One way to build wealth, but don’t want to actively manage it, treating investing as a form of accumulation is to passively invest in a diversified portfolio.
And one of the best way is to invest in a diversified portfolio across the world as if you are purchasing a group of the stalwarts around the world.
If we know that it is hard to pick the right active manager, the best way is to invest in an index that tracks a Global World Index.
Little known to much investors is that there are indeed 3 feeder index funds in Singapore. They were brought over in early 2000 by then OCBC Asset management, now Lion Global Investors.
- Infinity Global Stock Index Fund: A feeder fund into Vanguard Global Stock Index Fund, which tracks the MSCI World Free Index, a basket of 1600 global stocks
- Infinity US 500 Stock Index Fund: A feeder fund into Vanguard US 500 Stock Index Fund, which tracks the S&P 500 index
- Infinity European Stock Index Fund: A feeder fund into Vanguard European Stock Index Fund, which tracks the MSCI European index
They are distributed by many platforms like your normal unit trust and one distributor is Fundsupermart.com
If you want to keep things simple, and own majority of the corporates in the world passively, Infinity Global Stock Index Fund fits the needs.
What you need to do
The Infinity Global Stock Index fund has an advantage because a lot of Singaporeans are familiar and know how to purchase it.
- Sign up with a distributor like Fundsupermart
- Decide X amount or Y% of your disposable income per month to funnel into Wealth Building
- Start a regular savings plan (RSP) to monthly funnel X amount to Fundsupermart to purchase Infinity Global Stock Index Fund using GIRO (minimum amount is $100, which is low)
- Get on with Life!
Benefits of investing passively in a basket of global stocks
There are some benefits of this plan
- It enables you to participate in the global growth of the corporates in the world. If your time horizon is 20 years or more, and a firm believer of optimism that the world will be a better place 20 years from now, this is a passive way to do that
- The basket of stocks is diversified. There are 1600 stocks, sampling based on the composition of the largest companies in the world. If a few company blows up, it will cause a minor dent in your portfolio
- It removes a single country risk. You can always invest passively in a Singapore STI Index ETF, but what if Singapore languish for 20++ years the way Japan did? A global index portfolio minimizes that risk
- There is no worry about underperformance. Because you are essentially buying the benchmark where all global unit trusts, or active managers measures against, there is no worry that choosing the wrong fund, 20 years down the road, results in abysmal performance versus the benchmark
- You are removed from the execution. Note the process above. You set it and forget it. Human’s tend to make irrational decisions due to our genetic behavioral makeup. We become our worst enemy by buying high or selling low. Fixing a GIRO plan is a form of pre-commitment and protection against yourself, compare to if you need to monthly manually purchase a fixed amount yourself (You might decide then and there when the MSCI Index is down 4% in 2 days to ‘wait until the coast is clear’ before investing)
- It lets you get on with what you value most: Life
Some negatives about this plan
- If you have an ‘edge’ to perform better, you may be missing out on an opportunity. There are folks that do have a certain edge that when they actively managed, they do better than the average performance of the market. And they have the time to actively manage. This might not be for them. The question is whether they have the ‘edge’ (Or most of the time its their ego that thinks they have the edge)
- In the short term, the value of your holdings can be very volatile. Your value at the worse case in the depths of 2008 can go down by 50%. Can you bear with that?
- Global growth of corporates in the world can stagnate or deflate in 20 years. There are always pessimists in the world. If you firmly believe we are in such a scenario, this is not for you.
- The Infinity Global Index Fund is not as low cost as the original US Index Fund. Ultimately cost matters and the Achilles heel of the Infinity Global is that the expense ratio is 0.95%. The original index fund’s expense ratio is close to 0.25%. That means you lose out 0.7% return just to fund management and by virtue of it being in Singapore. (See below why this cost matters)
Summary of costs
These are the cost incurred if you invest in Infinity Global Stock Index Fund:
- Buy charge: Fundsupermart is rather neat in that their sales charge was down from 1% to the current 0.5%
- Expense Ratio of 0.95%
- Sell charge: Nil
- Quarterly platform fees: 0.125% per quarter (0.5% annually)
What is not included in the expense ratio are various trading charges carried out by the unit trust to ensure that the underlying basket of stocks in the Infinity fund matches that of the MSCI Index.
So in total your total costs is around 1.95%
Some recent returns
The SGD Class fund was incepted in May 2000 which is 13.5 years ago. The USD Class fund was incepted in Oct 2003 which is around 10 years ago.
You will observe that there are 2 column of NAV: NAV and NAV^. NAV stands for the returns in % of Net Asset Value of the basket of stocks, while NAV^ is the returns after preliminary charge. I am not sure how much is the charge but the indication can be as high as 2%.
Benchmark indicates the returns in % of the MSCI World Free index.
Firstly the returns of the benchmark, the last year to date return was 27.3%, which is a splendid return.
Here is a comparison against other 2013 returns. Now we know that you can’t based your wealth on 1 year of returns, so let us take a look at the 10 year return. The benchmark 10 year return is 4%. That is rather low.
Here is a Factsheet from MSCI ending at 31st Dec 2013. Here you can observed that the 10 year return is 7.51% per annum. Much better than what the infinity factsheet provided. Why is there such a difference I have no idea.
Here is how the 10 year return compares against the 11 year return of other indexes.
Overall, in a short 10 year span, we have gone through a massive bull market and a rather large bear by historical standards with our capital intact and growing. If we were to push back 3 more years to 2000 during the funds inception, you will observed that Infinity did not gain much, due to that from 2000 to 2003 it was another bear market.
If you were to observe the performance table again, and compare the NAV versus the benchmark returns you will see a pronounced 1% difference (27.3% vs 26.4% for year to date, 4% vs 3.1% for the 10 year)
We revealed that the expense ratio for the Global Infinity Fund is roughly 0.95% and over here it clearly shows the underperformance of the index fund.
It has to be said that we can never be as close to the index, since an index is costless while the fund always needs to earn a certain amount, no matter how low cost it is.
In contrast, here is the factsheet to Vanguard FTSE All World ETF, an exchange traded fund, which is listed in the London Stock Exchange, tracking the FTSE all world index, an index quite close to modeling what the Infinity Global Index Fund is trying to do.
In the performance table, notice the returns versus the returns net of expenses. They are closer , by virtue that the expense ratio is 0.25% compared to 0.95%.
Comparison versus Actively Managed Unit Trust Mutual Funds
How does the returns of the Infinity Global stack up versus the smart managers from different fund houses?
Here we compared the Infinity Global against 34 other global funds.
Do click the picture to see it in its full glory.
There are 2 different color boxes. The brown box indicates the best performing fund for that time period. The blue box indicates the best performing fund out of those fund with at least 10 years of history.
Picking the best fund looking forward
One thing you will notice is that at different time periods, there are no best performing fund throughout the different time periods. At different time frames, its difficult to pick the best fund.
3 Active funds stands out
- Templeton Global
- Fidelity FPS Global Growth
- Aberdeen Global Opp
To pick the best fund going forward, you have to look at their past track records.
Given this data, you would probably pick Fidelity FPS, but 10 years in, it turns out that Aberdeen Global performed best.
Yet Aberdeen Global hasn’t been performing the best for these 5 years.
So how do you resolve that?
It is difficult to pick the best performing fund looking forward with rear view mirror data.
When I was introduced to unit trusts or active funds in 2002, the best performing funds was Nikko Shenton Global Opportunities and United International Growth Fund. Now, their results are average compare to the rest.
Investors Limited Choices
If you are advised by your investment advisor or insurance agent to purchase an investment linked policies, you will realize the choices are limited.
What if the best funds available is not within the choices? You may have to endure mediocre results
Infinity Global’s ranking among active funds
I tabulate the rankings of Infinity Global versus the active funds, with the smallest position being the highest return for the time period:
YTD: 10th out of 35 funds (71% position)
1 Week: 20/35 (42%)
1 Month: 15/35 (57%)
3 Month: 11/35 (68%)
6 Month: 9/35 (74%)
1 Year: 6/32 (81%)
2 Year: 3/28 (89%)
3 Year: 3/27 (88%)
5 Year: 6/25 (76%)
10 Year: 3/6 (50%)
You will realize
- Not all active managers are able to outperform a fund that mechanically follows an index. The closest was Fidelity FPS which lost out on a 3 year basis.
- Except for a 1 week basis, Infinity Global was always among the top half of the funds, meaning that half the active funds perform worse than the index.
- On a long term basis, an index fund ranks quite well.
- There is low underperformance, this underpinned by Infinity Global’s expense ratio and sales charges rather
It is difficult to find a low cost instrument in Singapore that is liquid enough to model a basket of global stocks, and you have to pick your poison. While cost is a big issue, there are many advantages of investing passively using the Infinity Global Stocks index Fund.
The action steps to get started are simple, made even easier that you don’t have to bother with making a purchase decision monthly, limiting you from being entrap by your behavioral deficiency.