It’s been a debate that has been going on for the last 30 years, but yesterday marked the day which Lion Global Investors (LGI) believes that it has cracked the code. The debate in the media, according to LGI CEO Gerard Lee, is often about active versus passive funds. However, Lee believes that the real discussion should about high-cost funds versus low-cost funds. LGI launched the LionGlobal All Seasons Fund yesterday, in what it calls a very low-cost fund that is simple and accessible for all investors. With a total expense ratio of 0.5% per annum, LGI is setting a…
It’s been a debate that has been going on for the last 30 years, but yesterday marked the day which Lion Global Investors (LGI) believes that it has cracked the code.
The debate in the media, according to LGI CEO Gerard Lee, is often about active versus passive funds. However, Lee believes that the real discussion should about high-cost funds versus low-cost funds. LGI launched the LionGlobal All Seasons Fund yesterday, in what it calls a very low-cost fund that is simple and accessible for all investors.
With a total expense ratio of 0.5% per annum, LGI is setting a new benchmark for unit trusts and funds alike.
Cost Matters (A Lot)
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” – Vanguard founder John Bogle
As a quick background, LGI is a member of the Oversea-Chinese Banking Corporation Limited (SGX: O39) group, and ranks as one of the largest asset management companies in Southeast Asia.
In a world where actively managed unit trusts in Singapore can impose expense ratios as high as 4% per year, LGI is taking a different tack with its low-cost approach for its latest fund. Costs at the LionGlobal All Seasons Fund is capped 0.5%, which is a full percentage point below its fund category average of 1.5%. For reference, the benchmark is the Morningstar Global Flexible Allocation Category.
Costs do add up. LGI points out a 1% reduction in cost leads to a significant improvement in returns over time.
As part of LGI’s illustration, the asset management firm showed that if $10,000 achieved a rate of return of 4.5% per year over 20 years, the result would be a little over $24,000. However, if the $10,000 only increased at 3.5% per year – or 1% less – the result would be closer to $19,700. Said another way, the final returns in the second case has been eaten away by the extra 1% cost, leading to 18% lower returns.
I said it earlier, but I’ll repeat it. Costs matter. A lot.
One Cost To Rule Them All
The new LionGlobal All Seasons Fund is structured as a fund of funds. Simply said, the new LGI fund will invest in other funds.
While most fund of funds will include several layers of expenses, the 0.5% total expense ratio that LGI maintains will encompass the expense ratios of the underlying funds that it is investing in.
To achieve the lower cost, the firm has persuaded its service providers and distribution channels to lower their costs as well. Lee said that the fund would only be distributed through online channels and via its parent company, OCBC. LGI added that the online distributors have agreed not to charge a sales fee for the LionGlobal All Seasons fund, an arrangement that is expected to be a permanent feature.
Lee said that LGI will take the biggest hit on costs but is committed to maintaining the 0.5% expense cap. The firm will also absorb any changes in the expense ratios of its underlying funds.
Balancing For The Long Haul
The LionGlobal All Seasons Fund will have two flavours on offer on FSMOne, which is owned by iFAST Corporation (SGX:AIY), dollarDEX and POEMS. The fund is also available via OCBC Bank, OCBC online banking and the OCBC OneWealth app.
The LionGlobal All Seasons Fund (Standard) will consist of a 30% equity and 70% fixed income allocation. For the more aggressive, the LionGlobal All Seasons Fund (Growth) will sport a 70% equity allocation and a 30% fixed income.
The funds will utilise five units trusts and two developed market exchange traded funds (ETF) to achieve the equity-fixed income mix as prescribed above. The LionGlobal All Seasons Fund will be using passive index ETFs to gain exposure in the US and European stock market. LGI believes that stock markets in developed countries are more efficient where a passive approach is more suitable. On the other end, the fund will be using actively managed funds for less developed markets where LGI thinks it can generate an above market rate of return.
A Foolish Takeaway
Lee said that LGI does not have high hopes for earning a lot from these funds.
However, he is hopeful that the public and institutions that have been underserved will see the latest offering as a go-to investment that can deliver decent returns over the long term, and be as common as an EZ-Link card. LGI is cautiously optimistic that it can attract around $100 million in funds.
The Boglehead in me is supportive of the brave, new world that the LionGlobal All Seasons Fund is charting for the fund industry. Hopefully, we will see more unit trusts following LGI’s footsteps.
Editor’s note: this article has been edited for clarity on its total expense ratio, and available fund distribution channels.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on iFAST Corporation. Motley Fool Singapore writer Chin Hui Leong own shares in iFAST Corporation.