I have recently attended this webinar through an invitation from one of my friend who is a financial advisor. This webinar was held on the 30th of April 2020, from 8pm to 9.30pm. I have screenshot quite a number of slides from the session.
It was interesting to hear from the opposite side, with people trying to say the reasons why they support unit trusts.
Let me give the TL;DR to my TL;DR version of this webinar:
TL;DR (Level 2)
Expected:
Fair, transparent, open conversations of ETFs vs mutual funds
Reality:
Speaker threw shades on ETFs and Robo-advisors using articles/ inadequate studies. He was not transparent about the costs of mutual funds and gave anecdotal examples of mutual funds outperforming ETFs based on hindsight rather than a full statistical picture for the audience.
TL;DR (Level 1)
Expectations:
I expected to hear an objective and research-driven argument on why unit trusts/ mutual funds should be preferred over ETFs (and Robo-advisors). So I have expected the speaker to be completely transparent about the financial instruments, their costs, their advantages, and disadvantage.
Reality:
I received a presentation that tried to throw shades at other financial instruments (while contradicting himself in the midst of it) by questioning their research methodologies and the credibility of the studies. Ok, I understand that you should be critical in the studies that you read. But the speaker was not specific in the impact on the research methodologies and the counter-argument paper he has presented was inadequate in the scope that the other paper has looked at.
After throwing shades at the other financial instruments, the speaker was also not completely transparent about mutual funds. Especially the cost, where he has skipped over quite a bit of the cost like front-end loads, yearly management fees, and my favourite; advisory charge, etc. (You know? The things that will eat into your returns.)He has also done something that triggered me really badly. In order to prove his points that mutual funds do outperform the benchmark, he chose a fund that has outperformed the benchmark after accounting for all fees.
For those of you who do not understand, he has essentially filtered for a fund that outperformed the benchmark and just selected it based on that (and used a five-year time horizon to prove his point). You do know that hindsight is 20/20 right? What are the odds of you choosing a fund right now and 10 years later, perform higher than the benchmark?
Actual post:
It started off quite balanced. With this slide:
Alpha would mean outperforming the market. But even at this point, there are some parts where I actually disagree already. I would say that it is a spectrum rather than a binary option. Like how I am a passive investor, but I do some active maneuvers like timing my entry and exit into and from the market and keeping track of the stock market every day.
But I guess he was trying to contrast between a unit trust and ETFs investment approaches.
Sadly, that will be the only glimpse of an objective view I got for the presentation...
Point A - Throwing shades at other financial instruments
Part 1: Questioning the methodologies of research papers but not being specific about the impacts brought by the inadequacy of the methodologies:
The speaker was saying that SPIVA's yearly research paper of active vs passive investment was limited in its approach. This is as they used the wrong index to measure against that particular mutual fund (Example, what he is saying is that: A large-cap US-focused mutual fund was not measured against its benchmark, but aginst the S&P 500 instead. Do you see why I'm confused? SPIVA has actually classified the funds based on their biggest holdings - Check out my SPIVA blog post for that)
He was also saying that SPIVA's credibility is also limited as they sell ETFs and warn us not to fall for what marketers are saying. ERM, the SPIVA scorecard is transparent in its approach. They have shown their methodology and their data at different time horizons. At least try to show us evidence of inconsistency if you decide to question their credibility.
An article by Schroders was also used by the speaker. Schroder is also an active fund house, so I guess you can guess about the credibility using his logic. Furthermore, SPIVA's paper is 37 pages long, with several time horizons, while the Schroders' article (emphasis on the word ARTICLE) was only 13 pages long, while focused on the 5 years time horizon, with no mention on the US market. URGH. They are so different in their scope that they shouldn't be compared.
Furthermore, the speaker has said that the mutual fund should be measured to the ETFs for comparison, that is a fair view. It is something that I agree on the limitations of the SPIVA studies. However, even so, the speaker did not speak about the implications of this limitation with data to back it up.
Part 2: Throwing shades at ETFs and Robo-advisors and contradicting himself
During the presentation, the speaker has also questions on the age of ETFs and how its young age, compared to mutual funds, would not be fully representative of its impact in an investor's portfolio. I would not have a problem with this statement if I did not know how long ETFs have existed. This is as the speaker has phrased it in such a way to make it seem that ETFs magically appeared out of nowhere when actually it has started in the 1970s. That would be 50 years of existence.
He then attempted to throw shades at ETFs, saying that it is illiquid, that ETFs would affect the fundamental values of stocks as people are just buying all the companies in the index. But he then contradicted himself by showing that ETFs are not even the majority portion of the market (just 6% btw).
Regarding the illiquidity issues; the speaker was saying about how if there is a crash, everyone would be selling and no one would be buying. This would further the crash and you would not be able to cash out, this would lead to the illiquidity issues. The price of the financial instrument is determined by the price of the previous transaction. Hence, it does not affect liquidity.
Regarding the throwing shades on Robo-advisor, the speaker talked about the recent shut-down of one of the more prominent robo-advisors recently - Smartly. He then talked about the young age of Robo-advisor does not mean that it could give a proven track record on investors' return and if it closes down, we would be forced to cash-out at a time that we do not want to.
Yes, I agree that the young age of robo-advisors does not have a proven record of helping investors to achieve their returns. But investors using robo-advisors should already be aware before going into them in the first place. Furthermore, yes. robo-advisors can close down. But so can mutual funds and etfs. And the speaker did not bring out a fair argument.
In 2016, almost an equal number of mutual funds left the market. A total of 426 mutual funds liquidated, which is an increase from just 290 the year before. - Creditdonkey
Point B: Not transparent about the cost of Mutual funds
When I saw these two slides, I knew that something was wrong. The fees for mutual funds/ unit trusts were too low. As I am not a financial consultant; I asked my consultant friends on the fees on an ILP.
These are the fees in an ILP:
1. Front-end load (Plan distribution charge charged by the insurance company, in the first two years, only like 30% of your premiums paid is paid to buy units of a mutual fund)
2. Advisory fees (1-4%, might be 0 in some cases, charged annually by your agent on the total sum of your money)
3. Annual administration charges (Charged by the mutual funds)
4. Management expense ratio (sum of management fees and annual operating expenses of the mutual fund 1-2% of your money under management)
5. Bid offer spread (This can be charged by the insurance company or the mutual fund or both, some ILPs have no bid-offer spread)
Such fees are confusing due to a lack of standardization between the insurers and different fund houses, I was confused even though I had the help of 2 financial consultants and I am still a bit confused. Yet, the speaker did not speak about these fees. Oh. guess what, front-end loads are not included in the returns calculations when you are shown the fund fact-sheet. There isn't an ILP fees calculation formula that I can find on the internet as well.
Meanwhile, ETFs and Robo-advisors' costs are transparent and easy to calculate.
For ETFs:
3 components
1. Bid-offer spread (when you buy/sell)
2. Commission-cost (when you buy/sell)
3. Expense ratio (annual charge ~ 0.04% for S&P 500)
Example (Using FSMone):
ETF - NikkoAM-STC Asia REIT (REITs ETF)
Bid - 1.07
Ask - 1.078
Comms - Min 10.88 or 0.08% of your transaction
Expense ratio - 0.6%
Platform fees of ETF - 0%
Can you see why I prefer ETFs? The cost of investment is definitely lower.
Robo-advisors (Using StashAway):
1. Bid-offer spread (when you buy/sell)
2. Commission-cost (when you buy/sell)
3. Expense ratio (annual charge ~ 0.04% for S&P 500)
4. Annual fee rate (0.8% for the first $25,000)
5. Currency conversion fees (0.08%)
My fees are ~0.75%. This is not inclusive if you use my referral code to get 6 months of free management by them: https://www.stashaway.sg/referrals/dionysiazdky
So. Yes. His calculations are wrong. If you use an ETF with a really low expense ratio, like 0.04%, your cost of investment would not be anywhere near what he has calculated
Point C: Using a mutual fund that has outperformed the benchmark to show that mutual funds do outperform ETFs
This trigged me as:
1. This is just ONE example
2. The example used was in an inefficient market (China)
3. This example used a 5-year time horizon, even the since-launch option does not tell us the long-term performance
4. This example is in hindsight.
If you want to show that mutual funds can outperform ETFs, show us broad statistics, with super long time horizons, of it, don't just show us one example of it.
Show us a way to select a mutual fund that will outperform the ETFs on the spot instead of choosing it by filtering based on its past performance. Show me your portfolio that chose a mutual fund that has consistently outperformed the index net-of-fees. Don't show me something that you pulled out from a database of mutual funds.
In conclusion:
While there are some legitimate points being brought out in the session, they are not elaborated properly with no data to support it. The parts where he showed his calculations are also inadequate as they do not show the true cost of the ETFs, mutual funds, and Robo-advisors. He also used hindsight to support his point rather than telling us how to choose a proper mutual fund.
It is in my belief that if something is really good, there is no need to hide any information, and there will be a demand for it. I am not sure if the speaker was intentionally hiding such information, but yes. Certain information was not shown to its audience and if they do not know about the financial instruments, they would definitely be misguided.
If you really want to understand finance, read yourself, or read my blog. Read from somewhere that does not have a vested interest to sell you a product. It's your money, learn to manage it, never learn it from a salesman.
With that,
I end today's topic.
Stay vested, Stay frugal my friends,
Dionysius
Sources
https://www.investopedia.com/articles/mutualfund/09/mutual-fund-liquidation.asp
https://www.creditdonkey.com/average-mutual-fund-return.html
https://finance.yahoo.com/news/calculate-total-cost-etf-200030478.html
https://secure.fundsupermart.com/fsm/new-to-fsm/pricing-structure
https://www.stashaway.sg/pricing
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