Sunday, July 20, 2014

Philippine Index Funds Part 1: BPI

In he previous post we took a look at index funds: what they are and their pros and cons.  There are a number of index funds available to Filipino investors.  Let's start with BPI's offerings.

First up is a bond index fund: the ABF Philippines Bond Index Fund. This is a bit different from the examples in the last post in that it tracks a bond index instead of an equity index. It tracks the iBoxx Philippines Index.  Here's the key information as of the time of writing:

ABF Philippines Bond Index Fund
Fund Type: UITF
Index Tracked:  iBoxx Philippines Index
Minimum Initial Investment: P10000
Minimum Transaction: P1000
Minimum Holding Period: None
Annual Fee: ~ 0.349%
Tracking Error (from June 2012):  ~ 0.2%

Explanatory Memo
Performance Report for June 2014

The fees and tracking error are quite low, which is a good thing.


Next is an equity index fund:

BPI Philippine Equity Index Fund
Fund Type: UITF
Index Tracked:  Philippine Stock Exchange Index
Minimum Initial Investment: P10000
Minimum Transaction: P1000
Minimum Holding Period: None
Annual Fee: ~ 1.5%
Tracking Error (from June 2012):  ~ 2.27%

Explanatory Memo
Performance Report for June 2014

The fee isn't as low as what I'd expect of an index fund.  The tracking error is much higher than that of the bond index fund above, but I'm not sure if it's too high or okay.


Next is another equity index fund, the ALFM Philippine Stock Index Fund.  This differs from the other equity fund in that it is a mutual fund managed by BPI Investment Management Inc., a subsidiary of BPI.  As such it is regulated under the SEC instead of the BSP.

ALFM Philippine Stock Index Fund
Fund Type: MF
Index Tracked:  Philippine Stock Exchange Index
Minimum Initial Investment: P5000
Minimum Transaction: P1000
Minimum Holding Period: 180 days
Annual Fee: ~ 1.5%
Early Redemption Fee: 1% of the redemption amount
Tracking Error (from June 2012):  ~ 0.88%

Prospectus
Performance Report for June 2014

I'm not a big fan of minimum holding periods and early exit fees but 180 days is short compared to some mutual funds.  Invest only if you have an emergency fund already setup.  The annual fee is comparable to the other equity index fund above, but the tracking error is much better.


Lastly there's the Philippine Dollar Bond Index fund:

Philippine Dollar Bond Index Fund
Fund Type: UITF
Index Tracked:  JP Morgan Asia Credit Index – Philippines
Minimum Initial Investment: $500
Minimum Transaction: $200
Minimum Holding Period: None
Annual Fee: ~ 0.267%
Tracking Error (3-year):  ~ 1.06%

Explanatory Memo
Performance Report for June 2014

The investment and transaction amounts required are pretty high.  The fees are quite low and the tracking error isn't that bad.

That's all for BPI.  Next on the index fund list is Philequity.

 

Saturday, June 28, 2014

Index Funds

Roughly speaking an index measures the performance of a segment certain market, for example the stock market.  In the Philippines when people talk about the stock market going up or down, they usually mean the PSEI (Philippine Stock Exchange Index).  The composition of the index is not permanent.  From time to time stocks are added and removed from the index.

An index fund attempts to track the performance of an index.  When the index goes up or down, the fund NAVPS/NAVPU should also go up or down by the same percentage.

Who should invest in index funds?  Investors who:
  • believe that over long time periods the index tends to go up.  This is backed-up by historical data, but of course "past performance is not a guarantee of future returns".

  • want to invest in the index but don't have enough cash to invest directly in stocks that make up the index.  Replicating the index by buying shares in individual companies is quite expensive.  Investing in a fund allows the investor to invest in the index for a relatively low amount.

  • want to invest in the index but don't have the time or inclination to manage a portfolio of stocks.  When the index composition changes, the investor should buy and sell shares to mirror the index's new composition.  Investing in a fund allows the investor to "set-and-forget", in other words to invest and let the fund do the rest.

  • want to invest in an equity fund with lower fees.  Theoretically, an index fund should be passively-managed and have a lower annual fee than actively managed funds.
Who should not invest in index funds?  Investors who:
  • believe they can outperform the market.  Doing this is very difficult over a long time period.

  • want control over which stocks to buy or sell.

  • want control  over when to buy or sell.
What should investors look for in an index mutual fund?
  • Accurate index tracking - if an fund doesn't accurately track the index's movements, it's not an index fund.  The deviation from the index is called the tracking error, the lower the better.

  • Low fees - there's no reason for an index fund to charge a high fee
In the next post we'll take a look at the equity index funds available in the Philippines.

Thursday, June 12, 2014

First Metro ETF

In the last post I wrote about exchange-traded funds.  This post will be about the first (and as far as I can tell, the only) ETF in the Philippines: First Metro Philippine Equity Exchange-Traded Fund (FMETF).

The Fund aims to  track the performance of the Philippine Stock Exchange Composite Index (PSEI).  This means, roughly, that it will invest in the stocks that comprise the PSEI, in the same weights.

A listing of the PSEI component securities can be found on the PSE website.

Due to its nature as an index fund, and according to the prospectus itself, the Fund is passively-managed. Theoretically, this should mean lower operating costs and thus higher returns for the investor. However, the expense ratio listed for the fund is =< 2%. 2% is pretty high for an index fund. In other countries annual fees for index funds are usually below 1%. In comparison, BPI's equity index funds charge 1.5%.

On the other hand, the 2% listed is a maximum. The actual amount may be lower. Unfortunately I couldn't find any information about the actual expense ratio. I will update this post when I do.

Another thing to look at when reviewing an index fund is the tracking error.  Tracking error is the difference between an index fund's performance and the index's own performance.  Tracking error should be as close to 0% as possible.  The currently listed tracking error for FMETF is 0.09% which is a lot better than the ~1% achieved by BPI's index funds.

FMETF is interesting if you want to track the PSEI and at the same time be able to trade fund shares like any other stock.  However, it would be a good idea to research the actual expense ratio (roughly equivalent to mutual fund/UITF annual fee) and broker's fees first.




Saturday, June 7, 2014

Exchange Traded Funds

Some months ago I came across a news article discussing the first exchange-traded funds (ETFs) available to local investors.  At the time I wasn't actively blogging (or even investing) so I didn't take too much notice.  I think now would be a good time to educate myself by reading up on ETFs and writing a blog post.

From Investopedia:
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Much like a mutual fund or a UITF an ETF pools investors' money and invests it in assets such as stocks or bonds.  The main difference is that ETF shares (or units) may be bought or sold throughout the day on an exchange (such as the Philippine Stock Exchange).

The ETF share price behaves just like other stock prices, varying as they are bought and sold.  Thus investors are able to buy and sell shares at prices other than the NAVPS, unlike mutual funds and UITFs.  However, investors pay broker's fees for every trade (purchase or sale) of ETF shares.

Investors in ETFs may also use the same strategies stock traders do, such as short-selling and margin trading (see notes below), along with all the potential rewards and risks of those strategies.

Since ETFs track indices (such as the PSEI), the fund itself doesn't need to buy or sell assets often, unless the composition of the index changes.  Theoretically, this should translate to lower operational costs and lower fees for investors.

So, the most important question:  who should invest in ETFs?

Investors who:
  • want the advantages of index funds (post to come later)
  • want the flexibility of being able to sell ETF shares like stocks (more at Stocks vs. Equity Funds)
  • don't plan on cost-averaging with small amounts.  Broker's fees will quickly eat into smaller investment amounts 
That's it for this now.  In the next post, we'll take a look at First Metro's ETF.

Update:  Post about First Metro Philippine Equity ETF is now up.

Notes: 

Short-selling: selling shares not owned by the seller.
Margin trading: borrowing money from a broker to purchase shares.

More at Investopedia:

ETFs
Short-selling
Margin-trading


Friday, May 9, 2014

BPI Regular Subscription Plan

If you've been reading this blog or other resources about personal finance you're probably familiar with cost averaging.  If not, you can read my initial post about it here and another post with a detailed example here.

One of the challenges of cost-averaging is finding the time and effort to do it regularly.  (It's a bit like blogging that way.)  Fortunately several banks and financial institutions have introduced mechanisms to make cost-averaging easier.

One of these is BPI's Regular Subscription Plan.  It's a program that allows investors to set an amount and frequency for periodic investments.  Of course this assumes that 1) you have a BPI bank account and 2) you've already invested in at least one of their funds.

Basically, you tell BPI how much and how often you want to invest and the fund you want to invest in then 'forget' about it.  The amount should meet the minimum required, which varies from fund to fund.  The frequency may be monthly or quarterly.  You also specify when the plan should start and end.  For example, you can set your plan to invest P2500 quarterly in their Short-Term fund from June 12, 2014 to June 12, 2024.

You can enroll in a Regular Subscription Plan through BPI branches or online on http://www.bpiexpressonline.com/.   If you invest or plan to invest in BPI's funds I think this is a great way to do cost-averaging.  You can learn more by reading the offical FAQs.



Share it!