At Providend, we appear to take a “passive” approach to investing by not doing the typical tactical asset allocation (TAA), stock/fund selection or market timing approach, so it might seem that not much is going on behind the scenes. However, that is far from the case, and this article will shed some light on the active approach that Providend takes in managing your investment portfolio.
Why doesn’t Providend do the typical active investing?
Active investing, in the form of TAA, stock/fund selection or market timing can generate outsized returns if you get it right. However, the odds of getting it right consistently are shown to be very low. For example, SPIVA data shows that from 2001 to 2022, the majority (>50%) of large cap domestic equity funds underperform the S&P 500 every year except for 3 years. What this means is that running a strategy with elements of tactical switching, stock picking or market timing will lower your probability of matching the return of the index, let alone getting outperformance.
Do you need active investing to achieve your wealth goals?
The S&P 500 Index has returned 7.02% annualized over this same period (2001-2022), which equates to a dollar investing in 2001 becoming $4.45 in 2022. This period covers the Great Financial Crisis (GFC), Covid pandemic and the market fall in 2022, so with just the market return you can grow your wealth 4.45x over 21 years. Why jeopardize that with trying a strategy that lowers your odds?
Active investing at Providend – What it entails
Instead of pursuing an active strategy that does not put the odds in our favour, we focus on being active where it matters in the following 3 areas.
- We are always actively looking to improve the investment experience for clients
Investing is a continuous process of seeking improvement in small increments. When we first started on the journey to reduce our use of actively managed funds, we began with what we had, Index ETFs that were listed on the local exchange, SGX.
We did not stop there. Next, we met Dimensional Fund Advisers, and worked with them to bring their funds to the Singapore market, first for AI (Accredited Investors) only, and then subsequently launched a suite of SGD denominated retail funds. This allowed us to create our suite of Index Plus portfolios using Dimensional’s successful strategy of targeting higher expected return factors such as value and small caps that deliver long term returns that are higher than the market.
While the Index Plus portfolios have been a great success, we understand that factor investing is not for everyone. Alongside this effort, we continued to work with other managers like Blackrock to use their Index funds for AI clients. Recently, these funds have been registered for retail distribution in Singapore and we have since incorporated their funds into our Index Plus USD portfolios while still maintaining a suite of Index Portfolios (in USD) for our AI clients.
Lastly, we have also recently begun working with a new platform, Saxo Markets, which gives us the capability to have both listed and unlisted funds in the same portfolio. For example, on Saxo we have incorporated ETFs tracking an index of CGB’s (Chinese Government Bonds) into our Index Plus portfolios for further diversification as the Dimensional funds currently do not invest in that asset class.
These are the small steps that we are constantly and actively taking to incrementally improve our portfolios – either by reducing tracking error or costs, or any other ways to improve expected returns that delivers a more positive investment experience for clients.
- We are always actively checking that our investment portfolios are performing as we expect them to
The investment process does not just end when we select funds for a portfolio. There is continuous monitoring in place to ensure that the funds in our portfolios are behaving as we would expect them to.
For index funds, this means that we monitor the performance of the fund vs their benchmark to ensure that the funds are not deviating too far from the benchmark (tracking error). We do this by both checking on the fund performance as reported by the manager, and also through a third party source such as Morningstar which Providend subscribes to.
For factor funds such as Dimensional, we not only monitor the performance, but we also do a regular call with the fund manager to get an update on the fund strategy and allocation to check on the consistency of the manager. As with any strategy, we want to ensure that the manager is following the strategy and in Dimensional’s case, we want to make sure that they are consistent in their tilts towards value and small cap stocks.
Finally, in the rare case where we find a fund not performing up to our expectations, we will begin the discussion to replace it with a different fund. To ensure that this process does not take up too much time, we also constantly monitor a set of funds that are “possibles” for our portfolio from other managers, and we also seek to bring these funds on to the investment platforms that we work with ahead of time if possible.
These are the ways that we actively check on our portfolio performance and composition on a regular basis.
- We are always actively checking our investment assumptions used for the client’s wealth plan
Our clients come to us for a wealth plan to achieve their financial goals. This wealth plan is underpinned by a set of assumptions on the return of financial assets such as stocks and bonds.
There are many ways to look at these assumptions. One way is to use historical returns of the asset classes. Another way is to forecast the return with some models, and this data is usually published by various asset managers and can be used as a guide. While both methods are valid, we actively look for a method that allows us to look ahead, but yet use history as a guide.
In the past year, we have been working with our Senior Adviser, Dr Chen Peng, to incorporate the formula he has developed, the Ibbotson-Chen model, to calculate the equity risk premium that underpins some of the key assumptions for our investment portfolios. We feel that this way, we will be able to guide client expectations for their wealth plan in a more consistent manner and improve the robustness of our planning methodology.
This way, we can be actively checking the investment assumptions that our client’s plans are based on.
Adding value through active investing – the Providend way
We believe that in the ways we are active, we can increase the odds of our clients having a successful investment experience. By avoiding the typical styles of active management, we are already improving the odds. Actively looking for incremental ways to improve the portfolio, actively working with the managers to ensure consistency of implementation, and actively monitoring the assumptions for our wealth plans add to the odds of success, and ultimately benefits our clients who will have the peace of mind when they achieve their wealth goals.
This is an original article written by Cheng Chye Hsern, Head of Investment at Providend, the first fee-only wealth advisory firm in Southeast Asia and a leading wealth advisory firm in Asia.
For more related resources, check out:
1. The Futility of the Active Versus Passive Debate
2. Lump Sum Investing vs DCA, Is There a Clear Winner?
3. Providend’s Money Wisdom Podcast S2E8: Our Pursuit of the Perfect Portfolio for Long-Term Investors
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current estate plan, investment portfolio, financial and/or retirement plan, make an appointment with us today.