Tuesday, 13 November 2012

Why I Choose Funds Over Stocks

Note: This article was originally written for MyPaper. Sadly, due to layout constraints one chart didn't make it.

Here’s the reality: many local investors would be better off investing in a Singapore equity fund.  Am I saying all investors would be better off? No. There’s every chance a savvy stock picker will see their portfolio performance outperform the market. But not everyone has the time or inclination to wade through years of annual reports and mountains of data, and such people are a relatively small part of the population. 

So a good number of local investors would be better off in a fund.

Here’s why.

Singapore fund beat the STI over long time periods
The Straits Times Index is the benchmark index for the Singapore stock market, and consists of the 30 largest companies listed on the Singapore Exchange. Aberdeen Singapore Equity Fund is a portfolio of equities managed by Aberdeen Asset Management Asia. The fund is one of the longest running funds in the business, having launched in December 1997. 

Disclosure: I have a position in the Aberdeen Singapore Equity Fund.
Source: iFAST compilations, in S$ terms, dividends reinvested, extracted 2 Nov 2012.
The data shows, S$100 invested in the STI and the Aberdeen Singapore Equity Fund would have seen remarkably different growth over more than 14 years. From end-97 to end-Oct 2012, $100 in the STI would have grown into $202, while $100 in the Aberdeen fund would have grown into $472. I’d wager few, if any, stocks on the STI can boast similar growth over the same time period.

Singapore fund beats the STI over good and bad market conditions
To get a clearer picture of how the fund does in good and bad markets we look at the yearly returns of the fund against the STI. For simplicity, a year that sees positive returns is ‘good’, while a year that sees negative return is ‘bad’. A fund does better when it beats the benchmark.

Source: iFAST compilations, in S$ terms, dividends reinvested, extracted 2 Nov 2012.

More often or not, the fund beats the benchmark. In 9 good years, the fund did better 6 times. In bad years, the fund did better 5 times. Again, I’d wager few, if any, individual stocks can post similar performance.

Granted, an individual stock might outperform the STI and the fund for an extended period of time. But bearing in mind many of us, the author included, are not savvy stock pickers, the question is, “What are the odds of an individual picking such a stock?”

Many Funds Beat The STI in 2012
Passive investing purists will rightly point out I’ve only considered one fund. What about the rest? 

To be fair, Aberdeen Singapore Equity is the rare fund with 14+ years of track record we can pit against the STI to show an actively-managed fund can indeed beat an index. From end-2011 to end-Oct 2012 (also termed as ‘year-to-date’), a total of 12 Singapore equity funds have posted returns greater than the 15% STI return. 

I’ll just name three, including the Singapore Dividend Equity Fund, Amundi Spore Dividend Growth, and JF Singapore, but if you’re really curious, you can head down to Fundsupermart.com, and generate a list of Singapore Equity Funds to look at.

And that’s why, in the case of Singapore equity at least, I’ll choose a fund over a stock any time.

Thursday, 8 November 2012

Why Finance Needs Bloggers

Like Hugh Young says, the finance industry is essentially venal. I wish I could read the entire interview where he says it, but because the financial publishing industry covers, well, finance, the interview is hidden behind a venal paywall.

So I tend to think financial blogging is a good idea when it comes to exchanging opinions about all things financial. Singaporeans in general don’t have a whole lot in the way of unbiased financial advice. Possibly because the word advice has subverted by financial advisors, 80% at least 30% of which are well, venal.

The other side is the mainstream media, which, rather than cultivate a diversity of financial viewpoints, has focused almost exclusively on the local stock market. Sure, there is some basis for this approach, after all, it’s a safe story to write, and you know there are a ready pool of stock investors in the local market that you’ll never have to worry about no one reading about SIA’s disappointing 1H2013 or the Heineken/Thai Bev tussle over Asia Pacific Breweries.

But what you gain in safety you lose in experience, and when you cover a world as fast-moving as finance, a diversity of experience is required to keep tabs on all the innovative ways this industry works to speculate on uncertainty. How many people did you know said anything about DBS High Notes 5 prior to the Lehman Brother’s collapse? Could this have been avoided by more honest opinions and better discussions among individuals? No one really knows, but it wouldn’t hurt.

If one were to do a poll right now, and asked the average equity-only investor on the features of a managed futures is, or a fixed income fund, or a multi-asset strategy, or a hedge fund, or a macro strategy fund, or a structured product, or a foreign currency time deposit, or a finglefangledoodletwat, I think most would have better luck describing that last term.

I’m not calling for people to take a position on where the market is going or trying to bet on the next financial crisis; only to venture authentic opinions, clearly backed by evidence, logic and data where available. Like one Chan Chun Sing says, “Diversity is a survival strategy.”

And now I’m going to attempt to come to terms with quoting the same guy who made the Lanfang Republic of ancient China famous. At least his speeches have gotten better over time.