Stop Paying
for Bad Performance

November 1, 2019 | Victor Lye


What to do when you see people being fleeced every day?
It’s hard when you see people pay too much for too little – people who don’t have a lot to start with. Yet you see the people who have so much – and who are smart enough to avoid being fleeced.

In the Singapore unit trust industry, do be careful not to pay for bad performance! The fees are already higher than the global average. Yet, the Singapore retail unit trust industry continues to grow. According to the MAS Asset Management Industry Survey 2017, the retail unit trust industry had SGD 149 billion in assets!

According to Westwood, a publicly listed investment manager in the USA, clients suffer when they are charged fees during the inevitable periods of underperformance.

In other words, traditional investment products such as unit trusts charge you whether you are above or below water!

Morningstar estimates that USA investors paid more than $105 billion in fees to underperforming large-cap managers during the ten years from 2009 to 2018.

What Smart Investors should do…

In my view, a smart investor should only pay for risk-adjusted returns. So what kind of fee structure is consistent with this?

A Performance Fee structure aligns with the client’s interest. Such a fee is paid out of actual returns achieved, and not from the base capital. A high watermark will make it fair that the investor only pays the fee for cumulative returns once.

In a human-managed fund with a performance fee, there is a risk that the manager will take excessive risks because of greed.

At SquirrelSave, your portfolios are managed by machine learning AI Machines don’t have that human greed.

It’s time for unit trust investors to shift over to SquirrelSave

At SquirrelSave, you get a personal global portfolio that is forward-looking – because it is fully AI-driven for as low as one dollar! Not only that, we charge a flat low half per cent annual management fee with a performance fee of ten per cent based on a high watermark. That means SquirrelSave earns the performance fee only when you actually gain on a cumulative basis.

For example, if a client starts a SquirrelSave portfolio with $100. And if at the end of the year, that original $100 grows 10 per cent to $110 – SquirrelSave will earn a Performance Fee of $1 (calculated as 10% of $10).

Let’s say in Year 2, the portfolio does poorly and drops from $110 to $90. SquirrelSave earns zero Performance Fee.

Then say, in Year 3, the SquirrrelSave portfolio rises from $90 to $100. Does SquirrelSave earn a Performance Fee? The answer is “no”.

Why?

Well, the last time SquirrelSave earned a Performance Fee was when the portfolio was worth $110. So with a highwater mark, it means that SquirrelSave can only earn a Performance Fee again – when the SquirrelSave portfolio crosses the $110 high watermark.

Now that’s fair to clients!

It’s time unit trust investors seriously consider shifting out to Exchange Traded Funds (ETFs) which offer lower expense ratios, better transparency and good diversification.

According to the Investment Company Institute, global ETF assets stood at US$4.7 trillion at end-2018 and is forecast by BMO Global Asset Management to double in assets to $10 trillion within the next five years. Yet, global ETFs amount to just over 10% of the total fund assets worldwide.

In the USA, ETF assets stood at $3.8 trillion at end-March 2019, about one-fifth of the mutual funds' $19.3 trillion in assets.

ETFs are still a relatively small proportion of the global total fund assets. But ETFs are growing very fast – mostly in the Western Hemisphere.

Conclusion

Unit trusts are like dinosaurs waiting to be replaced with ETFs. Yet ETFs are slow to take off in Asia – mainly because of vested interests in selling high fee earning products. This cannot be good for investors, especially small investors.

It’s time for investors to experience low-cost ETFs in SquirrelSave’s global portfolios which are designed in real-time for each investor – whether for $1 or $1 million.

Without human greed, our AI-driven SquirrelSave’s Performance Fee structure is aligned with investors.

Welcome to the World of Smart Investing!




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