This article was written in collaboration with Endowus. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
There are traditionally two ways we can invest. The first way is to invest on our own. To do so, we need the knowledge to invest well, and the time to manage and rebalance our portfolio regularly over a long period.
The other way is to get an investment professional to invest on our behalf. This can be done via unit trusts sold in Singapore. Unit trusts, also known as mutual funds in the US markets, are professionally managed funds that pool money from many investors, and invest it on their behalf. When we invest in these unit trusts, we typically go through investment advisors or platforms that give us access to these funds.
It is so often assumed that investing in unit trusts would be more expensive when compared with exchange-traded funds (ETFs). There is also a misperception that unit trusts do not offer a simple passive tracking of the global markets, as ETFs seem to do. Both assumptions are, in reality, myths.
Why Investing In Unit Trusts Has Traditionally Been Expensive?
When we invest on our own, we have to pay a commission to buy and sell securities. Some brokerage firms may also charge us platform and custodian fees. And if we invest in ETFs, we also pay management fees to the ETF managers and have to manage our own foreign exchange, bid-ask spreads, and potential tax inefficiencies.
These costs reduce our investment returns, so all things being equal, it makes sense to minimise cost whenever possible.
The same logic applies when we invest in unit trusts. Costs that we may incur include sales charges that are charged by the platform through which we invest. As explained by MoneySense, if we invest $1,000, there could be an initial 5% sales charge/subscription charge. This means that we end up investing only $950, with the remaining $50 paid as sales charges. Some unit trusts may also charge a redemption fee when we sell our invested funds and this could be 1% to 5% of our investment.
Besides charging one-off fees, unit trusts charge investors recurring management fees. These could include platform fees and management fees charged by the funds.
In the past, access to unit trusts was typically marketed and sold via financial advisors from insurers, as well as bankers. For advisors and bankers, there is usually a sales commission fee for the representatives who sell these unit trusts to their clients.
With the stronger adoption of digital solutions, online platforms such as Endowus Fund Smart, Fundsupermart, DollarDEX and POEMS started becoming more popular as they offer retail investors direct access to a wide range of unit trusts without the need to buy it from a financial advisor or banker. Investors can also purchase the funds directly on bank platforms. The three Singapore banks — DBS, OCBC, and UOB — offer these funds on their platforms.
Specific to Endowus, it only charges an Endowus Fee for all relevant advisory and investment services, product and platform access. The fund-level fee (or total expense ratio) is paid to the fund managers. This is already accounted for in the NAV of the fund. There is no initial sales charge, or redemption fee.
Endowus clients will get back all of the trailer fee component of the fund-level fee, if this is charged. Trailer fees, also known as retrocession fees, are earned by traditional fund distributors for selling these funds.
Is Singapore An Expensive Country To Invest In Unit Trusts?
Given that Singapore is seen as a financial hub in Asia that embraces the use of technology, you would expect our country to offer plenty of options for retail investors to invest in unit trusts at highly competitive pricing. Surprisingly, this isn’t the case.
In a recent Morningstar report, Singapore scored “High” when it came to initial charges and ongoing commission, implying that Singapore investors pay too much for our unit trusts.
Singapore also scored a rating of “Below Average” when it came to fees and expenses for unit trusts. This made us one of the eight countries (of the 26 countries studied) to get a “Below Average” or “Bottom” rating, due to “use of front loads, limited availability of retrocession-free share classes (with retrocession fees making up around half of the total expense ratio), and several high asset-weighted median fees”.
A large part of the fees we pay for unit trusts are simply kickbacks paid by the unit trusts to the person or platform who marketed the funds to us. As stated in the report as well, “certain robo-advisory platforms” offer a 100% cashback on trailer fees to retail investors. We believe this statement refers to Endowus.
Could Investing In Unit Trust Be Cheaper Than ETFs?
The idea that all ETFs are cheap and passive in nature, and all unit trusts are expensive and automatically active in strategy, is false. Take for example the new Amundi Prime USA Fund. It is now not only the lowest cost unit trust on Endowus, but with a fund-level fee of 0.05% p.a., cheaper than any of the ETFs listed on SGX.
Endowus is now offering exposure to global equities and fixed income markets through four passive unit trusts that are cheaper than the ETFs listed on the Singapore Exchange (SGX). The new funds, launched just this month to Endowus clients, add to the suite of more than 200 unit trusts already sold through Endowus Fund Smart.
According to Endowus, this is a passive fund that aims for medium to long-term capital appreciation by following the performance of the US markets through a replication of the Solactive GBS United States Large & Mid Cap Index. Endowus has selected Amundi Prime USA as it provides an extremely low-cost exposure to an exposure similar to the S&P 500. It tracks the performance of around 550 companies and covers about 85% of the free-float market value of the US market.
After adding the Endowus Fee (0.30% p.a. for a single fund), we end up paying an all-in annual fee of just 0.35% p.a.. Besides being lower than the fees charged by some ETFs, it is also significantly lower than the 1.73% p.a. median fee expenses for unit trusts in Singapore that invest in equities alone, as noted in the Morningstar report.
Compared to the median fee expenses for unit trusts in Singapore as reported by Morningstar that is at 1.46% p.a. (equity and fixed income), 1.73% p.a. (equity) and 0.87% p.a. (fixed income) (before any advisory fees or platform fees), the four Amundi passive index funds launched by Endowus have fund-level fees ranging from 0.05% p.a. (Amundi Prime USA Fund), to 0.2% p.a. (Amundi Index MSCI Emerging Markets). The fund-level fee for Amundi Index Global Aggregate 500m fixed income fund is 0.1% p.a., while that for the Amundi Index MSCI World Fund is at 0.18% p.a..
In fact, Endowus says it currently has about 33 funds with a total fund fees less than 0.5% p.a, after including the cashback on trailer fees that is returned to clients.
For many Singapore investors who are paying 2.0% p.a. or more in annual fees for their unit trusts, they are likely paying more than they should. And this additional fee incurred each year will compound to a large amount in the long term and ultimately eat into their returns.
Are Fund Fees On Endowus Portfolios Low As Well?
I was curious to understand whether the fund fees used for Endowus advised portfolios are similarly low in cost too, especially against what the Morningstar report has shared.
Again, the report shared that median fee expenses for unit trusts in Singapore is 1.46% p.a. (equity and fixed income), 1.73% p.a. (equity) and 0.87% p.a. (fixed income). Note here that the Morningstar study does not look at advisory fees or platform fees, and only discusses cost of fees at the fund level.
On that like-for-like basis, median fee expenses for unit trusts in the US are much lower at 0.58% p.a. (equity and fixed income), 0.63% p.a. (equity) and 0.43% p.a. (fixed income).
The important fee to review here is the fund-level fee charged by the managers of the unit trusts that we invest in. Endowus returns trailer fees, if any, back to their clients.
When I look at my own Endowus portfolio, I can see that the fund-level fees I am paying for the two of the unit trusts – Dimensional World Equity Fund; PIMCO GIS Global Bond Fund — that hold the highest weightage in the portfolio are 0.35% p.a. and 0.49% p.a. respectively, or about 0.42% p.a. if I were to average it out.
For investors who prefer to invest in individual unit trusts on their own, you can do so through Endowus Fund Smart, at a fraction of the cost. Since the access fees for single fund investments on Endowus Fund Smart is just 0.3% p.a. that brings the all-in, total expense for these funds to just about 0.7% p.a.. This is significantly lower than the comparative median fee for unit trusts sold in Singapore.
Endowus Fund Smart provides investors with control over their investment by allowing them to choose what they want to invest in. This is done by helping investors to curate some of the best-in-class funds, executing the trades, and managing the portfolio on behalf of the investors.
For single fund investment, the access fees for Endowus Fund Smart is just 0.3% p.a. We can also choose up to 8 funds to build a portfolio, and build multiple portfolios to match our specific wealth goals. For multi-fund portfolio goals, the access fee ranges from 0.25% to 0.60% p.a.
If you are keen to access unit trusts in Singapore at a lower cost, we think it would make sense to consider Endowus Fund Smart. With Endowus Fund Smart, the cost we pay for the funds we choose to invest in is low and transparent, with no hidden cost built into the fund management fee. Any trailer fee that is paid by the fund is returned to the investor.
Disclaimer:
Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.
For investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors, The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations.
This advertisement has not been reviewed by MAS.
The post Are Singapore Investors Overpaying For Unit Trusts, And Could They Actually Be Cheaper Than ETFs? appeared first on DollarsAndSense.sg.
0 Mga Komento