Wealth & Investing
Are cheaper funds really better bets?
Jordan N. Boslego , Are cheaper funds really better bets?

30 January 2021
Business Times Singapore
STBT
English
© 2021 Singapore Press Holdings Limited

Investors should be agnostic to absolute fees, and instead rank investment options on their value added net of costs.

NO MATTER what we're shopping for, there's nearly always a positive relation between quality and price. So why, on Wall Street of all places, would the best managers charge less?

Study after study concludes that on average, the lower an active fund's fees, the higher its net performance. As a result, it's now common for both individual and institutional investors to heavily weight expense ratios when selecting investments.

In fact, the latest Morningstar Fund Fee Study revealed that in 2019, a whopping 93 per cent of net new money into active strategies flowed into the least costly 10 per cent of funds. Clearly, investors have become allergic to paying above-average fees.

In commoditised markets with high standardisation and uniform quality, cheaper is indeed better. If there are two adjacent gas stations, for example, most people are happy to buy from whichever one is selling their preferred octane for a penny less.

Passive index funds are commodities too, so long as they offer enough liquidity and closely track the benchmark they're supposed to replicate.

In Economics 101, we learn that the price of a commodity is equal to its marginal cost. So, what does it cost Fidelity's algorithm to create one new share of an index-tracking mutual fund? Apparently not much, since those fees have now dropped to zero.

Actively managed funds, by contrast, are anything but commodities. Their very purpose is to offer a differentiated return stream compared to their competitors, and there can be a huge dispersion between the top and bottom performers in a given category.

First-class tickets aren't cheaper than flying coach, and tennis champions don't get paid less than ball boys and girls - that just wouldn't make sense. Therefore, the consistent finding of a backward cost-versus-performance relationship in active funds is highly counterintuitive. Why would we screen for bargain-bin funds in search of star managers?

In fact, highly skilled managers do charge more: They're called hedge funds. If a top-fee-quartile mutual fund seems expensive, try paying a 5 per cent management charge plus 44 per cent performance fee for the honour of investing in Renaissance Technologies' Medallion strategy.

While an inverse relationship between expense ratio and performance does indeed exist on average, it's a fallacy to use that fact as a basis to favour low-cost funds. Here's why:

Suppose that a given fund manager has no edge: In other words, their relative performance is just a function of fluctuating luck. Over time, their fund would be expected to mirror its benchmark on a gross basis.

Because the manager doesn't add any value, the more they charge, the worse their fund ranks versus peers: In the end, net performance simply equals the benchmark minus the manager's fee.

Unfortunately, this phenomenon describes most active long-only funds. Depending on the sample and methodology used, research consistently shows that from 60 per cent to more than 90 per cent of managers don't exhibit any persistent advantage over a passive benchmark.

That's where the backwards statistical relationship comes from. It's not that the best managers give discounts; it's that the market is swamped by a large number of strategies that fail to add value in excess of their costs.

As a result, if we had to choose an active fund at random, without observing manager skill, our best bet would simply be to pick the cheapest one. That's because we'd most likely end up with one of the many underperformers - in which case, the less we pay, the better.

Here's where this reasoning falls flat. In order for an investor to rationally allocate money to an active fund in the first place, they need to believe that their due diligence process can accurately measure quality.

If they have no way of discerning skill, taking a chance on ending up with an outperforming fund is a bet with long odds.

Instead, they should simply buy a passive index, because even the cheapest unskilled manager isn't worth paying for when benchmark exposure comes practically for free.

If the investor does have a way of evaluating quality, then expense ratios shouldn't matter much at all. Rather, all they care about is a fund's ability to deliver net outperformance, after its fees.

For example, if Renaissance allowed new assets into its Medallion fund, investors would line up to buy in. Fees only have meaning in comparison to returns.

Because skilled managers deliver value for their investors, it's natural that they also generally capture more value than their unskilled peers in the form of fees. This makes it unlikely that the best managers are clustered in the lowest-cost funds.

As a result, screening based on fees is a particularly bad idea, and could end up eliminating the strongest funds from the outset.

Incidentally, if fund investors' myopic focus on fees continues, high-ability portfolio managers will exit the market over time, and their employers will replace them with lower-cost stand-ins.

The extreme case is a market failure where only the "lemons" remain. Should that occur, active funds won't be worth buying at any price.

The takeaway? Investors should be agnostic to absolute fees, and instead rank investment options on their value added net of costs. If they aren't equipped to do that accurately, they'll be better served by avoiding the risks and expense of active management in favour of low-cost indexes.

* Jordan N. Boslego, CFA, is an environmental, social, and governance (ESG) researcher and co-founder of Empirically, a provider of predictive analytics and litigation support regarding investment manager selection.

Because skilled managers deliver value for their investors, it's natural that they also generally capture more value than their unskilled peers in the form of fees. This makes it unlikely that the best managers are clustered in the lowest-cost funds.

Singapore Press Holdings Limited

Companies & Markets
Brokers must 'act and think' like fintechs
Claudia Tan

8 February 2021
Business Times Singapore
STBT
English
© 2021 Singapore Press Holdings Limited
Firms are facing intense competition as more retail customers turn to self-directed online trading; this calls for change in mindset to stay relevant, says Phillip Securities exec

Singapore

SINGAPORE'S traditional retail broking business has been facing intense competition in recent years as more retail customers turn to self-directed online trading with the emergence of discount brokers.

Phillip Securities executive director Luke Lim said brokers that want to remain relevant will have to start "thinking and acting like a fintech". This entails taking a technology-driven approach with a focus on optimising operations and meeting customers' needs.

Mr Lim, who has been with Phillip Securities since 2002, has witnessed major changes to the industry.

Technology has transformed the way investors interact with capital markets. The speed of account opening, for instance, has in part contributed to a surge in stock trading.

Where once it might take a week or two to open a trading account, the process takes just a few days today.

Also, investors are more sophisticated these days and place greater emphasis on the speed of executing trades.

Adding to the pressure is the entry of many discount brokers to the local market in recent years. These brokers typically charge a reduced commission but do not provide other services such as investment advice.

Brokerage commissions - the main source of earnings for most securities houses in the past - can now be as low as 0.08 per cent of trade value.

Staying ahead of the game therefore boils down to a change in mindset, said Mr Lim. This is even if existing beliefs and assumptions previously yielded positive results.

He believes that local brokerages can catch up to fintechs in terms of technology and user experience, and those that are able to zero in and capture the needs of clients will have an edge over others.

To improve its competitive position and distribution scale in Singapore and Asia, Phillip Securities had in 2020 completed the acquisition of RHB Investment Bank's Singapore stockbroking business RHB Securities Singapore (RHBSS).

"RHBSS had what we were looking for to increase our scale and scope," said Mr Lim. "It has also reinforced our position as the largest retail broker in Singapore and allowed us to achieve greater economies of scale and offer more value to clients."

Before the acquisition, Phillip Securities was already the largest non-bank-backed retail broker in Singapore. The addition of RHBSS gives it a larger salesforce as well as customer pool. A majority of RHBSS staff were offered positions within PhillipCapital, with some 30 per cent taking up offers. The rest chose to retire or found alternatives.

Meanwhile, Phillip Securities's daily trading turnover has increased from S$150 million pre-merger to S$200 million.

An enlarged customer base will allow the brokerage to fast-track its digital strategy and launch innovative technology solutions on its online trading platform Poems, Mr Lim said.

But the challenge is ensuring clients are able to achieve their financial goals. As an example, Mr Lim notes that the average age of Phillip Securities's clients is rising.

"One of my worries is really the retirement planning of my existing clients today. Because when I look at the age demographics, in five years' time, a significant proportion of my clients will be 60 and above. So we need to be able to build out this retirement solution for them so that they can at least start planning ahead," he said.

Phillip Securities intends to develop its wealth management capabilities and ensure that its products cater to the needs of these older clients. Wealth management is something the brokerage industry is paying attention to, Mr Lim said, adding that the medium- to long-term nature of wealth advisory services will enhance client loyalty.

Phillip Securities will also be able to offer its wealth management services to RHBSS' clients.

To deal with pricing pressures, Mr Lim said Phillip Securities aims to remain competitive on price while enhancing its own capabilities.

"Our approach is not just to build ourselves, but also partner and invest in startups," said Mr Lim.

He cited working with fintechs as a good way to build tech capabilities.

Many fintechs find it difficult to roll out their products, said Mr Lim, adding that brokerages can serve as a platform for fintechs to launch their products and at the same time, learn from them.

Phillip Securities had, for instance, in 2017 started collaborating with fintech firm BondLinc to allow trading of bonds online.

It currently also has an innovation lab to look into new solutions such as chatbots, artificial intelligence and blockchain. Mr Lim is bullish on the prospects of blockchain in the financial services industry.

"We think blockchain would democratise financial services and potentially pass on cost savings to investors with the cost of processing coming down," he said.

At the same time, Mr Lim believes the brokerage business will continue to be about more than just better technology. He predicts full service brokerage firms such as Phillip Securities will need to move towards a high-tech but also high-touch approach -- a model smaller discount brokers would find difficult to compete with.

"It's not the first time we are facing competition. And I think most of the brokers here are very resilient. The value proposition we provide as local brokers is that we know what the market and customers want," he said.

He said that local brokers are also backed by strong research teams that have longstanding coverage of local firms. "Our belief is that with an adviser or remisier on the ground, there's an element of value-add," said Mr Lim.

At Phillip Securities, every client is assigned to a financial advisory consultant while its team of research analysts plays an active role in providing market intelligence and picking out investable stocks.

Currently, most of Phillip Securities's clients fall in the 40 to 49 age range while RHBSS' clients are within the 50 to 59 demographic. The latter is more likely to appreciate the experience and human touch that brokerages such as Phillip Securities can provide.

This particular age group will also generate more income for brokerages given their higher disposable income.

Of course, brokers everywhere are starting to see an uptick in interest from younger investors. More than 40 per cent of the users of Phillip Securities's cash-plus programme are below the age of 40. The cash-plus programme positions itself as an account that allows clients to trade in global markets at low brokerage rates.

Hence Mr Lim reckons that most brokerages will try to capture both age groups. With a younger demographic, he said, brokerages will get the opportunity to build longer-term relationships.

Given the trends of shrinking fee income and rising costs of technology and compliance, there has been a wave of consolidation in the local stockbroking scene since 2000.

But Mr Lim is not expecting this trend to continue. "Singapore is a small market. I don't think there will be much (more consolidation). You will see more new entrants. The question is what will happen to those that are non bank-backed."

Phillip Securities executive director Luke Lim says: "The value proposition we provide as local brokers is that we know what the market and customers want."

Singapore Press Holdings Limited

Companies & Markets
HOCK LOCK SIEW; Should investors beware the Lippo effect?
Lee Meixian
Lee Meixian , Should investors beware the Lippo effect?
774 words
9 February 2021
Business Times Singapore
STBT
English
© 2021 Singapore Press Holdings Limited
LOCALLY listed stocks with links to the Riady family have generated significantly negative returns in the last five years, compared to gains in the Straits Times Index (STI) and FTSE ST Reit Index.

The difficulties faced by some of these entities seem to have their roots in Indonesian developer Lippo Karawaci's (LK) liquidity problems, following trouble at its US$21 billion Meikarta township project in 2018.

LK's need to raise cash urgently led it to sell several assets, which have ended up within various Riady-linked entities.

For instance, LK sold the manager of First Reit to OUE and OUE Lippo Healthcare in late 2018. But First Reit Management has not been a great investment for either company. Its fees have fallen in tandem with revenue declines at First Reit.

First Reit, a healthcare Reit, has recently had to restructure master lease agreements with LK to allow the latter to pay lower rents.

Without this restructuring, both LK and First Reit would have gone into default.

OUE and OUE Lippo Healthcare, as beneficial owners of First Reit, also had to backstop a rights issue for First Reit.

But with the restructuring and accompanying rights issue, First Reit's distributions per unit are now set to fall substantially.

The Riady empire

The Riady empire can be broadly divided into two. One part is associated with James Riady, who ran LK before handing the reins over to his son John Riady in 2019. Most of the family's Indonesian businesses are within the LK umbrella.

James Riady's brother Stephen Riady, a Hong Kong national, runs the businesses outside Indonesia - including those in Singapore.

Although separate, the two sides have close links. And some analysts have suggested investors ascribe a discount to Riady stocks such as OUE because of an implicit readiness to "bail out" troubled entities within the family empire.

Analysts also said the various family assets have tended to change hands among the listed companies. But the impact on returns is not always positive.

This has certainly been the case at First Reit, whose hospitals are master leased to LK.

The actual operator of the hospitals, however, is Siloam International Hospitals.

Siloam pays low rents, which benefits its business. First Reit was previously offered high rents to boost the attractiveness of its distributions. LK bore the difference until it could no longer do so - resulting in the recent need to restructure the leases and the sharp decline in the value of First Reit units.

In fact, unrealistic income support levels have plagued the Riady-linked entities. Assets have been purchased at values that take into account income support from vendors.

When these assets fail to live up to the level of earnings expected, distributions decline and the asset value appears inflated.

Total returns

In the last five years, OUE has returned a negative 17 per cent. The STI's return is 35 per cent and the Reit index's 62 per cent.

OUE Commercial Reit (OUECT), which listed in January 2014, has performed better, returning a negative 6 per cent over the last five years. This could be due to its merger with OUE Hospitality Trust. At the same time, OUECT has in the past shown some autonomy in rejecting unfavourable assets from its sponsors - a move the market may have looked upon favourably.

OUECT last year declined to acquire US Bank Tower, a Grade A office tower in downtown Los Angeles, from OUE. At the time, tenants at the office tower had greatly reduced or temporarily shuttered their operations due to measures implemented by US state governments in response to Covid-19. This inevitably impacted rental income from the property.

OUE ended up selling the property to an entity connected to New York's Silverstein Properties for US$430 million, or two-thirds of its year-ago US$650 million valuation.

Lippo Malls Indonesia Retail Trust and First Reit have returned negative 67 per cent and 73 per cent, respectively, in the last five years. They were also the two worst-performing Reits last year, excluding Eagle Hospitality Trust.

OUE Lippo Healthcare, formerly International Healthway Corp, has returned negative 42 per cent over the same period. Its financials were turning around in FY19, but the group suffered fresh blows after Covid-19 hit.

It said last month that it expects to post a significant loss in its half-year and full-year results due to provisions and impairments on the carrying value of its investments, including First Reit, and the pandemic impact.

Singapore Press Holdings Limited

Government & Economy
SINGAPORE BUDGET 2021; Underemployment a bigger issue than unemployment: economists
Sharon See
Sharon See , Underemployment a bigger issue than unemployment: economists
978 words
9 February 2021
Business Times Singapore
STBT
English
© 2021 Singapore Press Holdings Limited
Those underemployed in jobs not matching their skills will find it tough to find desired, better-paying jobs later

Singapore

IF December's data is any indicator, Singapore's labour market appears to be on the mend, but economists warn that underemployment - rather than unemployment - could be the bigger issue this recession.

Overall unemployment rate fell for the second straight month in December, coming in at 3.2 per cent, but Walter Theseira, an economist at the Singapore University of Social Sciences, believes one reason is that "a lot of people have decided to settle for any kind of job for the moment".

Concurring, Irvin Seah, DBS senior economist, said: "During this Covid-19 crisis, my observation is that underemployment is actually a much bigger problem in Singapore than unemployment, but it's just that we don't have the numbers to substantiate this."

This is because there is currently no international consensus on how underemployment should be measured.

There are two main types of underemployment: One is when individuals work fewer hours than is necessary or desired; the other is when individuals work in lower-paying jobs that do not match their skill set.

While time-related underemployment can be tracked, the problem with skill-based underemployment is a lack of parameters to quantify it, particularly since it is difficult to ascertain whether it is a voluntary situation.

For example, an assessor could look at all the workers in a job type and find out the most common qualification, and then deem that as an appropriate qualification level. But this could present incomplete data that does not account for individual work experience beyond objective qualifications, Assoc Prof Theseira said.

In the US, the UK and the European Union, underemployment is measured based only on the number of involuntary part-time workers who want a full-time job.

Singapore tracks a time-related underemployment rate, which is based on the percentage of part-timers who are willing and available to work additional hours.

"In general, underemployment is a concern during any economic shock in Singapore," said Assoc Prof Theseira.

"While our economic shocks typically do not result in a substantial increase in unemployment, they can result in underemployment, when displaced workers choose to take up less preferred jobs, or jobs that require less skills than their last-held position," he said.

One clue is in the number of qualified professionals who have had to take up "informal jobs" during this recession, such as those in the ride-hailing or food-delivery industries, Mr Seah said. This is especially the case if they come from sectors that are hard hit by Covid-19, but possess skills that are not easily transferable to other industries.

Not helping workers to get out of temporary and lower-skilled jobs as the economy recovers could result in "long-term scarring" of these workers, said Assoc Prof Theseira. It could become more difficult for them to move to a more desirable or well-paying jobs later, since they would lack the experience for more senior positions.

Again, this comes back to retraining and upskilling - something that is likely to be integral to Budget 2021. But beyond that, creating the right opportunities for these workers is equally important.

Mr Seah said: "Continued upskilling of our workers has to go hand in hand with the calibration of the extent of competition from our foreign workers."

Another way to reduce underemployment is to support job-search efforts and match displaced workers with opportunities that require their skills and hence are likely to offer better wages and career progression, said Assoc Prof Theseira.

"This is one of the reasons unemployment insurance is considered to help reduce underemployment, even though it may increase unemployment because it may help to lengthen the job-search process," he said.

He added that underemployment could also be a perception issue, as some workers may not feel they are "being paid fairly, have meaning in their jobs, career progression, and are valued".

"Career progression comes to an end for all of us at some point, when our abilities and skills start deteriorating relative to younger workers and we become less competitive in the labour market," he said.

"I don't think many societies or organisations have learned how to manage that transition for older workers in a way that preserves job opportunities and avoids the sense of underemployment."

Singapore's time-related underemployment rate rose to 4.1 per cent in 2020, from 3.1 per cent a the year before, just shy of the 4.3 per cent seen during the 2009 Global Financial Crisis, says the Labour Force in Singapore 2020 report.

However, the rate rose more sharply for industries severely affected by the Covid-19 pandemic, including retail, food and beverage and transport and storage.

The time-related underemployment rate for workers in their 50s and above, as well as those with below-secondary qualifications also increased more acutely than for other workers.

Meanwhile, the proportion of part-time workers among employed residents fell to 10.6 per cent in 2020, from 11.2 per cent the previous year, even though more part-timers were willing and available to work additional hours.

This is because the services industries, which typically employ more part-time workers, cut back on part-time employment as they were more adversely affected by Covid-19 and work stoppages. These industries include F&B, retail, education and the arts, entertainment and recreation.

READ MORE: Saving jobs in Budget 2021: what and whose jobs to save?

One sign of underemployment is the number of qualified professionals who have had to take up "informal jobs" during this recession, such as in the ride-hailing or food-delivery industries.

Singapore Press Holdings Limited

Hahaha, no. Just appreciate the work you put in, hence the like. Invested in Vicom, SATS (bought during the crash), ifast, banks but not starhub.