SINGAPORE (Jan 8): The Singapore Index Fund (SIF), formerly known as the Singapore Regional Index Fund, was the first open-ended fund to be listed on the SGX. The fund is currently managed by Singapore Consortium Investment Management, which also manages the SGX-listed mutual fund Global Investments Limited.
SIF’s objective is to replicate the returns of Singapore’s benchmark FTSE Straits Times Index (STI). Two SGX-listed exchange-traded funds (ETFs) — SPDR Straits Times Index (SPDR STI) and Nikko AM Singapore STI (Nikko AM Singapore) — also have similar objectives.
ETFs have been in the spotlight lately, with their low costs attracting investors who are unhappy with sub-par returns by active fund managers. Although SIF is passively managed, it too potentially faces threats from ETFs. Case in point: Compare the total returns of these three funds with the STI benchmark over a five-year period (see Chart 1).
Over this period, SIF had an annualised total return (assuming dividends are reinvested) of 4.61% versus the STI’s 5.77% — a tracking difference of about 1.2%. Meanwhile, SPDR STI and Nikko AM Singapore each returned 5.21% and 5.24% — with smaller tracking differences of 0.56% and 0.53%, respectively.
The tracking difference is simply the annualised difference between a fund’s actual return and its benchmark return over a specific period of time. The metric is important for buy-and-hold investors who focus on maximising returns.
The results show that SIF does a poorer job at tracking the STI in the long run. Why? A big contributor is the fund’s higher operating expenses, as measured by its total expense ratio. Assuming perfect tracking, an index fund or ETF should underperform its benchmark by an amount equal to its TER on an annual basis.
SIF’s high cost base
Fund annual reports show that SIF’s TER has been consistently higher than those of its two comparable ETFs (see Chart 2). From FY2012 to FY2017, the SPDR STI and Nikko AM Singapore ETFs charged an average of 0.30% and 0.37%, respectively. Meanwhile, SIF investors have had to pay an average of 0.95% each year, weighing on overall returns.
SIF’s higher costs have had a noticeable impact on returns, relative to its benchmark and the ETFs. In dollar terms, a $10,000 investment in SIF on Nov 30, 2012 would be worth $12,530 five years later. A similar investment in SPDR STI and Nikko AM Singapore would be worth $12,893 and $12,912, respectively. Meanwhile, an investment in the STI benchmark itself, which is not possible, would have grown to $13,239.
Other possible reasons for SIF’s larger tracking difference include transaction and rebalancing costs, the fund’s replication methods and cash drag. But the TER has a sizeable influence.
Given the availability of cheaper alternatives, it appears that investors are already opting out of SIF. Between FY2012 and FY2017, SIF’s total assets under management fell 51.5% from $82.7 million to $42.6 million, owing to redemptions. On the other hand, SPDR STI and Nikko AM Singapore have gained AUM in the same period (see Chart 3) on net fund inflows.
Going forward, SIF’s TER is expected to remain high because of falling AUM and fixed operating costs. Therefore, investors should not expect the fund’s tracking difference to improve dramatically. On the other hand, Nikko AM Singapore and SPDR STI can continue to leverage on their larger AUM to keep costs low.
Between SPDR STI and Nikko AM Singapore, which is the better bet for investors looking to switch out of SIF or new investors looking to gain exposure to the STI?
Based on a five-year tracking difference alone, Nikko AM Singapore appears a better choice. Though its TER of 0.33% is just a touch higher than SPDR STI’s, it has declined from a high of 0.42% in FY2014. This suggests that Nikko AM could be able to squeeze out more cost efficiencies down the line that will benefit its ETF holders.
