A month or so ago, I decided to open some sort of investment account. Not for punting, just to stick some money in and let it grow. (Expats don’t have access to the nifty tax-free retirement funds that residents do – Australian superannuation, US 401(k) funds, or Singapore’s CPF – you’ve gotta handle it all yourself, and post-tax too.)
And because I am the most boring investor in the world, I wanted exchange-traded index funds. You know the sort. You buy ’em on the exchange just like a normal stock; they pick an index, track it closely, and they never trade except when the index itself changes. They’re simple, effective, and deathly dull and boring.
But boring is handy if you’re a long-term investor – you’re buying a basket of stocks, so you benefit from diversification; you’re not paying an active manager for sub-standard performance (most actively managed funds don’t beat the market); and you’re not paying the outrageous sales charges and management fees that actively managed funds charge.
In Australia, you have the StreetTracks 200 fund (code: STW) that tracks the S&P/ASX 200; in the States, you have the SPY fund that tracks the S&P500; in Singapore you have the STI ETF. No matter what you pick, you’ll pay about 0.3% brokerage to get in, 0.3% to get out, and 0.3% a year in management fees (which are deducted from the fund’s price, you don’t actually have to cut a cheque every year).
So I wandered into HSBC and asked if they could set me up with a brokerage account.
(Read on for more – plus a straight-faced lie!)
But I want to buy stocks. I want to pay brokerage. I am trying to give you my money and you will not take it.
“We offer unit trusts instead. They’re very good. Would you like a brochure?”
So I looked at their unit trusts. Can I have an index-linked unit trust, so I’m not paying some clown to punt my hard-earned cash around? I sure can. There’s exactly one listed.
It’s the Infinity US500 Stock Index Fund, which is a “feeder fund” to Vanguard’s well-respected (and low-fee) S&P500 index fund. All well and good. The Vanguard fund charges 0.15% management fees, and no entry or exit fees. Sounds great.
The feeder fund charges a 2% entrance fee and 0.45% a year management fees.
So what do you get for those stupendous extra fees?
You get… well.. spectacular underperformance.
The Vanguard fund has underperformed the S&P500 by about 0.1% per year over the last five years, which is fine – that’s about the amount of the fees they charge.
In the prospectus for the unit trust, the managers are forced to admit (check out page 30) that the “Sub-Fund” has underperformed the S&P by a full 1% per year over the last five years.
So if you’d invested in HSBC’s unit trust fee-o-rama instead of the low-fee Vanguard fund or the SPY exchange-traded fund, you’d have given up about 0.8% per year over the lower-cost options, plus the 2% entry fee.
Let’s run some numbers on this. Let’s say you invest $10,000 at age 25, and let’s say the stock market grows at 8% per year. In the low-cost Vanguard fund, you’ll earn 7.9% per year, and have $209,000 when you retire at age 65.
In the unit trust fee-o-rama, you’ll pay 2% upfront, earn 7% per year, and end up with $147,000 when you retire – a $62,000 kick in the nuts.
“Er, no thanks, I’ll pass. You can have the brochure back.”
So my money’s still in cash. No brokerage account today.
EPILOGUE: The best bit, I think, is this. From HSBC’s Common Questions about Unit Trusts:
Are the commission fees high?
Unit Trust fees are actually much lower than if you were to set up an individual fund or investment. This is due to economy of scale. As a large number of investors are involved in a fund the fee cost is therefore shared and thus reduced.
This is a lie. And you just saw why.