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Posts Tagged ‘Index Funds’

Costs savings in airlines: every little bit counts

In Airlines, Financial competency on 14/11/2013 at 7:21 pm

Singapore Airlines (SIA) has reported a 78% rise in net profit for its second quarter*.

This reminded of a story in the New York Times, some time back, that Delta Airlines by slicing an ounce off its on-board steaks saved US$250,000. It even calculated that removing a single strawberry from its First Class salads would save US$210,000.

Talking after looking after the pennies, and the dollars will look after themselves.

In investing, John Bogle, the founder of indexer Vanguard, keeps stressing the importance of buying funds that charge low fees. The expenses saved when compounded over time adds to performance. Besides most active fund mgrs underperform the market., so they mare a waste of money. Indexers charge very little in comparison with active managers.

Related posts:

http://atans1.wordpress.com/2010/01/01/the-perils-of-indexation-revised-and-updated/

http://atans1.wordpress.com/2010/02/16/even-the-rich-should-use-index-funds/

http://atans1.wordpress.com/2011/01/07/rebalancing-can-lock-in-profits-trim-losses/

 

——–

*Asia’s second biggest carrier was boosted by the sale of aircraft, spare engines as well as increased passenger traffic.

The firm posted a total net profit of $128.6m (£80.9m) for the quarter, up from $72.1m a year earlier.

But it warned it was facing tough competition and a strong Singapore dollar. (BBC report)

Old fashion 60/40 beats hedgies! Lot cheaper too

In Financial competency on 19/07/2012 at 6:22 am

Before they discovered hedge funds, pension funds and endowments typically held portfolios with 60 percent in equities and 40 percent in bonds. Many would be better off if they had stuck with the old formula.

Hedge funds have trailed both the Standard & Poor’s 500 Index and a Vanguard index fund with the same 60/40 mix over the past five years, according to data compiled by Bloomberg. The balanced fund beat the main Bloomberg hedge-fund index in six of the last seven calendar years, according to data compiled by Bloomberg.

http://www.businessweek.com/news/2012-07-11/hedge-funds-trail-vanguard-as-elliott-returns-atypical

Still as Bloomberg News reports: “GLG Partners, a unit of the world’s largest publicly traded hedge fund manager, formed a long-short equities team in Asia co-headed by a former fund manager at Singapore’s sovereign wealth fund, seeking opportunities in the region’s stock market.” http://www.bloomberg.com/news/2012-07-15/glg-forms-asia-equities-team-co-headed-by-former-gic-manager.html

 

 

 

Fifty / Fifty Approach in Investing

In Financial competency, Investments on 08/12/2011 at 5:13 am

 Some research from America, and how it can tried out here.

Vanguard created a model portfolio divided equally between stocks and bonds, and compared the returns in periods of economic expansion and recession. It found that “the average real returns of such a portfolio since 1926 have been statistically equivalent regardless of whether the U.S. economy was in or out of recession.”

Vanguard’s founder, John C. Bogle, popularized index funds, and the study tracked the stock and bond markets using indexes that mirror the broad markets. Individual stock and bond selection wasn’t involved at all.

http://www.nytimes.com/2011/11/27/your-money/half-stocks-half-bonds-a-solution-for-turbulent-times.html?src=me&ref=business

What accounts for these results? Put simply, bonds tend to outperform stocks when a recession is on the horizon, while stocks tend to rally when an economic expansion is in the offing. “The financial markets themselves tend to move in advance of the economy,” Mr. Davis said.

Predicting the economy’s direction is famously difficult. So unless you have substantial bond holdings in your portfolio well before a recessions begin, you’ll miss upturns in the bond market. And unless you’re holding stocks before an economic recovery has started, you’ll miss those big rallies.

By holding stocks and bonds in equal proportion — a portfolio that’s easy to construct by using index funds — you won’t need to be prescient; you can stick to your portfolio and ride out the storms.

Of course, a 50-50 stock-bond division is relatively conservative. Alter those proportions and the results will shift significantly. During recessions, for example, a portfolio containing 60 percent stocks and 40 percent bonds fared worse than the 50-50 portfolio, with an average real return of 4.9 percent annually. In expansions it did better, with an average real return of 6.8 percent, according to Vanguard’s calculations.

That points out the allure of market timing. In an ideal world, if you knew in advance where the economy was heading, you’d be a market wizard. You would shift your entire portfolio into stocks during expansions, for example, and put all of it into bonds in recessions. If you could actually do this, the results would be impressive. In expansions, Vanguard found, stocks have gained an average of 11.9 percent annually, after inflation, while the comparable figure for bonds in recessions is 7. 2 percent That kind of timing is ideal.

BUT it’s easy to shoot yourself in the foot. Get the timing wrong and hold only stocks in recessions, for example, and you’d have an annual average gain in those periods of 3.3 percent, after inflation. And if you hold bonds in expansions, you’d lose an average annual 0.7 percent, also after inflation.

 Want to try this here? http://www.nikkoam.com.sg/files/documents/funds/phs/phs_homebalanced.pdf

 The term sheet says, among many other things:

WHAT ARE YOU INVESTING IN?

You are investing in a unit trust constituted in Singapore that passively invests its

assets primarily in S$ denominated fixed income securities and Singapore-listed

equities in the proportion of approximately 50:50 respectively (proportionate

allocations are subject to a 5% variance).

The Managers intend to invest all or substantially all of the Fund’s assets in the

following exchange traded funds (“ETFs”), namely the ABF Singapore Bond Index

Fund and the Nikko AM Singapore STI ETF (the “Underlying Funds”).

Both of the Underlying Funds are managed by the Managers.

The base currency of the Fund is S$.

This is for yr further study. I’m not recommending either the 50/50 strategy or the product.

One Big Thing We Don’t Know About Stocks

In ETFs, Investments on 08/08/2010 at 6:54 am

Sumething to think about if you are investing in equities for the long term, esp if you are doing it via ETFs or other low-cost index funds.

The only reason we invest in stocks is to earn more than we would get from cash or bonds. The amount you are supposed to earn by taking the additional risk of owning stocks is called the risk premium. If you don’t get paid more for taking the risk, you should put your money in bonds.

Over the last 207 years you got paid 2.5 percentage points more each year (on average) to invest in stocks than you did in bonds.

But you know what they say about statistics, right? In the real world, we have to deal with the fact that, like all averages, this one has some serious problems. Sometimes the risk premium is higher than 2.5 percent, and sometimes it goes away or is hugely negative (say, in a bear market).

Until recently, most of us thought of bear markets as those three- to five-year periods where you grit you teeth and hang on. But recent experience is more painful than that. Read the rest of this entry »

Our SWFs: What our MPs are not asking II

In GIC, Investments, Temasek on 30/04/2010 at 9:52 am

Do they even know that, Norway’s finance ministry will tighten risk controls over the country’s sovereign wealth fund but has rejected calls for an end to active management?

The scope for active management of the NKr2,757bn US$456bn) oil fund will be limited  after criticism of its performance during the financial crisis.

Norway has been reviewing its investment strategy since the fund lost 23 per cent of its value in 2008, doing worse than the decline in the benchmark portfolio against which it is measured. Initial calls for a shift to passive management have become more muted as the fund recovered most of the previous year’s losses in 2009 and outperformed the benchmark by 4.1 percentage points.

However, the report proposed the scope for active management, measured in terms of expected tracking error from the benchmark, should be reduced from its upper limit of 1.5 percentage points to 1 point.

Other proposals included limits to leverage and tighter regulation of risk concentration.

The fund, officially known as the government pension fund, recorded a return on investment of 25.6 per cent in 2009, the best in its 13-year history, on the back of its worst performance the year before.

As the Norway Fund went into the crisis underweiged equities, it used the opportunity to load up on equities last yr.

Our MPs should be asking ministers why S’pore is not following the Norwegians?

Fat chance as they never asked these the questions in this posting.

m/2010/03/15/our-swfs-what-our-mps-are-not-asking/

FYI

In Marchm Carl Heinz Daube, the head of Germany’s formidable debt management agency, travelled to China and Singapore for a meeting with two of the world’s biggest investors – as part of an attempt to tap a new pool of investors, such as sovereign wealth funds – who might be willing to buy German government bonds.

Sumething that the FT said “that would have seemed almost unimaginable – or unnecessary – five years ago.”

Even the rich should use index funds

In Financial competency on 16/02/2010 at 6:14 am

Burton G. Malkiel* of “A Random Walk Down Wall Street,” fame has just published “The Elements of Investing” with Charles Ellis, an investment consultant. He argues that wealthy people lose out by chasing the latest, greatest investment: they should be index funds, ” the economy cars of the investing world”.

“His assertion that even the wealthiest investors should use indexes is intriguing” and this article from NYT examines “his main arguments in favor of indexing and the rebuttals from advisers who earn their livings doing the opposite”.

And no, I’ve not forgotten that I promised that I would blog on rebalancing a portfolio that uses index funds.

*Backgrounder

“Mr. Malkiel, a professor of economics at Princeton University, has long advocated index funds … He has long said that no one can consistently pick winning stocks and bonds. He argues that index funds are the best, low-cost ways to invest money you will need … This is still a strategy that is good for people of all income levels,” he said. “If I took all the mutual funds that existed in the early 1970s and asked the question how many really beat the market through 2009, you can count them on the fingers of one hand.”

The Perils of Indexation (Revised and Updated)

In Investments on 01/01/2010 at 5:36 am

(Been thinking more about this since I blogged on this topic a few weeks ago. This is an expanded and revised version.)

This writer agrees with Warren Buffett that buying low-cost index funds  is the best way for most people to invest in equities.  http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But he is not blind to the problems with index investing.

Even over 10 years, things can go wrong

– The return of the Dow to 10,000 (10428 on NY’s eve) serves as a reminder that US stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before reaching a high of 14,164 two years ago and falling to a low of 6,547 in March 2009.

– In 10 years the FTSE is only 25% lower. A lot better than the Dow but it too has been very volatile.

And longer term : “For those seeking solace in the conventional wisdom that stocks rise in the long run, consider this: 20 years after Japan’s stock market peaked, share prices are still less than 25 percent of their top values, ” from NYT article in March 2009.

All the above means is that buying index funds is fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds. (I hope to blog something on rebalancing in early 2010). In the meantime, an example of rebalancing http://www.fisca.sg/product_reviews?mode=PostView&bmi=210476

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter (you may need to draw on yr capital). Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demoralise you.

“It’s sadly ironic that the boom in tracker [index] funds at the end of the 1990s came at the most inappropriate moment possible,” says a BBC writer.

But the article implicitly points out that the alternative could have been a lot more worse. Read about the stocks that lost value and have little chance to recover.

At least an index fund can bounce back.  Look at STI: STI started 2000 at around 2000. Went to a high of just below 4000 and on 31 Dec was at 2897. Just in March 2009, it was at 1455.

The moral of this piece: index but rebalance periodically. As I said, I will blog on rebalancing soon.

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