Personal Finance Apprentice

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)



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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photo credit: kennymatic via photopin cc
photo credit: pasukaru76 via photopin cc

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