Nirgunan Tiruchelvam Wed, Jun 08, 2022
Singapore’s hawker centres are unlikely sources of investing wisdom. There are 110 such establishments on this island. Every day, over three million people savour a wide range of dishes. Choices range from roti prata to Hokkien mee.
Hawker centres make Singapore one of the world’s cheapest cities for eating out. A plate of chicken rice costs $4, almost half the average hourly wage in Singapore. In London, an average meal costs $8, which is half the average hourly wage in that city.
Exchange traded funds (ETFs) are a financial innovation that has made investing as cheap as chicken rice. Investors can hold an index fund which trades like a stock. The typical management fee could be as low as 0.02%.
This means that an ordinary investor can manage $10,000 at an annual fee of 0.02%. A hypothetical ETF portfolio is cited in Eric Balchunas’ new book The Bogle Effect (see table). The total management fee is $2. This is just half the cost of a plate of chicken rice.
Unfortunately, Singapore’s savers are deprived of such value. CPF Investment Scheme provides for only five ETFs. All five are focused on Singapore.
Patron saint of index funds
ETFs partly owe their existence to Jack Bogle, the patron saint of index funds. Bogle is to investing what Steve Jobs is to computing. Jobs brought the PC into every American household. Bogle popularised investing in America, by making it cheap.
Bogle, who was born in 1929, was a child of the Great Depression. He was from a prosperous family that was laid low by that catastrophe. As a boy, he sold newspapers for pocket money.
Bogle attended Princeton University on a scholarship, where he studied economics. This was long before finance was taught in universities.
He eventually got a job with Wellington, then the leading mutual fund. By the 1960s, Bogle realised that a common practice was impacting Americans’ savings. The mutual fund industry (known as unit trusts in British parlance) was imposing high fees on investments. The average mutual fund was charging over 1% for a professional to manage money.
Savers were engaging fund managers to find a needle in the haystack. Managers would have to research stocks to find outperformers.
Bogle observed that you do not need to find outperformers. Instead, investors should just buy the index without engaging a manager. The fees for these index funds would be 90% lower. “Instead of finding the needle in the hay stack, why not buy the hay stack,” he commented.
Bogle’s other finding was that in the investment field, the only thing that you can control is the timing of your investment and the fees. The performance is up to the market. Hence, cutting fees is vital.
The silver-haired Bogle was blessed with a silver tongue. He spoke forcefully in favour of index funds. Bogle had not only insight, but also the determination to press on. Index funds were met with scepticism. The mutual fund industry dismissed them as a gimmick.
They have now caught on. Bogle’s firm Vanguard introduced index funds in 1976. Today, US$7.7 trillion ($10.6 trillion) are in index funds, which is one-third of US GDP.
ETF innovation
In 1980s, index funds received a shot in the arm with a further innovation — ETFs. The irony was that Bogle was in favour of index funds but opposed ETFs. The man who introduced ETFs was a gold trader called Nathan Most.
Most called Bogle out of the blue in 1987. He pitched ETFs. He said that if index funds could trade in realtime, it would be more efficient. It would also popularise investing for the masses. He was proved right. Today, ETFs are worth US$10 trillion worldwide, which is even larger than index funds.
CPF allows investors to hold as many as 100 mutual funds. The average cost of the mutual fund investing is 1.5%. This means that the cost of managing $10,000 is $150. This 75 times higher than for the ETF portfolio described above.
Change may be in the air. Through robo-advisers, investors can tap their CPF savings to build a portfolio that includes ETFs. The range is limited to five ETFs for now, but industry players expect the choices to widen. Singapore’s investors may then have cheap options, like the diners in the hawker centres.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column