Money Market Fund update - 31 Mar 09

In my previous article, I did a post on Money Market Fund (MMF). I explained what MMF is all about and what are some of the factors that you need to consider before putting your money in the fund.

With the current low interest rate environment, I believe these funds have lost its appeal. Nevertheless let me just compare two of the preferred MMFs available to local investors. They are Phillip and Lion Global MMF.

As usual I like to make use of Dollardex performance and charts features when comparing unit trusts. Attached below is a 1-year and 6-months performances of these two funds. You can see that Lion Global MMF performs better than its counterpart during both periods. But take note the former fund has a higher risk in terms on monthly volatility. All in all, Lion Global MMF has a slightly higher risk adjusted returns as denoted by its Sharpe ratio.


Table courtesy of Dollardex

In terms of volatility, the 1-year chart below will give you a better picture. You can see that Phillip MMF has a much smoother and upward sloping line. But Lion Global MMF may suffer momentary dipping in fund prices. In other words, you may suffer a slight loss when redeeming money from the fund.


Chart courtesy of Dollardex

Attached below is a risk return chart comparison of these two funds. I intentionally put the other MMFs in the comparison so as to give a more meaningful impression of how Lion Global and Phillip MMF perform in contrast with the other funds. You can clearly see that these two funds are the better MMFs.

Chart courtesy of Dollardex

In terms of the funds holdings, both MMFs have almost similar investments in them. I believe Lion Global MMF is able to provide a slightly higher return because of the lower management fees which is at 0.25% pa as compared to Phillip MMF which is at 0.5% pa.

In conclusion, I would say Lion Global MMF is a better choice if you are looking for a slightly longer period of investment. For a shorter period of cash movement and in terms of liquidity, Phillip MMF is a better choice.

NTUC Thrift

I have read about NTUC thrift account before but I never really pay too much attention to it. But today a regular visitor of this blog Cukcuk, alerted me to look further into it.

I find their saving account currently giving out good interest at 2% per annum. While SIBOR is low and money market funds giving out lower interests, I am surprised NTUC Thrift can still give 2% per annum.

The last saving account that I have was Citibank Step-Up account which I managed to step-up till 2%. That account I need to wait patiently for 1 year to step up the interest rate but Thrift account starts off from 2% instead.

I read the FAQ section but did not manage to settle a few questions. Below are some questions which I wrote to NTUC Thrift.

Letter to NTUC Thrift
Hi,

1) May I know the historical yield of dividend payout for Subscription Capital Account?

2) Is the money in the Subscription Capital Account capital guaranteed?

3) I understand full redemption of Subscription Capital is allowed only upon cessation of membership. Which membership is this? Is it The NTUC union membership or thrift membership?

Thanks

Reply from NTUC Thrift
Dear Mr. Mike,

Thank you for your feedback.

The past few years dividend payout is as follow:

Yr Mar 2002/Apr 2003 - 2%
Yr Mar 2003/Apr 2004 - 0.5%
Yr Mar 2004/Apr 2005 - 4%
Yr Mar 2005/Apr 2006 - 5%
Yr Mar 2006/Apr 2007 - 5%
Yr Mar 2007/Apr 2008 - 0%

The money in Subscription Capital A/c is principal protected. If Thrift is not doing well, we are not required to have any dividend payout. For example, the financial year that just ended has no dividend payout because of "paper loss" Thrift suffered.

For every member, they need to open Subcription Capital A/c with a min deposit of $20. This $20 is refundable when a member cease membership with Thrift.

In case if you are not aware, you need to make a one time payment of $20 to NTUC Thrift when opening a Thrift membership. This money is so called your membership fee which will be contributed to your Subscription Capital account. You can potentially earn dividend payout from that account. You may deposit more funds into this capital account if you wish to.

If you don’t wish to contribute more into the capital account, you may make use of NTUC Thrift saving account, fixed deposits and loans to enjoy attractive rates.

Dollardex performance and charts feature

Even though I don’t have an account with Dollardex, I really like to use the performance and charts feature from their website. I prefer its feature to Fundsupermart fund returns or chart center features. So whenever I need to compare performance and charts among various unit trusts, I will go to Dollardex website.

The picture above shows a user friendly menu consisting of a wide selection of options that you can choose if you wish to compare unit trusts. You can view chart, price and performance of unit trusts up to the past ten years if available.

An interesting tool that I like most is the ability to display risk-adjusted returns denoted by Sharpe ratio and monthly volatility of a fund. Thus you can make use of the available data as an aid in your funds selection process. This can help investors to save time if they wish to find out the Sharpe ratio and volatility of a fund.

You can explore more on Dollardex performance and charts feature from the attached link. It is good if Dollardex can add the other technical risk ratios like alpha, beta, standard deviation and R-squared of a fund. They are useful statistical measurements used in modern portfolio theory (MPT) that can help investors find out the fund’s risk reward profile.

NTUC Flexi-Cash

In one of my previous articles on Money Market Fund (MMF), I made a comparison on some of the funds that you can buy online. I did not include NTUC Flexi-Cash in that comparison, so I thought of writing something about it now.

From the name, you know that Flexi-Cash is offered by NTUC. You may want to read more about Flexi-Cash from their official website. The description sounds too good to be true but in fact there is nothing much to cheer about.

First of all, let me highlight its good points. From the FAQ, its management fee is at 0.25% per annum. Assuming that expense ratio is the same as management fee, the expense ratio of 0.25% per annum is considered very low for a MMF.

On top of that, the other strong point is the minimum death benefit of 105% of total investment amount after first year. It is mentioned that the insurance is given at no extra cost. Is it really true? In the event of death, NTUC will pay the cash value of the investment or the minimum death benefit, whichever higher.

Now I shall I highlight its disadvantageous in points form.
- Minimum investment amount is $5000. That is the reason why they can keep expense ratio lower
- Minimum withdrawal amount is $500
- Must maintain minimum investment balance of $5000
- First year policy fee of $20. So now you know where the cost of insurance comes from. For that amount, you can get a death protection of at least $100K with a term insurance

The minimum amount of $5000 and requirement to pay a policy fee are really a put off for me to consider this fund. MMFs are meant to cater for short term saving needs. Therefore Flexi-Cash does not meet those criteria. Even if you are looking for a long term saving, why do you need to pay for the policy fee if you don’t need to pay with other funds? In my opinion, the policy fee is to cover the insurance portion which is barely adequate.

As for the performance of the fund, again there is nothing spectacular about it. The 12 months to 31 May 2008 annualised return for Flexi-Cash is 2.07% while Lion Global MMF is 2.19%.

In my conclusion, it is not really that flexible as the name of the fund implies. I think you are better off with the other MMFs available online.

Money Market Funds

Money Market Fund (MMF) is a fund that invests in short term government and corporate bonds, treasury and commercial bills, deposits with financial institutions or some other debt securities that you can name of. It is a fund that gives investors an alternative solution to fixed deposits. Some investors don’t like the idea of locking up their money in fixed deposits; therefore they choose to put them inside MMF.

Just like fixed deposits, MMF is a low risk but low return investment fund. Thus, investors who have low risk appetite prefer MMF to an equity fund. MMF also offers a convenient parking place for an investor’s cash reserve. He may choose to put his cash reserve in MMF while waiting for investment opportunity to arise.

There are many choices of MMFs that are offered to investors in Singapore. I have put up a list of some of them in the table below.

Money Market Fund	ER (%)	Fund Size (SGD million)	Launch Date	Holdings (May not be top 3)
Lion Global SGD MMF	0.46	116.4 (as at May 30, 2008)	1-Nov-99	Sing Investments & Finance Ltd MTN 4.36% 17/04/2009
				City Developments Ltd MTN 2.995% 16/10/2008
				F&N Treasury Pte Ltd SER MTN 3.065% 10/09/2008
Phillip MMF	0.61	407.31 (as at Mar 31, 2008)	16-Apr-01	Capitaland Commercial 4.26% 10/11/2008
				Tuas Power Ltd 4.5% 28/5/2009
				F&N Treasury Pte Ltd 3.065% 10/09/2008
DBS Enhanced Income SGD	0.44	453.44 (as at May 31, 2008)	6-Sep-00	City Development 2.3 20/02/09 MTN
				Woori Bank 2.82 20/08/08 EMTN
				Guocoland LTD FRN 19/10/08 MTN
DBS Navigator Ready Access	1.68	63.72 (as at Mar 31, 2008)	7-Sep-07	City Development 2.3 20/02/09 MTN
				Com Bank Australia 6 24/06/09 MTN
				Cadbury Schweppe 4.07 19/04/08
Fundsupermart Cash Fund	0.35	289.60 (as at April 29, 2008)	22-Jan-07	OCBC Bank Spore
				Landesbank Baden-Wurrttemberg Spore
				Credit Suisse Spore
Schroder $S Reserve Fund	0.37	456.60 (as at May 31, 2008)	1-Oct-01	Singapore T-bills 0% 12/06/2008
				Export-Import Bank Korea 2.835% 20/7/2008
				Singapore T-bills 0% 24/07/2008

Data is latest and correct as of this writing. Please refer to factsheet for latest information

Except for both DBS and Schroder funds, the other MMFs hold assets only in Singapore dollar. Therefore you may have to consider the risk of currency exchanges when investing in DBS or Schroder funds. These funds can also be more volatile as you can see from the one year charts.


Chart courtesy of Dollardex


Chart courtesy of Fundsupermart

DBS Navigator Ready Access is a classic example of how an expensive fund can perform poorly. The fund performs badly and is also volatile among all the funds. In my opinion, if you are looking for a temporary parking place and preservation of your cash reserve, Phillip MMF and Fundsupermart Cash Fund are good options to consider. These two funds offer same day switching when you are buying into stocks or unit trusts.

If you are conservative, looking for an alternative to fixed deposits and willing to keep for a longer term, you may consider Lion Global SGD MMF which gives slightly higher return than the other funds. However, take note that liquidity will be compensated for the higher return of this fund.

All of the MMFs described above can be bought at no sales charge from Dollardex, Fundsupermart or Phillip Capital. Lastly, as for the returns of the funds, you can expect them to be around SIBOR or Singapore dollar fixed deposit rates. They too can move up or down in line with the interest rate that we live in.

In my opinion, its return is not the main factor in considering a MMF. It is the liquidity and ability to preserve your capital that are the important factors in deciding for one. If you want a fund with higher return, then you should consider another asset class to achieve that.

US Exchange Traded Fund (ETF)

As of now most of my CPF-OA and CPF-SA money are invested in unit trusts. Only some of my CPF-OA money is invested in stocks. And a major portion of my cash is invested in Singapore stocks while the balance in high yield deposits.

I have faith in my own country’s economy and since I do have home ground advantage of our local stocks, which is why I choose to put substantial amount of money in them. However I do see some risks in investing in a single country market like Singapore.

An important rule of investing is to diversify. It is not advisable to put all your money in a single country market. As such I am looking for opportunities to invest in global stocks.

However being a small time investor, it may not be efficient to invest in global stocks on my own. Furthermore you don’t live in that country and you may not have sufficient knowledge in those stocks. Therefore I decided to look at ETF listed in the overseas exchanges to gain exposure.

Why do I choose ETF instead of unit trusts? The main reason is definitely cost. And as all the ETF listed in SGX market are not liquid, recently I went all the way to US exchanges to look out for ETF. They really amazed me with a list of active ETF there.

I did make use of ETF screener at Morningstar website for ETF that tracks international indexes and with expense ratio less of 0.4%. It gave me a list of choices as below.

Fund Name	Morningstar Category	Expense Ratio (%)	P/E	PTB	Yield (%)	Total Assets ($m)	Standard Deviation (%)	Sharpe Ratio (%)	Trading Volume	Inception Date
BLDRS Asia 50 ADR Index	Diversified Pacific/Asia	0.3	--	--	1.56	114	15.93	0.81	48,701	11/13/2002
BLDRS Developed Markets 100 ADR Inde	Foreign Large Blend	0.3	7.76	1.15	2.67	150	11.66	0.92	17,234	11/13/2002
BLDRS Emerging Markets 50 ADR Index	Diversified Emerging Mkts	0.3	--	--	1.59	930	21.05	1.5	314,712	11/13/2002
BLDRS Europe 100 ADR Index	Europe Stock	0.3	7.97	1.18	2.9	44	11.81	0.95	4,374	11/13/2002
DJ Euro STOXX 50 ETF	Europe Stock	0.3	10.26	1.54	2.83	476	12.3	1.14	622,528	10/15/2002
DJ STOXX 50 ETF	Europe Stock	0.3	10.26	1.57	3.2	116	11.38	0.86	8,760	10/15/2002
iShares MSCI EAFE Growth Index	Foreign Large Growth	0.4	14.48	2.37	0.92	1,449	--	--	52,606	8/1/2005
iShares MSCI EAFE Index	Foreign Large Blend	0.34	12.42	1.68	2.61	47,565	10.91	1.08	10,528,041	8/14/2001
iShares MSCI EAFE Value Index	Foreign Large Value	0.4	10.75	1.27	3.33	1,077	--	--	69,626	8/1/2005
iShares S&P Global 100 Index	World Stock	0.4	12.13	2.05	1.81	1,356	9.61	0.62	70,509	12/5/2000
SPDR MSCI ACWI (ex-US)	Foreign Large Blend	0.35	12.9	1.84	1.89	309	--	--	16,881	1/10/2007
SPDR S&P BRIC 40	Diversified Emerging Mkts	0.4	16.15	3.25	--	347	--	--	68,329	6/19/2007
SPDR S&P World ex-US	Foreign Large Blend	0.35	12.53	1.7	1.78	26	--	--	1,100	4/20/2007
Vanguard Emerging Markets Stock ETF	Diversified Emerging Mkts	0.25	13.02	2.21	1.9	27,529	19.67	1.31	591,001	3/4/2005
Vanguard Europe Pacific ETF	Foreign Large Blend	0.12	11.46	1.58	--	3,894	--	--	473,177	7/20/2007
Vanguard European Stock ETF	Europe Stock	0.12	10.82	1.65	3.26	36,296	11.12	1.16	271,663	3/4/2005
Vanguard FTSE All-World ex-US ETF	Foreign Large Blend	0.25	11.86	1.67	0.88	2,716	--	--	242,392	3/2/2007
Vanguard Pacific Stock ETF	Japan Stock	0.12	13.41	1.41	2.47	16,881	12.18	0.86	128,896	3/4/2005

Some of the ETF expense ratios are as low as 0.12% per annum compared to our StreetTRACKS STI which is at 0.3% and Lyxor MSCI Asia Pacific ex Japan which is at 0.65% per annum. From the list, I can invest in a minimum of one ETF that can cover the global market.

I have short listed Vanguard Emerging Markets ETF and iShares MSCI EAFE Index which will form a supplementary portfolio of my long term investment using cash. Currently I am in the process of setting up my access to trade in US markets with DBS Vickers and OptionsXpress.

Investment, savings and annuity calculator

I have been trying to improve my skill with Microsoft Excel. Now, I realise how powerful Excel can be in doing financial calculations which can’t be done on a calculator easily. By exploring Excel, it helps me to enhance my knowledge in finance as well.

I frequently used the financial calculators available online to compute my final investment values based on a certain projected returns. However, there is a limitation on all the online calculators. To compute final value of investment or savings, all of them accept only inputs with regular payments or withdrawals. For example, while making monthly contributions to my investment, I want to make some withdrawals and at the same time calculate the final values, I won't be able to do that with those calculators. Probably I have not scanned the World Wide Web completely for such a calculator.

I believe the irregular payments or withdrawals can be computed via software. Alternatively, I can make use of the formulas in Excel to do the job. As such, I came up with a flexible and all in one investment, savings and annuity calculator. You may download this investment, savings and annuity calculator from the link that I posted. Below is a picture of how the calculator looks like in Excel.

I know I am not the first person to come up with such a calculator in Excel, but the completion of this calculator is considered an achievement to me, especially for a person who has a zero finance background just last year.

Expense ratio versus sales charge

It is imperative that you keep your investment cost low no matter whichever instruments you may want to invest in. It applies to unit trusts investment as well. I am sure some of you might have heard of a wrap account which offers funds with no Sales Charge (SC). The advantage of this account is that you are given free switches throughout the year. The catch is you need to pay a wrap fee of lets say 1% per annum. Is it really worth to pay extra fees in exchange for the free switching?

By paying an additional wrap fee, it means your total Expense Ratio (ER) is increased by an additional amount equal to the wrap fees per annum. So now the question is, is it worth to pay a fund with SC and low ER or no SC and high ER? For example, is it better to invest in a fund with 1.5% SC and 1.5% ER or a fund with 0% SC and 3% ER? Let’s assume you intend to do a Regular Savings Plan (RSP) of $1000 monthly for a long term investment. Sit back and think which option is good before scrolling down.

Congratulation if you choose the former. Remember it is acceptable to pay a one time SC than to pay higher ER continuously in the long run. A higher ER means more fees are eroding your returns. Therefore choose a fund which has a lower SC if you intend to keep the investment for long term.

The effects on your final investment value are illustrated in the following table for different cost of investment. You can see a significant reduction in the final value if the ER is higher. If you wish to do your own computation you may download my custom made excel file to see the difference.

Scenario: An investor who wishes to invest $1000 monthly assuming the fund can generate an annual return of 8% per annum.
Option 1: Fund with 1.5% SC and 1.5% ER
Option 2: Fund with 0% SC and 3% ER

	Option 1		Option 2
Length of investment	Total Invested	Final Investment	Total Invested	Final Investment
after 5 years	$60,000.00	$69,645.52	$60,000.00	$68,090.02
after 10 years	$120,000.00	$165,065.92	$120,000.00	$154,992.06
after 15 years	$180,000.00	$295,800.14	$180,000.00	$265,903.52
after 20 years	$240,000.00	$474,917.34	$240,000.00	$407,457.78

Choosing a fund

Investing in unit trusts is one of the many instruments that one can venture with their capital. Unit trusts allow you to invest in a region or a type of asset which you can’t easily access as an individual investor. For example, you may find it impossible to buy Korea stocks but it is possible for you to invest in a Korea equity fund.

One of the important steps in making an investment plan is fund selection. Assuming you have already done an investment goal, know your risk appetite and decided on the right asset allocation, the next step is to choose the right funds before executing that plan. First you can read more on how to make an investment plan from sgfunds, but in this article I am going to share what are the points that you need to look out for when choosing a fund.

One of the most important criteria when choosing a fund is its annual expense ratio. An expense ratio includes management fees and other charges which you need to pay to the fund manager. A typical annual expense ratio can range from 1% to 2.5% for an equity fund. It is advisable to choose a fund that has a low expense ratio so as as to maximise returns. When you invest in a fund, the expense ratio is computed daily and automatically deducted from the Net Asset Value (NAV) or price of your fund.

Besides expense ratio, Sales Charge (SC) is also an important criterion when choosing a fund. Most of the funds sold in Singapore are front-end loaded type. That means you need to pay a certain fee in terms of % to the fund house or distributor if you want to invest in that fund. Choose a fund that has lower SC so that you have more capital to be invested earlier.

A typical SC for most equity funds can range from 1% to 2% if you buy from online fund houses like Fundsupermart, POEMS or Dollardex. Take note that if you are a long term investor, you are better off choosing a fund with high SC and low expense ratio than choosing a fund with low SC and high expense ratio. Switching charges should also affect your decision when buying funds.
After looking at the fees, you should then see the fund size. A fund which has a smaller size may pose the fund manager a difficult task to do proper diversification or allocation. A smaller fund may also faces the risk of an early termination. Therefore choose a fund which has a big fund size.

You always hear that past performance do not guarantee future performance. Even though this statement is true but it should not deter you from choosing a fund which has a good track record. For example with all things being equal and you are asked to choose between a new fund and an older fund which has been performing well, which fund would you choose? Obviously you would choose the latter. So choose a fund that performs well historically or as good as its benchmark.

You might also want to take a look at the fund top ten holdings or country and asset allocation from the fund fact sheet. Make sure you are comfortable with the allocation made by the fund manager before investing into it.

You can also check the management style adopted by the fund manager. For example, Lion City fund managers adopt growth investing while Aberdeen fund managers adopt value investing. Choose a style that you are comfortable with.

The final criteria and the least important points you should look out for are its minimum subsequent investment, minimum redemption amount and minimum holding. These minimum amounts will affect your future decisions when making rebalancing, redemption or switching of the funds. For example, if the minimum holding amount is big, it is difficult for you to take profit if your invested capital is small.

The above are some of the important points you should consider before putting your capital in unit trusts with costs being the most important factor.