Stocks investment strikes fear in many people because there are so many news of people getting burnt. These are people who have invested their life savings into ‘sure wins’ only to watch in panic when stock prices suddenly tank due to a variety of reasons. Some of them then vowed, ‘once bitten, twice shy’, and hence never again ventured near stocks.
In Malaysia it’s not uncommon for properties to be more favoured over stocks for investment. After all, people often hear about prices of properties keep going up and never coming down. If it seems like a sure thing, why not?
There’s nothing wrong in investing in property. In the short term you can earn some rent and over the long term you reap its capital appreciation. The main challenge, however, is usually in accumulating enough for the initial downpayment and legal fees (if any). Also not all properties are the same. Pick the wrong property project and you can be stuck for a long time.
I’ll elaborate more about property investment in a future post but the upshot is that when you are starting out to build an investment portfolio to grow your wealth, there are other easier ways to start out with smaller amount of money than trying to buy a physical property.
Don’t Put All Your Eggs In One Basket
If you buy a property as investment, you will find that the majority of your investment funds will be allocated to that single property. The success or failure of your investment plan will depend on that property. If you are lucky, then great. If not, then it’s a costly mistake.
The same goes for stocks. If you start building your stock investment by picking and buying individual stocks then you will focus quite a bit of your investment funds in individual companies. In itself, concentrating your wealth in individual stocks is not wrong but it’s risky. If the company hits a rough patch, quite a lot of your investment can be wiped out if the stock never recovers. Keep in mind that companies can die one day and the average life of a Fortune 500 company is 40 to 50 years. The average life of a sexy tech company is probably half of that.
If you are just starting out to build your stock investment, it’s wise not to put all your eggs in one basket. An easy way to do that is buy into funds because that will automatically diversify your money into multiple stocks. Diversification means the risk of stock investing will be averaged out over the stocks that the fund purchases.
There are several types of funds. In Malaysia, unit trusts are the most common. Of these, the Amanah Saham series by Permodalan Nasional Berhad (PNB) are probably the most familiar as they have been around for ages. Their first fund, the Amanah Saham Nasional was created in 1981.
The best thing about these funds is that their minimum investment is just RM10 so it’s very easy to get started. The bad thing is that some of the funds are available to just Bumiputera citizens, meaning they have race and/or religion based eligibility to buy. For funds that are available to all Malaysian citizens, there are race based quotas on how many units each race can purchase. With such restrictions and quotas, it is a surprise that most funds do not place a limit on how much each individual can invest.
To explain the bizarre eligibility criteria, the funds were created in the past to increase the wealth of the Bumiputera folks so that they can grow to be as wealthy as their fellow citizens of other races. It’s therefore ironic that quite a few pure Bumiputera funds perform poorly (see below) and if you consider the 5% sales charge when buying into the fund, you may end up with a loss. A sad fact for me is that most of the pure Bumiputera funds are likely being held by the poor, since almost 98% of Amanah Saham Nasional unit holders hold less than 5,000 units, which translates to RM3,242 and less per person based on its NAV value of 8th January 2019.
It’s also ironic if you consider that these returns are generally below that of the EPF dividends and people sometimes withdraw their retirement savings from EPF in order to buy into these unit trusts. (It’s not a good idea)
Below are 5 year annualised returns of a few of their funds:
- Amanah Saham Nasional (Bumiputera only) – 2.00%
- Amanah Saham Equity 2 (Bumiputera only) – 3.03%
- Amanah Saham Equity 3 (Malaysians) – 2.95%
- Amanah Saham Bumiputera (Bumiputera only) – 4.71%
- Amanah Saham Bumiputera 3 Didik (Bumiputera only) – 6.35%
- Amanah Saham Malaysia (Malaysians) – 6.35%
- Amanah Saham Malaysia 2 Wawasan (Malaysians) – 6.26%
If you look beyond the Amanah Saham unit trusts, you will find many choices out there. In fundsupermart, there are 223 equity funds (ie funds that invest only in stocks) available. You are spoilt for choice!
But always beware of the fees! Sales fees, management fee, redemption fees, platform fees, etc. These fees take a big chunk of your profit away from you in good and in bad times.
Looking at the 223 equity funds, it’s clear that there are as many good as there are bad funds. Pick the ones that suit your risk appetite and check their past performance. Although past performance does not determine future performance, a fund that consistently delivers above average performance and at competitive cost is preferred.
There are 110 funds that have existed for at least 10 years. If you look at their annualised 10-year performance you will find that more than half of them perform better than the EPF by providing a return of at least 7% on average. About one fifth of them actually returned over 10% on average over 10 years so these are the cream of the crop.
In case it is not obvious, if you put in RM10,000 into a fund that returns 7% a year, your money will double to almost RM19,672 in 10 years due to the magic of compounding interest.
If the fund returns 10% a year, your money will grow 2.5 times to RM25,937 in 10 years.
Exchange Traded Funds (ETF)
If you have been following the series of my posts you may realise that I have a sore spot for fees. Most of the local funds in Malaysia charge a management fee of over 1% but there is such a big difference in their performance. How can they justify charging the same fees when the long term returns of the funds vary so much? Additionally, the fees are charged even if the fund loses money – the fund manager’s profit is guaranteed and they enjoy their salary even if they screw up.
The median 10 year annualised return of equity funds is 7.2%. When the fund manager charges a 1% fee, they take close to 14% of the profit. If it charges a 1.5% fee, it takes 21% of the profit. It’s an insane guaranteed profit margin for the fund manager.
Additionally don’t get me started with the 5% sales charge that many banks charge. Right from the beginning you lose 5% of your investment. Your investment now needs to grow 5.3%, not 5%, just for you to break even. (eg. RM1,000 less 5% is RM950. RM950 x 105.3% = RM1,000)
This is why I prefer websites like fundsupermart because they slash their sales charge to 1.75% for equity funds. Additionally, it allows you to search through many unit trusts and compare their performance and fees. If you talk to a bank or ‘personal wealth advisor’, they can only recommend to your their own products and not those from other banks. You should be free to buy any fund that meet your requirements.
But there’s one type of fund that offers a much lower fee than unit trusts – exchange traded funds (ETF). ETFs are passively managed funds which track a particular index, such as the FBM KLCI, which comprises the top 30 listed companies in the KLCI. Passive means that the fund manager doesn’t go about researching companies in order to decide which to buy or sell to as they manage the fund portfolio. Instead the fund simply allocates the money that it has based on the current weightage of the companies that make up the index. This means that the fund will perform exactly like how the index performs. If the index goes up, the fund goes up the same amount, vice versa.
Since the ETF’s blind method of allocating money doesn’t require any real investment expertise, it charges very low, if any, management fees. The FBM KLCI ETF, managed by AmBank, charges 0.5% management fee, while the CIMB ASEAN 40 Malaysia ETF, charges 0% management fee. Additionally, ETFs are bought and sold like stocks using a brokerage account so you pay lower brokerage fees compared to unit trust sales fees.
This may sound counter-intuitive, but over the long run, the FBM KLCI ETF outperforms the median 10-year return of equity unit trusts, BEFORE considering all the fees involved. The 10 year average return of the passively managed FBL KLCI ETF is 7.97%. Comparatively the median 10-year return of actively managed equity unit trusts is 7.225%.
Assuming the lowest fees scenario for both ETF and unit trust, you arrive at the following results:
- Unit trust scenario: one time initial sales fee of 1.75% (through fundsupermart) with a typical annual management fee of 1.5% and median annual return of 7.225%. Your average annual return after 10 years is 5.55%
- FBM KLCI ETF scenario: one time brokerage fee of 0.1% (through Rakuten Trade) with annual management fee of 0.5% and average annual return of 7.97%. Your average annual return after 10 years is 7.46% which is 1.9% better than the unit trust scenario.
Just for entertainment, here is the highest fees scenario for both ETF and unit trust (in case you’d opened accounts with the wrong bank/ brokerage):
- Unit trust scenario: one time initial sales fee of 5% (through a typical bank) with a typical annual management fee of 1.5% and median annual return of 7.225%. Your average annual return after 10 years is 5.225%
- FBM KLCI ETF scenario: one time brokerage fee of 0.7% (through Affin Hwang) with annual management fee of 0.5% and average annual return of 7.97%. Your average annual return after 10 years is 7.4% which is 2.2% better than the unit trust scenario.
Below are a selection of ETF funds available. Visit the Bursa Malaysia’s ETF page to find more info.
|ETF||What It Tracks||Average|
|FBM KLCI||Top 50 biggest companies listed in|
|Top 40 biggest companies listed in|
Malaysia, Singapore, Thailand,
Indonesia & Philippines
|50 largest Chinese stocks in HKSE|
(Red Chips, H shares and P Chips)
|50 largest companies listed in |
NYSE and Nasdaq
*management, trustee & index license fees
# returns as of last published report, which is not the latest result
There will be people who believe that the unit trust that they have invested in always perform better than the average one. If you are one of them and that is indeed the fact then fine, stay with the unit trust but at least be mindful of what you are paying in fees. But if you do not understand the unit trust that you have bought and do not want to bother comparing between different unit trusts, then put your money in an ETF.