and the returns are higher, the fees will be higher as well.

Invest wisely
At endowus, we believe that for long-term, buy-and-hold investors who do not need intra-day trading liquidity, it may be more effective to invest in unit trusts which trade at NAV, rather than trying to time the market when you invest in ETFs and  potentially paying more than what the underlying assets of the ETF are worth.

At the same time, we believe in keeping our costs low, so that our clients keep more of their returns. Our all-in Access Fee is from 0.25% to 0.60%, depending on your assets under advice. This all-in Access Fee includes advice, investment, rebalancing, transfer and brokerage, all at a fraction of the industry average. On top of this, you pay a fund-level fee of between 0.50% to 0.56%, which is charged by the fund managers out of the fund’s daily NAV.

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Durians and diversification

November 17, 2018

Diversification is an investment principle that we all know we should be following. But we also need to understand what diversification is not:

TAKEAWAY OF THE WEEK
What diversification is not

There are some things we can all agree on. Books are more enjoyable to read in paper form. Durian should be a superfood. Also, that diversification is a good thing. It’s an investment principle that we all know we should be following. Who doesn’t want to take less risk and enhance their portfolio returns at the same time? (a.k.a a free lunch?)

But we also need to understand what diversification is not:

1) You can’t diversify your way out of a financial storm
Having a diversified portfolio will not protect you from market volatility in the short-term - you will still have big down days or even consecutive months of losses. It will not prevent bear markets and it cannot protect you against market reactions to Trump’s latest Tweet. Diversification may or may not help in the short-term, but it’s really a strategy for the long-term investor that will help you smoothen out returns over market cycles.

2) More is not always better
Having a portfolio with more components does not mean that it’s more diversified. This might be true if all the asset returns are uncorrelated (i.e. the prices do not rise and fall together), but this is unlikely to hold true.  Also correlations are constantly changing, even assets that were uncorrelated in the past may be in the future.

Each asset you hold is less important than how they interact together (known as covariance) to reduce your portfolio’s overall risk. The marginal benefit of adding another investment decreases past a certain point . This means adding a 20th fund to your portfolio will probably not meaningfully improve risk-adjusted returns, and your advisor might just be building you a very complex portfolio to justify their own existence and high fees.  

3) Diversification is not exciting
In fact, it’s pretty dull to talk about a portfolio that gives you globally diversified exposure to the world. You’re not going to hit any home runs like Amazon, but you’re also less likely to strike out with all your life savings in Lehman Brothers. You can leave the excitement to other parts of your life - being able to live the life you want after retirement is exciting, but the path to growing your retirement nest egg to get there doesn’t need to be.  

Diversification is a strategy that plays out over a long period of time, and give you a greater chance of achieving your goals without having to predict how the future will turn out.  As Howard Marks said:

“You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.”

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THE WORLD IN VIEW

Business 

Morgan Stanley's mutual funds, investment bank and Palantir dispute over Palantir's valuation (Bloomberg)

The inside tale of how Nokia lost a market it dominated (The Economist)

Desperate Chinese middle class take big risks to move money, and themselves, overseas (SCMP)

Markets

Cheap is great, but free will cost you (Bloomberg)

Causeway Bay’s Russell Street trumps 5th Avenue in New York as the world’s most expensive retail rental market (SCMP)

The market’s been falling. I’m putting my money in stocks anyway. (NY Times)

Singapore

Ho Kwon Ping: How Singapore can play a crucial role in the emerging Pax Sinica by bridging East and West (SCMP)

Facebook stands ground after Singapore criticism over 1MDB post (Bloomberg)

Go-Jek partners DBS to offer regional payments services (Straits Times)

Longform

Into the Brexit endgame (The Economist)

Podcasts

TED Radio Hour: Why do we undervalue introverts? (NPR // 18 mins)

Good to Know

Dizzying heights: Vertical tourism in China (The Atlantic)

These guys deal with cannabis in Singapore - and don't feel paranoid (SCMP)

Louis Armstrong’s life in letters, music and art (NY Times)

16 popular psychology myths you probably still believe (Nat Eliason)

Stan Lee, the progressive genius: A tribute to Marvel's mythmaker (The Guardian)

Low carb diets are still a metabolic mystery (Popular Science)

UK still top of the class for rich Asians (SCMP)

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