A possible long term strategy

Posted by Drizzt
February 18, 2007

An acquaintance told me about his research:

“Assuming you have about 30 yrs to retirement.
Buy Growthpath 2040 and an global emerging fund.
Allocation wise 80% Growthpath, 20% emerging fund.
If you want an “kicker”, at 10% small caps. (reduce from the Growthpath).”

My opinions:

I have no prior experience with growthpath 2040 other than knowing it is a lifecycle fund. The good thing is that the cost for growth path is low, which is what we should be doing to keep the overall cost of my portfolio down.

If i were to switch from UOB United International Growth, the pros must be good enough to make the change, since i will most likely need to inherit some switching cost.

Also my RSP will be heavily affected by this change as well.

Further conversing and he did elaborate on his research:

I don’t have time to go get and clean up other asset classes’ data and only used the Global Developed Equities, Global Emerging Equities and a Global Bond Index data. (A lot of the other asset classes are relatively new and don’t have a long enough track record for me to do the analysis.)

Running the numbers, 50% Global Equities, 30% Bonds and 20% Emerging Equities gave a good risk adjusted returns. Taking into account timing risk, it generated a worst case returns for a 15 yr holding period of 5+% and best case scenario of 8+%.
The “average”scenario was about 7%.
The resulting returns is not normal (symmetrical), you have a higher chance of hitting the high 7%.
Given this result, I have almost decided to implement it using the Growthpath 2040 and Fidelity Emerging mkt fund. (80/20)
Almost because I need to confirm the performance of the Growthpath fund before executing it.
My current view is that the fund is good is from their fact sheet. (have you seen their performance? Amazing for a almost passive balanced fund)
Another pro of the fund is that it is mainly passive and has a very low expense.

Didn’t follow fama/french research totally as I don’t go for value in this “plan”.
Small caps do have a higher beta than the broad market so for a longer time horizon, it will boost your returns but at a higher volatility.
The “boost” isn’t very significant, i.e., less than 0.5% for a 10% allocation.

The most attractive part of the Growthpath fund is that it has a passive bond fund component and slowly shifts equities to bonds over time without me having to do such rebalancing.
Currently the bond allocation is about 30% and for 80% GP, effective bond allocation is 24% which is slightly lower than my target but it will increase over time so it isn’t a concern to me.

Some research i did about GrowthPath 2040

Expense and turnover has been declining which is good. However at 1.29% it is at a high side still.

Allocation

Currently, the relevant sub-funds of Barclays Global Investors Index Selection Fund in which BGI World Index Sub-Fund will invest are:

  1. BGI North America Index Sub-Fund
  2. BGI Japan Index Sub-Fund
  3. BGI UK Index Sub-Fund
  4. BGI Europe ex UK Index Sub-Fund
  5. BGI Pacific Rim Index Sub-Fund

The BGI World Index Sub-Fund may invest in future sub-funds of Barclays Global Investors Index Selection Fund which cover countries that form the MSCI World Index, according to their weightings in the MSCI World Index.

US is about 55% of the Barclays World Index. UK and Euro is about 10% each and Japan about 9.54%. Pacific Rim is around 3++%.

GP 2040 has 70% equities and 30% bonds. Inside that 70% equities, 10% is from UOB themselves (Asia funds). So that leave about 60% for Barclays. Meaning about 30% of this fund is in US. 40% is rest of the world and 30% are in bonds.

In response to my query on the number of rolling 15 years used in the analysis:

I used 50, 15 years period (due to lack of data from the emerging markets).
As for the switching question, it depends on whether you believe UOB IGF is going to be good for the next 20 yrs.
If yes, then don’t change can continue with it.
If not sure, then stop adding to it and just start with the Growthpath.
If you don’t think it will be good, then do the switch.

I am in the “not sure” category so probably will end up having both.
Haven’t started with the Growpath yet because I still need some time to confirm its performance.

I may not have the flexibility here if i were to mix bonds and equity. what if somewhere down the road we suddenly realise this allocation is wrong and we cannot do much about it cause we are not in control? We will be inheriting a hell lot of switching risk then.

I also highlighted concerns on the expense ratio of growthpath. The thing about a lifecycle fund is that most of them exist as passive and therefore should hav elower cost but the expense at 1.29% is not low at all! And I have not mentioned another lifecycle competitor in Fidelity Target. More replies on his thoughts on what i have just highlighted.

For the growthpath funds, there is some discretion on how much bond and equity it is to have but it is in general shifting more into bonds as it “matures”. Which fits into my retirement plan.

The 2040 fund will “evolve” into the Today fund in 2040. (unless it closes)
In 2040, I will be well into retirement and with the returns of the Today fund of 4-5%, it will suit my retirement need.

Yes, its expense is higher than the UIGF (1.22% vs 1.12% for 2006), it is a “simple” fund which I don’t have to do rebalancing nor monitor the performance of the fund as it is passive. (Yes, there is still the Singapore Equity and Bond component that is managed by UOB but have relatively low costs even thought their performance aren’t fantastic.)

I am quite busy so I don’t have much time to do the monitoring so this fund seems to meet my need.

I am not saying this is the best fund but I think this is a good fund for busy people.

I am actually quite concern about the UIGF as its recent years’ performance isn’t very good as compared with its peers.

For the DBS Global Opp fund, it is very volatile.
Sometimes good, sometimes bad.
Its cumulative performance looks good because of some fantastic years.

Change in investment strategy.
I have found that nowadays I don’t have the time to monitor funds so closely so have decided to pick funds that are close to their benchmarks. If possible index funds or ETFs. (the singapore kind)
It also makes the asset allocation strategy more effective as active funds can sometimes really screw up your asset allocation strategy because of the bets they make.

I am splitting my portfolio into 3 parts.
i) What I already have – active funds
ii) The Growthpath plus Fidelity Emerging market plus DBS Global Advantage fund (70:20:10)
iii) Infinity Global Stk plus Lyxor ETF MSCI AC Asia-Pacific Ex Japan. (70:30)

A very weird strategy but will have to wait a few years before seeing which works out best.
If Lyxor comes out with more ETFs (eg. global emerging market, etc) I will probably abandon (i) and focus on (iii).
Hopefully more ETFs get listed on SGX so that my life becomes easier when it comes to investments.
I am much better with asset allocation than picking funds so ETFs will suit my needs.
Too bad for the estate duty nonsense for US listed ETFs, else I would be a big player in them.

I do share his view that if we have more choices in Singapore ETFs, choices would be much simpler. I for one would really hope for an ETF that tracks MSCI Emerging Markets since almost all the funds available DO NOT beat the MSCI EMERGING MKT index. Which means that all your nice returns recently do look good, but actually a dumb pc can do it better than these managers.

Another point to highlight would be the under performance of UOB United International Growth. Here, I have a few choices. I can go for Shenton Global Opp, which gives you fantastic results when all is going well, and shitty results when it isn’t. Or,I can go for either Aberdeen global opp or Infinity Global. I am incline to switch to infinity global, for its lower sales charges and expense but at the same time the fund size is abit worrying. Its 10 mil FFS!

Related posts:

  1. The case for UOB United International Fund
  2. Adding Emerging Markets to Global Allocation
  3. 2 Weeks of mini-hell
  4. Current allocation.
  5. The Active vs. Passive Debate Moves To Global
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