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The relentless pursuit of better investment options
MY courtship with Vanguard funds started 16 years ago in 2004. Providend was licensed to give advice just a year earlier in 2003 and while we had an investment philosophy and process in place, there were no low-cost index funds that we could use to execute it. As a young CEO then (I was 34 then), I asked for a meeting with the then Vanguard Singapore's country head, 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 he told me he couldn't help me because there is no demand for funds like Vanguard in Singapore. He meant that the advisory industry did not like to use low-cost funds for clients because funds like Vanguard do not pay trailer commissions. Trailers are the portion of funds' annual management fee paid to distributors. Hence distributors would rather carry actively managed funds with high management fees.
So Providend had no choice then, but to use actively managed funds. Our workaround on our platform back then was to rebate the trail commissions back to our clients.
But our obsession with index funds is not just due to their low costs. It is also because most actively managed funds do not perform better than the average returns of the markets and those that do outperform don't do it consistently. There are primarily two reasons for this.
Firstly, fund managers who try to beat the market 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 stocks should be priced at. If the value that they arrive at is higher than stocks' current prices, then the stocks are undervalued, and the managers will look to buy them. In market timing, managers try to outguess everyone by deciding when is the best time to buy or sell, based on economic forecast, geopolitical events and so on. These methods seek to be predictive but evidence shows that the success rate is low and successes are difficult to replicate consistently.
Secondly, active managers typically charge more in terms of management fees. The fees eat into the returns, so the benefits derived from these activities are actually negated by costs. So, it is not that we don't believe that there are managers 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 return objective is simply too high and not worth it. By simply using low-cost index funds, clients are still able to achieve their life goals.
Sometime in 2014, I was approached by Peng Chen of Dimensional Fund Advisors (who later become the first CEO of Dimensional Fund Advisors, Asia-Pacific ex-Japan). He wanted to gauge 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. We started using Dimensional for clients in 2016.
But our search for index funds that are registered for retail investors continued. In all, I met three other country heads of Vanguard after Mr Robinson left and in every meeting, I urged them to register the funds for the retail investors.
Finally in a meeting with Richard Wane, the final country head of Vanguard here, he said Vanguard was open to registering 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, 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 our CPF system and why Vanguard should be in Singapore.
A few months later, I received good news that Vanguard had given the green light to register the funds for retail investors and Mr Wane would begin to recruit a new team for this endeavour. Things moved very quickly after that and by June of 2018, I was ready to send my team to Vanguard for training in preparation for the launch.
Sadly, that training never happened. At the last minute, Vanguard made the shock decision to close the Singapore office and consolidate their Asia HQ in Hong Kong. We would only be able to use Vanguard for clients who are accredited investors.
But just about two weeks ago, Vanguard announced that they would de-register all their funds for accredited investors in Singapore by the end of this year.
There are other more cumbersome but indirect ways for advisers to continue to access them out of Singapore. 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 with the additional layer of fees charged by LGI , the total expense ratio of the index fund ranges between 0.4 and 0.71 per cent per annum, which makes it less than ideal. Just for comparison, you can get the original Vanguard S&P500 fund at a TER of 0.2 per cent pa and the ETF version for as low as 0.07 per cent pa.
This is a sad state of affairs for Singapore, a country aspiring to be a top wealth management destination in Asia but without a slew of index funds for retail investors.
Imagine my angst when two years ago, the manpower ministry decided to limit the advisory fees for the CPF Investment Scheme to 0.4 per cent a year. This took effect in October.
While this lowers the cost for investors, it may in fact have the opposite effect. This is because with a lowered advisory fee, there is even less motivation for advisers to use low-cost funds like Dimensional and Vanguard. 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 for their CPF, which may result in a poor investment experience.
Furthermore, low-cost fund managers would now have even less of a business case to register their funds for the Singapore retail market. But for us, while our courtship with Vanguard has finally ended, our relentless pursuit of more low-cost and better performing investment options for clients' retirement plans will never end. In fact, it has triggered a new beginning.
- Christopher Tan is CEO, Providend Ltd, Singapore's first and probably sole fee-only comprehensive wealth advisory firm. He can be contacted at email@example.com