Book of Wise Investors

This post will talk about a passively managed fund that is introduced in Singapore two days ago, on 4 August 2009. According to various sources and opinions, Singapore is a small rich city state with more than US$100 billions in reserves, with stable social-political-economical environment for decades.

According to local mainstream media in Singapore, there are three funds options. The POSB’s MyHome Fund buys into DBS Singapore STI ETF and ABF Singapore Bond Index Fund.

Let us look at what the DBS Singapore STI ETF and ABF Singapore Bond Index Fund consisted of, based on what the newspaper say, the two funds invest into the following, as you can see the equities portion is already a much diversified portfolio of stocks listed on Singapore Stock Exchange.

DBS Singapore STI ETF = buys into Singapore Shares (a diversified portfolio consisting of companies listed on Singapore Stock Exchange)

ABF Singapore Bond Index = buys into Singapore Government bonds (only? Without other corporate bonds?)

The POSB’s MyHome Fund consisted of three options,

1. HomeSteady portfolio = 80% in the ABF index and 20% in the STI ETF

2. HomeBalanced portfolio = 50% in the ABF index and 50% in the STI ETF

3. HomeGrowth portfolio = 20% in the ABF index and 80% in the STI ETF.

There are four simple reasons why investors will be better off buying directly into the funds that the fund invested in.

1. Stability of returns

The return of STI ETF in the long run depends essentially on two main factors, the increase in productivity and inflation of Singapore.

The return of ABF Singapore Bond Index depends on Singapore government bonds only and in turn depends on the reserves and social-political-economic stability.

2. Basically no diversification for ABF index

I don’t understand why there is even a need to pay an initial 3% of sales charge (not 0.3% as reported in newspapers) and annual management fee of 0.5% when you may as well directly buy into the Singapore government bonds at the same bank and ATM machines.

3. No difference between placing money in local and foreign banks in Singapore and buying into Singapore government bonds

In the sense that both fixed deposits and returns from Singapore government bonds are guaranteed and backed by the massive reserves. If you see savings and fixed deposits in local and foreign banks in Singapore as risk free, then buying into Singapore government bonds is essentially the same as risk free also.

There is no need to invest through a bond fund when all of the bond’s funds are invested in one financial instrument. It is like investing in a mutual fund that consisted only of one company stocks and you still pay all the purchase fee, management fee, load fees, etc. Why don’t you may as well own the stocks directly?

There is no doubt that buying the HomeSteady portfolio is short changing yourself by paying the initial 3% of sales charge and annual management fee of 0.5% for nothing, with 80% invested in ABF index.

As a result, there is no need to invest through a bond fund for safety through diversification.

4. DBS Singapore STI ETF is already a diversified portfolio of stocks

Seriously speaking, one should just buy into STI ETF directly rather than through POSB’s MyHome and add another layer of cost totally for nothing. Given that most investors will be for long term, a better way to achieve higher returns is simply once the STI index falls below a certain value, start to dollar cost averaging into buying and totally stop buying once STI index rises above a certain value. (Simply kept cash in savings account when STI index is too high, wait for the value to fall).

What is the conclusion?

Singapore investors will be better off buying into DBS Singapore STI ETF and Singapore government bonds directly (NOT ABF Singapore Bond Index which still got higher costs than directly buy and hold Singapore government bonds through online brokerage)

You are simply paying the 3% of sales charge and annual management fee of 0.5% for almost nothing. Quite an easy way to make money for the bank involved, it is clear that there is no need to hire another first class honors as fund manager to manage the fund.

If there are significant people buying into POSB’s MyHome Fund, a better way is to invest in DBS bank shares (POSB bank is wholly owned by DBS bank and provided if the price is right) as this fund is really a good way of increasing the profit margins of POSB bank.

In short, if you have $10 000 and want to invest $2000 in ABF Bond Index Fund and $8000 in STI ETF and, you can buy into these two directly with lower costs, no need to buy the HomeGrowth portfolio and lose 3% of sales charge and annual management fee of 0.5% immediately.

Moral of the story,

Finance companies, insurance companies and banks are not benevolent donors to your wealth. The most important fact in growing your hard earned money is really more financial literacy and not paying unnecessary expenses for nothing.

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1. Is it wise to invest in bonds through bond funds?
2. The right way to measure mutual fund performance
3. What is a good index for index investing?
4. Essential 7 guidelines for actively managed mutual funds investing