Philippine Index Funds Part 2: Philequity and First Metro

Let's continue our review of index funds.  If you missed it you can check out Part 1.

This post features Philequity and First Metro.  First up is Philequity:

PSE Index Fund
Fund Type: Mutual Fund
Index Tracked: Philippine Stock Exchange Index
Minimum Initial Investment: P200000
Minimum Transaction: P50000
Redemption Fee:2% in the first year, 1.5% in the second year
Annual Fee:1.5%
Tracking Error:  No data

Steep investment requirements, high fees.  Not very attractive.


Next is First Metro.  This fund was actually covered in a previous post so I'll just put a summary below.

First Metro ETF
Fund Type: ETF
Index Tracked: Philippine Stock Exchange Index
Minimum Initial Investment: (Multiple of 10 shares) x NAVPU (P111.00 as of 8/8/2014)
Minimum Transaction: Same as above
Transaction Fees: Broker/trading platform dependent
Annual Fee:  < 2%
Tracking Error:  0.05%


That's it for this post.

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.

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

Some notes about the MF Company Roundups

I got a PM on another forum asking me to comment on the mutual fund companies I've covered in the roundup series. These are (in order of appearance in my posts) Sunlife, FAMI, Philam, and Philequity. Here are my thoughts on each company:

Sunlife
The Good: Sunlife has a long company history that might make it more attractive to risk-averse investors. It also has low minimum investment amounts. If investing for the long-term, sales load charges can go as low as zero.
The Bad: Of the companies listed here, it has the highest annual fee at 2%.
Conclusion: Good for long-term investors looking for moderate returns and zero sales loads.

FAMI
The Good: FAMI was the best performing Philippine MF company of 2011. Minimum investment amounts are low.
The Bad: To some, the phenomenal performance could signal that FAMI is less conservative in its investments than others. There is no "zero sales load" option.
Conclusion: Good for investors who believe that high returns are repeatable.

Philam
The Good: Philam has the lowest annual fee at 1.5% (tied with Philequity). In the long term this could have a significant effect on returns. Good performance in 2010.
The Bad: No "zero sales load" option.
Conclusion: The low annual fee could be attractive to long-term investors, especially those who believe that returns are largely a matter of luck (such as myself)*.

Philequity
The Good: Philequity has an index fund available. In my opinion this is the best type of fund. It also tied with Philam for lowest annual fee.
The Bad: There is no "zero sales load" option. Also, the minimum investment amounts for the index fund are very high: P250,000 for the initial investment and P50,000 for subsequent investments. The index fund also carries a hefty front-end sales load at 5%.
Conclusion: If there were a "zero sales load" option and the minimum investment amounts were lower, this would be the best MF company in the roundup. As of now, however, their offerings are not very attractive.

Stay tuned for more! Check out these links:

Mutual Fund Company Roundup 1: Sunlife and FAMI
Mutual Fund Company Roundup 2: Philam
Mutual Fund Company Roundup 3: Philequity
* An interesting read: Luck vs. Skill

Mutual Fund Company Roundup 1

I'm going to do a comparison of the different Philippine mutual fund companies. The information on each company will include the types of fund available, minimum investment amounts, sales load, annual fees, and contact information as well as my sources. I will do my best to ensure the information is complete and accurate, but please verify all information before investing.

Let's start with Sunlife and First Metro.

Sunlife Financial Philippines

Fund types offered:

Bond Fund

 

Balanced Fund

 

Equity Fund

 

Money Market Fund

 

Government Securities Fund

 

Dollar Bond Fund

 

Dollar Balanced Fund

 

 

Minimum initial investment:

P5000 for peso funds

 

$2000 for dollar funds

 

 

Minimum subsequent investment:

P1000 for peso funds

 

$500 for dollar funds

 

 

Sales load:

 

Option A:

2% front-end load (plus VAT)

 

0% back-end load

 

 

Option B:

0% front-end load

 

5% back-end load plus VAT if the investment is redeemed within the first year

 

4% back-end load plus VAT if the investment is redeemed within the second year

 

3% back-end load plus VAT if the investment is redeemed within the third year

 

2% back-end load plus VAT if the investment is redeemed within the fourth year

 

1% back-end load plus VAT if the investment is redeemed within the fifth year

 

0% back-end load plus VAT if the investment is redeemed beyond the fifth year

 

 

Annual Fee

2%

 

 

Website:

Sunlife Financial Philippines

E-mail:

phil_prosperity@sunlife.com

Phone Number:

8499888

First Metro Asset Management, Inc.

Fund types offered:

Fixed-income Fund

 

Balanced Fund

 

Equity Fund

 

Money market Fund

 

 

Minimum initial investment

P5000

Minimum subsequent investment:

P1000

 

 

Sales load:

 

 

 

For equity, balanced, and fixed-income funds:

 

Front-end load

 

Php5,000.00 > Php100,000.00

2.00%

Php100,000.00 > Php500,000.00

1.50%

Php500,000.00 > Php2,000,000.00

1.00%

Php2,000,000.00 and above

0.50%

 

 

Back-end load

 

Redemption or exit fee is applicable if redemption or withdrawal is made within the first six months or 180-days of investment. Redemption or withdrawal made beyond six months or 180-days, redemption or exit fee is waived.

 

 

For money-market fund:

 

Php5,000.00 > Php100,000.00

1.00%

Php100,000.00 > Php300,000.00

0.50%

Php300,000.00 and above: Waived = 0.00%

 

 

Back-end load

 

Redemption or exit fee is applicable if redemption or withdrawal is made within the first month or 30-days of investment. Redemption or withdrawal made beyond one month or 30-days, redemption or exit fee is waived.

 

 

Annual Fee

1.75% for equity, balanced, and fixed-income funds

 

1% for money-market fund

 

 

Website:

FAMI

E-mail:

FAMI@firstmetro.com.ph

Phone Number:

8912860 to 65

Roundup Part 2: Philam Asset Management Inc.
Roundup Part 3: Philequity
Roundup Part 4: ATR KimEng