On 24th October 2020, I wrote in this column about Providend’s courtship with Vanguard funds. It was a 16-year courtship which started in 2004, speaking with 4 country heads to get them to bring in their index funds for the Singapore-based investors. I shared that the reason why we are so obsessed with using index funds is not just due to its low cost, but also because most actively managed funds do not perform better than the average returns of the markets and for those that do, they do not do it consistently for the long term. I also shared the reasons for this. Firstly, the forecasting nature of trying to pick mispriced securities as well as the predictive nature of active management to try and outguess everyone by deciding when the best time is to buy or sell based on economic forecast, geopolitical events etc. has a low success rate. And if there are any successes, they are either difficult to replicate consistently or the higher management fees charged by active managers will eat into the returns. So, it is not that we do not believe that there are managers out there who can do better than the average returns of the market, but since only the minority can do it consistently, the risk of using active managers to achieve clients’ long-term returns is simply too high and especially not worth it when clients can obtain sufficient returns to meet their life goals by simply using low-cost index funds.
I also wrote that those 16 years trying to get Vanguard funds were difficult because we could not get them to agree to bring in their funds due to a lack of demand by the industry as index funds do not pay trailer commissions to advisers. And when there was finally a ray of hope in 2017 to register their funds for the retail investors, Vanguard dashed it at the eleventh hour in 2018. Mr. Richard Wane, then Vanguard Singapore’s country head told me that they had changed their minds and had even decided to close down the Singapore office. The final nail on the coffin came in 2020 when Vanguard decided to de-register all their funds from Singapore. At the end of the article in October 2020, I said “while our courtship with Vanguard has finally come to an end, our relentless pursuit for more low-cost and better-performing investment options to execute clients’ retirement plan will never end. In fact, it has triggered a start for a new beginning.”
So, after “recovering from a broken heart”, we went to speak with BlackRock (which happens to be the biggest asset management company in the world) and after 8 months of hard work and just 2 weeks ago, we finally managed to onboard the institutional share classes of the iShares index funds to form part of our total investment offerings to our clients.
You may ask what is the big deal with getting these index funds since one can just buy ETFs on their own to track the index? Well, as a start, it may surprise you to know that these institutional share classes of the iShares index funds are a lot cheaper than their ETF versions (see table below). Just looking at the equities portion, the iShares Developed World Index Fund (IE) which tracks the MSCI World Index is 50% cheaper than its ETF counterpart. The iShares Emerging Markets Index Fund (IE) which tracks the MSCI Emerging Markets Index is less than a third of the cost of its ETF cousin.
In fact, the cost of these institutional shares classes which we onboarded for our clients are either the same or even lower than most other ETFs tracking the same index. On top of that, they are Undertakings for the Collective Investment in Transferable Securities (UCITS) regulation funds which have tax advantages for non-US-domicile investors. ETFs that are listed on the US exchange do not have the same benefits. Last, but definitely not least, one of the key advantages of investing via a fund instead of an ETF is that you will face lesser implementation issues. When one buys or sells an ETF, it is like buying or selling a security from an exchange. There must be an available seller or buyer wanting to transact at the price that both of you agree. Sometimes, this does not happen easily and you have to wait a few days before you can buy or sell successfully. This can be especially troublesome and frustrating if you want to make regular investments by simply deducting your investment amount automatically from your bank account. You will not be faced with such liquidity issues if you use a fund and investing regularly can be a breeze.
During this pandemic, especially during periods of lockdowns, I learnt to cook for my family. My adult kids love the novelty of eating dad’s cooking even though mum cooks much better. My whole family (except for my wife) loves to eat steak. So, I went in search of a good cut, usually ribeye and turned to technology (the internet) for pointers on how to cook beef perfectly like a chef. But no matter how hard I try and even after 18 months, the steak never turned out the way the websites describe it to be. Although my children pretended to love it, once a while, when they cannot take my cooking anymore, we still go to our favourite steak restaurants to have our cravings for steak fixed. So, while we are excited to be able to offer these institutional share classes of index funds to our clients after an 8-month wait, we are very aware that just like cooking, having the best products (or the best cut of the steak) is only one part of the equation. We need a good wealth adviser (especially like a private chef) who understands exactly how we like our steak to be, to be able to whip up a good dish. Having said that, we will continue our relentless pursuit of more and better investment options for our clients.
The writer, Christopher Tan, is Chief Executive Officer of Providend, Singapore’s first fee-only wealth advisory firm. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation.
The edited version of this article has been published in the Money Wisdom Column of The Business Times Weekend on 24th July 2021.
For more related resources, check out:
1. The Relentless Pursuit of Better Investment Options (Part I)
2. RetireWell Part 3: Low Cost, Consistent Results
3. A Stitch in Time Saves Nine – Do Both Annual Health & Financial Screening
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