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And the best performing equity pooled fund is . . .

/ 04:03 AM January 12, 2022

It is that time of the year when our company, the Personal Finance Advisers Corporation of the Philippines or PFA, announces the performance of pooled funds invested solely in Philippine equities. But allow us to lay down certain parameters first.

Our study, which is encompassed in the My PF App™, is limited to Philippine equity mutual funds (MFs) and unit investment trust funds (UITFs) as data is readily available for such pooled funds. We also compared the performance of such funds to the Philippine Stock Exchange Index (PSEi) Total Return Index (TRI) since these funds reinvest the dividends they earn. In this regard, our earliest base year is 2007, the same base year for the PSEI TRI. Our computations did not include any attendant taxes and fees that may be incurred in buying and selling such funds.

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In addition to investment returns, we used risk-adjusted returns, alpha and tracking error to rank the funds. Lastly, we came up with review periods from 2007 to 2021 (14 years), 2011 to 2021 (10 years) and 2016 to 2021 (five years).

14-year period

The 14-year review period included the bull run after the Global Financial Crisis. During this period, in terms of return, only two pooled funds beat the PSEi TRI’s annual compounded return, and both were UITFs. The rest of the top five best performing funds were MFs. In addition, the top performing fund was also the best in terms of risk-adjusted returns and alpha.

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What is interesting though is that when it came to risk-adjusted returns, the second and third best performing were both MFs. There were only two index funds in existence from 2007 and they were both MFs that ranked fifth and sixth in terms of return. Understandably, these index funds underperformed the PSEi TRI because of their expenses.

10-year period

The 10-year review period saw a continuation of the recovery from the Global Financial Crisis but had the PSEi on a downtrend in the last five years. None of the pooled funds beat the PSEi TRI during this review period. This time around, the top two best performing funds were MFs. In fact, only one UITF made it to the top five list, and that UITF ranked third.

The top performing fund, which is an MF, was also consistently best in terms of risk-adjusted returns and alpha. And that MF is surprisingly also an index fund with a second-best ranking in terms of tracking error.

Five-year period

Except for a big rally in 2017, the PSEi was on a downtrend during the five-year review period. The top performing fund during this time was an MF, which also solely managed to outperform the PSEi TRI. The rest of the top five were index UITFs, all of which underperformed the PSEi TRI.

In terms of risk-adjusted returns, the top five ranking did not change. But in terms of alpha, only two of the index UITFs remained in the top five ranking.

Conclusion

As the years pass, we will have review periods that will have more funds in the mix, particularly for rolling 10- and 15-year periods. What is clear for now is that while the index can be outperformed and that tracking errors of index funds get larger the longer the review period, no fund maintains dominance across all review periods. This implies that an investor would need to regularly check the performance of the fund in which he invested.

More importantly, the analysis supports the mantra that the investor should not ask which investment is good. Rather, the investor should ask what good an investment can do for him based on his life goals and risk appetite. INQ

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Efren Ll. Cruz is a registered financial planner and director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. To consult with a YAMAN Coach, email [email protected] To learn more about personal financial planning, attend the 93rd RFP Program this January 2022. To inquire, email [email protected] or text at 0917-6248110

Copyright 2022 Efren Ll. Cruz, RFP®. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without the prior written consent of the author.

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