Asked on 29 Apr 2019
Hi Anonymous, it's Chuin Ting from MoneyOwl. Thank you for your question. We start first from our investment philosophy - what would give our clients the best chance of meeting their financial goals - and then look for funds and instruments that best fit this philosophy. We also take into account what is suitable for the ordinary, Singapore-based investor. We looked at about 4-5 fund managers' products before landing on Dimensional. Our investment philosophy has the following main tenets:
Broad diversification - because we believe that asset allocation explains the bulk of the variability in returns, we go for globally and sectorally diversified funds that provided the broadest market exposure to "make up" or fulfil our asset allocation-based portfolios. In this way, we do not take country/market, sector, or company-specific risks. For equities, this means global equities (both developed markets and emerging markets). For bonds, we go for global bonds (but hedged back to SGD - explained below). Dimensional funds we have chosen for equities have 7,500 securities in the Core Equity fund, 900 securities in the Emerging Markets Large Cap fund and 200 securities in the Global Short Fixed Income fund.
Market-based return, not "active" management based on forecasts or individual manager skill - we believe that markets are efficient, and the track record of active fund managers has been very poor. We believe in harnessing the collective wisdom of markets. In both the short and long terms, only a minority of active managers outperform their benchmarks - and this is observed across developed markets equities, emerging markets equities and bond markets. Furthermore, the persistency of good performing managers is low - in other words, even if you managed to select one manager in that minority that outperforms in year 1, by year 5 in all likelihood he is no longer top performing. Thus, we choose funds that do not do such active management such as tactical asset allocation shifts based on reading of macro data or forecasts, or stock picking based on forecasting sector rotation or company earnings.
2 types of funds can fulfil this "market-based" criterion. One is passive funds, but there are no globally diversfied passive indexed funds available for retail clients in Singapore. (On why we did not choose ETFs, please see below.) Two is "evidence-based" funds, namely, Dimensional funds. In its funds, Dimensional takes a broad market exposure and tilts them towards “dimensions” or factors that have been documented over time and with evidence of higher projected return over the long term. For equities, for example, these tilts are towards value, small size and profitability. The observation of these dimensions are based on leading academic research, including that by Nobel laureate Eugene Fama and his colleague Ken French (Fama being the progenitor of the Efficient Market Hypothesis in 1966). Note that market efficiency does not mean that all assets have the same expected return.
As a side comment, this trust in markets rather than in individual manager skill is evinced in the corporate culture of Dimensional and its principals. On a corporate level, to keep costs low, they do no advertising, never pay any commissions, moved their HQ to Austin, Texas. Over the past years when my colleagues and I met with Dimensional folks, we were struck by how humble and down-to-earth they are. By their own admission, they are rather "boring".
But perhaps the meek do inherit the earth:
Over a 15-year period from 2003-2017, 73% of Dimensional's equity and fixed income funds outperformed their prospectuses' benchmarks, while in contrast only 14% of equity and fixed income funds that were around at the start of 2003 beat their Morningstar category index.
Low costs - kudos to all the companies in this event on this count, which are choosing low-cost funds which pay no trailer commissions (which often account for up to half of funds' high expense ratios) because this affects the return of investors. However, low-cost by itself is insufficient for a fund to be selected by MoneyOwl, as there are funds which have low expense ratios but market-time through allocation shifts in response to macro or market data.
Suitable for small investors in Singapore - this set of considerations lead us to prefer SGD-denominated unit trusts rather than ETFs:
a. As an NTUC social enterprise, MoneyOwl seeks to serve the ordinary investors and we particularly encourage regular savings plans (RSP) whereby a sum is put towards investments every month. We start our minimums at $100 lump sum/ $50 monthly, so almost everyone can invest! For this reason, while ETFs listed on overseas exchanges were considered, they are not suitable for small investors as the amount invested might not be enough to buy whole shares and investors would end up either with fractional shares, or not be fully invested. MoneyOwl is not comfortable with fractional shares of ETFs as legal ownership is not clear. There is no such problem with unit trusts/ funds. (There are a few additional issues of withholding/estate taxes, bid-ask spreads, forex spreads etc. esp for US-listed ETFs)
b. There is no suitable global bond passive ETF that is currency-hedged to Singapore dollars, unlike the Dimensional bond fund which is currency hedged. Bond currency exposure is generally hedged back to base currency because the volatility of currency exceeds that of bonds, and it does not make sense to take this additional risk.
Finally, I want to add a point that, while not directly related to why we chose Dimensional, is relevant in MoneyOwl philosophy of how we give clients a successful investing experience. Dimensional funds are unique in that worldwide, they are sold only through advisers. Dimensional believes in "advisor alpha" - that through the work of advisors in helping clients navigate trade-offs and especially to risk-coach clients to stay invested during turbulent times and not market-time by moving in and out and losing out on return. Thus MoneyOwl is more than just an access channel to low-cost or quality investments. Some people have commented that many "roboadvisors" are more robo-fund managers or robo-tools. MoneyOwl has a robo platform through which we deliver some parts of advice, but we also have a team of human advisers - our bionic model - to deliver this "advisor alpha" that Dimensional believes in.
Thank you for reading this and I hope it gives you better insight into how MoneyOwl selects funds for our advisory portfolios. I'll be happy to explain more at the event!
AutoWealth adopts a rigorous process to screen over 7,000 ETFs listed globally and select the best ETFs based on factors including diversification effect, direct holdings of underlying Bonds or Stocks, reputation of the ETF provider, ETF fund size, liquidity and expense ratio amongst other factors.
You may access our other FAQs at https://www.autowealth.sg/faq.php
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