Saturday, October 28, 2023

#10 The Missing Billionaires - How theory meets practice for actual asset classes


We’re into chapter 14 of the book and this is its most practical chapter that everyone should just buy the book and read it and I really don’t want to spoil what is otherwise an excellent chapter that debunks a lot of the bullshit spread by the industry.

The most important point for readers are three points that the authors believe in:

A) Markets are fairly efficient 
B) Costs matter
C) The market portfolio is the only investment that everybody can own at the same time. 

I think this is what ultimately divides the run of the mill commissions based FAs and the proper fee based businesses like Providend. 

Yesterday i was buying a war game from a Carousell trader and he was complaining that these days FAs would not even use the term ILPs when hawking financial products to the public. It takes a while to understand that you’re dealing with an ILP when terms like surrender value and bonus units comes into the discussion. The smart salespeople know that people are starting to understand the truth behind ILPs.

The fundamental problem with the alliance of commissions FAs and active unit trust managers is that once you account for management fees, the only way to generate more returns is to take a higher risk with your money. Another words, you need to be compensated more than 1% returns when you pay 1% in fees because you’re taking a higher standard deviation with your fund. To realise this, you need to not just understand what a standard deviation is, but also what the Kelly Criterion or Merton Share is. It comes as no surprise that commissioned salespeople will be willfully blind to these fundamental concepts and laypersons will not know any better. 

I’ve also grown to respect Providend’s decision to just promote market returns in their investment solutions, as in most cases, this is as good as it gets and paying a fee to minimise underlying costs do give a retail investor the best chance to grow their wealth over time. Removing conflict of interest is expensive, but over time, would be worthwhile. 

At the back of my head, I am aware that if we no longer have a monopoly in fee-based financial advice as in the current case in Singapore, it may not be possible to just talk up plain market returns without losing significant market share against a more enterprising ( but as yet non-existent ) business that provides fee based advice. 

In this case, my prediction in the event if the government outlaws commissioned sales, a new breed of financial advisor will appear in the market that will be forced to look into factor investing to gain market share. 

Another valuable insight from the book is that the value, momentum and beta factors seem to survive the test of time and there is a high confidence that such funds do outperform over time. 

[ At the personal level, I hope that I, one day, I can duel against Dimensional Fund Advisors regarding their unwillingness to apply the momentum factor in their products. I got some useful numbers to show from my own home-made Python based trading advisors. 

The reality though, is that I’m a small fly. 

A ronin with a rusty sword.]


  1. Just on its own, an active UT will require higher risk-taking by the fund mgr just to match mkt returns becoz of the high fee hurdle.

    Combined into an ILP structure, it requires even riskier investing to match mkt returns becoz of the even higher fees lol.

    Fund mgrs ain't dumb. Trying to match their benchmarks in their plain UTs is already so tough -- they ain't gonna take higher risks or crack their brains further to make ILPs profitable for the end customers.

    I think for fee based advisors, there's a mkt for good risk-adjusted returns, not just mkt returns. Many ppl will appreciate portfolios with consistent "middling" returns, say 5-7% p.a., but with much lower drawdowns or volatility.

    DFA is well aware of momentum factor, but this factor tends to be of the shorter term say 1-2 yrs. To have this factor as a mainstay in a portfolio will necessitate higher turnover, more trading, and higher transaction fees ... which DFA mgmt may not be interested at the moment.

    They did incorporate the quality factor to their original small value factors once it was demonstrable both academically & empirically over the long term.

  2. Thank you for sharing. Your statement on fund managers and ILPs really cracks me up. Also, I don't dare to ask what you do for a living.