My courtship with Vanguard funds started 16 years ago in 2004. Providend was licensed to give advice only about a year back and while we had an investment philosophy & process in place, there were no low-cost index funds that we could use to execute it. As a young CEO then (I was only 34 years old back then), I bravely asked for a meeting with the then Vanguard Singapore’s country head, Mr. Jon Robinson. He was a nice guy. He patiently listened to my impassioned plea on why Vanguard should register their funds in Singapore for the retail market. But at the end of my plea, he told me that he couldn’t help me because there is no demand for funds like Vanguard in Singapore. By no demand, he meant that the advisory industry does not like to use low-cost funds for clients because funds like Vanguard do not pay trailer commissions (a portion of the management fee that fund managers charged that is given to distributors) and so distributors rather carry actively managed funds with high management fees. So Providend had no choice then, but to use actively managed funds, though we worked out a way with our platform back then to rebate the trail commissions back to our clients.
But our obsession with index funds is not just due to its low-cost. It is also because most actively managed funds do not perform better than the average returns of the markets and for those that do, they don’t do it consistently. Why is this so? There are primarily 2 reasons.
Firstly, fund managers who try to beat market returns do so by trying to identify mispriced securities or/and through market timing. In trying to identify mispriced securities, fund managers attempt to forecast earnings of the stocks to arrive at what they think they should be priced. And if the value that they arrive at is higher than what these stocks are trading in the market now, they are undervalued, and the managers will then look to buy them. For market timing, managers try to outguess everyone by deciding when is the best time to buy or sell based on economic forecast, geopolitical events etc. These methods are predictive in nature and evidence shows that the success rate is low and if there are any successes, they are difficult to replicate consistently. Secondly, active managers typically charge more in terms of management fees and these fees eat into the returns such that whatever benefits that may be derived from these activities are actually negated by the cost of doing so. So, it is not that we don’t believe that there are managers out there who can do better than the average returns of the market, but because only the minority can do it consistently, the risk of using them to achieve clients long term returns is simply too high and not worth it, since by simply using low-cost index funds, clients are able to achieve their life goals.
Sometime in 2014, I was approached by Dr Peng Chen of Dimensional Fund Advisors (who will, later on, become the first CEO of Dimensional Fund Advisors, Asia Pacific Ex-Japan) to find out our interest in using Dimensional if they were to come to Singapore. Although Dimensional is not exactly an index fund, its investment approach is one that is non-predictive nor forecasting, but one that is based on evidence and financial science. Most importantly, it is low-cost. I told Dr Peng that I was excited that Dimensional was coming and will definitely use it for my clients and very soon, we started using Dimensional for our clients in 2016. But our search for index funds that are registered for retail investors continued. In all, I met 3 other country heads of Vanguard after Mr. Jon Robinson left and in each and every meeting, I urged each of them to register the funds for the retail investors and finally in a meeting with Mr. Richard Wane (the final country head of Vanguard that Singapore will have), he shared with me that Vanguard was open to registering their funds for retail investors in Singapore, especially when there was an opportunity to manage our CPF monies for the Lifetime Retirement Investment Scheme (LRIS) that was proposed by the CPF Advisory Panel in 2016. It was an understatement to say that I was thrilled and over the next few months that ensued, I had many meetings with Mr. Wane and even spent a morning with the Vanguard senior leadership team that he invited to Singapore where I had the opportunity to explain to them on our CPF system and explained why Vanguard should be in Singapore. A few months later, I received good news from Mr. Wane that Vanguard has given him green light to register the funds for retail investors and he will begin to recruit a new team for this endeavour. Things began to move very quickly after that and by June of 2018, I was ready to send my team from Providend to Vanguard for training in preparation for the launch. Sadly, that training never happened. At the very last minute, Vanguard made the shock decision to close down the Singapore office and consolidate their Asia HQ at Hong Kong. Singapore continues to only be able to use Vanguard for our clients who are accredited, investors.
But just about 2 weeks ago, Vanguard announced that they will de-register all their funds for accredited investors from Singapore by the end of this year. While there are other more cumbersome but indirect ways for advisors to still access them out of Singapore, come to the end of this year, wealth advisors in Singapore will no longer be able to use Singapore-registered Vanguard funds even for their affluent clients. There is of course still the Lion Global Infinity S&P500 fund which advisers can use. It is essentially a Vanguard fund wrapped by Lion Global Investors (LGI). But because of the additional layer of fees charged by LGI, the total expense ratio of between 0.4% to 0.71% p.a. charged by various distributors makes it not the ideal index solution. Just for comparison, you can get the original Vanguard S&P500 fund at 0.2% p.a. and the ETF version for as low as 0.07% p.a.
To me, this is a sad state of affair for Singapore, a country aspiring to be a top wealth management destination in Asia but without a slew of index funds for the retail investors. So, you can imagine my angst when 2 years ago, MOM decided to limit the advisory fees charged by advisers for the CPF Investment Scheme to 0.4% p.a. (taken effect on 1 Oct 2020). While the intention is for the lowering of cost for investors, it may in fact do the opposite. This is because, with a lowered advisory fee, there is even lesser motivation for advisers to use low-cost funds like Dimensional and Vanguard because at least with high-cost actively managed funds, they can get a trail commission to compensate for a lowered advisory fee. This will result in investors buying expensive funds with their CPF, which may result in them not having a good investment experience. Furthermore, low-cost fund managers would now have lesser a business case to register their funds for the Singapore retail market. But for us, 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.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Wealth Advisory Firm and also Executive Director of MoneyOwl, Singapore’s first bionic financial adviser. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation. The edited version has been published in The Business Times Weekend on 24th October 2020.
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