Which Equity Fund Will Earn More Using Cost Averaging (Index Fund vs Other Equity Funds Part 2)

Which Equity Fund Will Earn More Using Cost Averaging (BDO Equity Fund vs PhilEquity Fund vs BPI ALFM Philippined Stock Index Fund vs FAMI Save and Learn Equity Fund)
In my previous post, I compared the index fund against the best equity funds out there. The index fund ate dust.

But even before that test, I had an inkling the index fund may not look that good compared to the "big boys" of the equity world.

And that gave me an idea. Equities are about accumulation and capital appreciation. That means to make money you buy a heck of a lot at a low price and wait until the price gets high. But because of the volatility (and the fact we're not all Warren Buffet), you're better off cost-averaging - buying a few at a time.

But what if there was a best of both worlds? What if I choose a fund with a performance that isn't the best? And I use the time it lags to hoard a lot of shares and then cash out when it hits the peak or the time is up and I need my cash?

In this post, we'll conduct an experiment if that is a viable strategy.

The setup:

Juan is an employee with Php5,000 to invest monthly.

He started 5 years ago and put up Php10,000 on November 19, 2008. He made a tough choice and sourced it from his 13th month pay, hoping that in 5 years it could change his financial future (maybe as an additional retirement nest egg or maybe as capital for potential a business).

And each succeeding month, on the 19th (arbitrarily chosen; it's my favorite number) or the business day before it if the 19th is a holiday/weekend, he will invest 5K from his salary.

Should he shoot for the stars and invest in PhilEquity? Or the less-expensive BDO Equity Fund? Should he listen to some guy on the internet and invest in an index fund? Of course, he needs to consider FAMI too (he doesn't know it yet, but it's going to beat the index for the next few years).

I'd love to keep the suspense, but the data is too voluminous to post here. Instead it's stored here, if you want to see it.

Results:

Which Equity Fund Will Earn More Using Cost Averaging (BDO Equity Fund vs PhilEquity Fund vs BPI ALFM Philippined Stock Index Fund vs FAMI Save and Learn Equity Fund)
After cost-averaging for more than 4 years Juan had "spent" a total of 290,000 pesos. Much to his delight, his money appreciated significantly. And so last Aug. 1, 2013, he decided (for better or worse) to finally redeem.

Depending on what he chose, this is how it would have grown:

BDO Equity Fund:
Portfolio Value: Php566,079.42
Percent gain:    95.1998%

Phil Equity:
Portfolio Value: Php556,720.85
Percent gain:    91.9727%

BPI ALFM Philippine Stock Index Fund:
Portfolio Value: Php553,376.20
Percent gain:    90.8194%

FAMI Save and Learn Equity Fund:
Portfolio Value: Php544,932.24
Percent gain:    87.9077%

Notes:
  • I used NAVs from July 16, 2009 and December 16, 2010 instead of July 17, 2009 and December 17, 2010. BDO had no data on those dates. 7-17 I think may have had business disruption due to Typhoon Isang. 12-17 I'm not sure.
  • The results for the index fund would have been impossible, since it has not open for new subscriptions for a long while now. But I decided to ignore that just to test the theory.
  • I ignored back-end sales loads, since they are typically waived after 5 years. This test didn't have a  5 year span, but since I'd never advise anyone to invest for less than 5 years, and this is just an exercise I chose to pretend it went past the 5-year mark.
  • To make the math simpler, I pretended all funds will let you buy fractional shares to eat up all the money you are willing to invest. I think FAMI and BDO behave this way, but I know the index fund doesn't. 

Conclusions:
(The timespan is less than 5 years, so all "conclusions" are more suggestive and not at all definitive.)

  • My theory about getting a mediocre fund to hoard a lot of shares and then cash out when it hits the peak or the time is up is a bust. For something like that to work, I'd need a fund with huge swings in value and the patience (and optimism) to go through the big dips in value. That approach is better suited for direct stock investments, I think.
  • FAMI's performance was a surprise. Sure, I was hoping the Index Fund would do better, but I genuinely didn't expect FAMI to come in 4th. But the reason is the same one Phil Equity didn't top the list...
  • Those front-end sales loads are tricky. On one hand, as we saw in the previous post, these funds typically perform well and deserve it. But they eat up resources. If not for them, PhilEquity would have topped by a wide margin (FAMI would've been only 3rd though).
  • I'm starting to form the opinion that these great mutual funds are better suited for lumpsum investments, while low-cost (but good-performing) UITFs are better for cost-averaging. I can't think of a way to test that though, so that's more like a guess to be tested in the future. Plus, the index's performance (though not really low-cost) doesn't support that theory either.
  • To be honest, it was a crapshoot. Had Juan redeemed on July 19, 2013, after placing his money (as I had thoughtlessly first planned), the index fund would've actually beat PhilEquity by a hair. It may have been due to the relatively short timespan. But then that also means...
  • Invest long term! Redeeming on different dates would've changed the ranking. But as it is, the 1st and 4th place are separated by a reasonably small margin of 21,147.18. It's significant money, but you probably won't feel bad about it after redeeming over half a million in any of the above scenarios.
  • Choose a good fund, but there's no point obsessing over it. Nitpicking about who is number 1, may gain you extra money (if you get it right) but there's no point stressing over it. If you choose among the 5 best out there, you probably won't regret the outcome as long as you invest long term.



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10 comments:

  1. I think I may have made a mistake by "overdiversifying". I actually ended up with three already diversified funds: BDO Equity, FAMI SALEF, and PhilEquity Fund (all in equal proportions, and yes, all the "aggressive risk appetite ones"). I think I should stick to just one? Maybe close one, or rather, just not add to it anymore.

    And now that I think about it, what I did probably does not make a lot of sense since the three probably invest in the same equities, and probably in more or less the same proportions (hence the only P21k difference in one of your posts -- the lowest being 550k, the highest about 570k).

    Was thinking of adding to BDO Equity, convert FAMI to Balanced, and just leave what I already put in PhilEquity (who seem to have the highest loads). BDO Equity UITF has lowest "loads", plus seem to be performing really well.

    I basically have 1 year's worth of Emergency Funds, then right now, for the "investibles", 25% each in the three MFs and UITFs (though probably won't continue giving them equally every month -- maybe just put it in BDO Equity UITF), and another 25% in individual stocks. Eventually, the individual stocks would comprise only 10% of my investments, as I actually just want to play it (i.e., if I lose, okay lang -- but I would have had fun playing and all that, with the "real" investment would be in the MFs/UITFs).

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    Replies
    1. Hi Alfred, well I guess it would be a matter of perspective.

      I probably won't invest in three different ones. But I've heard Fitz say that's not such a bad move. They perform differently after all. They way you did it, you're guaranteed not to get stuck with the laggard fund (nor the best one...).

      You could also say you are "under-diversified" as all your "investibles" are in stocks and - depending on the funds top holdings - possibly have pretty much the same companies in them.

      I think keeping three or choosing the best one or two depends entirely on you and your goals. Either approach seems to make sense. Although I've red Investor Juan advise to just pick a low-cost fund (with good performance of course) and stick to that long-term.

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    2. I think you are more correct when you say that I am "under-diversified", and I'm glad you pointed that out!

      My problem with low-cost funds here in the Philippines is that there really are no low-cost funds like index funds here, unlike in the U.S. We have index funds, too, but they're not low-cost.

      Even our low-cost funds are not low-cost funds -- they're just less high cost.

      And, right now, Dr. Charles Ellis would recommend index funds, but until the Philippines really gets low cost (i.e., .1% -- that's point one percent) index funds, and until it is proven that index funds generally beat mutual funds (as they do in the US), I think I cannot yet follow Dr. Ellis' US-centric advise.

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    3. True, it's not really low cost here. BPI's index fund charges ~1.5%, I think. I also read PNB has an index that charges even more.

      Hopefully, ETFs can change that (when it come out).

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  2. I am adamant in investing with Mutual Fund such as ALFM since there are a lot of fees and in the long run I think the ROI is not that good. Any reviews on BPI UITF specifically the FEEDER FUNDS and EQUITY? Which do you think is the more convenient investment BPI UITF or BDO UITF?

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  3. Hi Anonymous,

    Thanks for dropping by.

    Ironically enough, ALFM probably has the lowest fees of all Mutual Funds. at 1.5% per annum, it's practically a UITF. But yes, other MFs like PhilEquity and FAMI do have large fees.

    As for convenience, it depends on your situation. There's almost no difference between the two (in terms of convenience) aside from the fact that with BDO, you can't just withdraw partially. If you invested 10k today and 5k the next day, you can withdraw either the 5k, the 10k, or both. But not 1k or 2k or even 12k. (with BPI you can, in the same situation).

    Even with that though, I'd advise just going with the bank that's nearest to you if you want convenience; both can be accessed online.

    I haven't had much experience with Feeder funds, though the BPI Equity value fund seems to be ok, but not fantastic.

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  4. That means it is best to invest out money in BDO Equity fund based on the amount of earning.

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  5. You can check BDO Index fund, trust fee is 1% PA vs 1.5% of BPi Index fund

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  6. ask ko lnag, paano if nag invest ako ng 5k @ 772.11 sa bpi stock index, tapos every month nag aadd ako ng 1k eh at the time na nag add ako sobra po mababa ung rate nya and na ulit pa every time na nag add ako ng 1k mas mababa than sa unag rate na nag avail ako. nag gain po ba ako doon?

    ReplyDelete
    Replies
    1. investment value per share shares bought
      1st investment 5000 772.11 6.4758
      2nd investment 1000 769 1.3004
      3rd investment 1000 760 1.3158
      4th investment 1000 755 1.3245
      TOTAL 8,000 10.4165


      Market value as of last investment(10.4165 x 755) = 7,864.46


      Market value 7,864.46
      Less: Total Investment 8,000.00
      Net Loss (135.54)

      Delete