Past performance is not an indication of future performance

Some financial advisers recommend to their clients to invest in funds with high expense ratios that performed well in the past years.

Dr Money (a financial journalist writing for The New Paper) said that Research done in America over the past decades have shown that the top performers in past years will not be the top performers in the future years. They tend to move to the lower quartiles.

This is why MAS require a statement to be made that "Past performance is not indicative of future performance".

This is also my view, based on the experience of the funds managed by NTUC Income and our external fund managers. The performance in some years will be better than the market, and will be worse in other years.

What is the reason? Each fund manager focuses on a specific strategy, e.g. growth or value strategy. In some years, a certain strategy will perform better than the other strategy. The situation is likely to change in other years, as the investment results go in cycles.

No one knows in advance which strategy will perform better. Hence, it is better to stick to a certain strategy and measure the results over a longer period, say 10 years or longer.

If you put your money now in a high cost fund that performs better in past years, you are likely to be disillustioned. You will find that the fund will perform worse in the future years, and you will be paying high expenses for nothing.

The financial adviser will be happy to sell you the story that he is able to select a good fund for you. And he can earn a higher commision to sell the investment to you!

Here is my advice. When you choose a fund, look for a large, well diversified, low cost fund.

Do not invest in a small fund, as you have to depend on the quality of the manager. It is difficult to judge, unless you know the manager personally and can trust the manager. And when the manager moves to another fund, you do not know who will be the next person who will manage it.

Most (but not all of) the funds managed by NTUC Income earn 2% to 3% higher than similar large funds managed by other insurance companies.

I do not claim that my internal or external fund managers are performing better. It can be a matter of luck. But, I do know that our expense ratio is 1% lower than the other funds.

I also know that we manage the funds ethically and look after the interest of the existing investors. We do not churn the investments. We do not allow new investors to come in and get a better price, at the expense of existing investors. Perhaps, our ethical practices account for another 1% to 2% in the difference in yield.

A 2% difference in expense ratio will amount to 34% over 10 years. If your investment value is $100,000, you can get $34,000 more by investing in a low cost fund that gives a differnce of 2% in yield.

Here is a final tip. The combined funds managed by NTUC Income has a total of $3,800 million in assets. The actual size reported to LIA/IMAS is smaller, as it is the portion held by the ILP investors. But, they are investing in a much larger fund that is co-mingled with our life insurance fund. You can attend our educational talk by calling 68773366.