Is BPI Invest Global Equity Fund-of-Funds UITF really outperforming its MSCI World benchmark?

Stocks

In my post on avoiding home-country bias in the Philippines, I mentioned the BPI Invest Global Equity Fund-of-Funds UITF (BPIGLBL:PM) as one of the options in diversifying into international stocks. This fund aims to “provide excess return” over its benchmark, the MSCI World Index, which covers international developed markets.

In June 2019, a number of news articles came out saying that the BPI fund has exceeded $100M in assets, and is now the largest of its kind in the Philippines:

These articles also mention BPI’s claims that its fund has consistently outperformed the benchmark MSCI World Index: “It overtook the returns registered by MSCI World Index – comprised of large and mid-cap equities of 23 developed markets such as United States of America, United Kingdom, Japan, Hong Kong, and Singapore – by 0.94% (year-to-date)to 2.58% (two-years) as of the first quarter of 2019.” This is a pretty bold and impressive claim. But is it true?

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The PSE may be taking a small cut from your PSEi index fund.

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In the Philippines, investment fund fees disclosed in a fund’s fact sheet or prospectus typically include trust/management, custodianship, and auditor fees. The fees are a percentage of a fund’s assets under management (AUM). Funds normally have other expenses that are not covered by these fees. Unfortunately, I have not seen any fund honestly disclose its total expense ratio (TER) or ongoing charges figure (OCF) which represent the fund’s total actual cost to the investor. For example, the total expense ratio of the country’s only ETF appear to reach at least 0.8% compared to the fund’s stated fee of 0.50% as discussed in the post: The true costs of FMETF.

Since the funds don’t disclose their TER, it’s always interesting for me to learn about what other expenses these funds may have that are not explicitly stated in the prospectus. I just read from a year-old news article that this year, the PSE has started charging a 0.03% index licensing fee to funds that explicitly mirror the PSE Composite Index (PSEi). As with other fees, this index licensing fee is based on a fund’s AUM. It is said to affect about 15 funds. That number more or less matches the funds listed in uitf.com.ph and pifa.com.ph that track the PSEi.

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How to pay lower US taxes on US investments as a non-resident alien from the Philippines

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I’ve discussed the important IRS tax issues when investing in the US as a non-resident alien from the Philippines in a previous post. I’ll repeat some of them here in discussing the known ways of lowering or avoiding altogether some of these US taxes.

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Is FMETF an accumulating ETF or a distributing ETF?

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The Philippines has only one available ETF in the market: the pioneering First Metro ETF (FMETF) which aims to the track the PSE Composite Index (PSEi).

When an ETF receives dividends from corporations whose shares it owns, it can either reinvest those dividends within the fund (accumulating ETF), or distribute the dividends to ETF shareholders (distributing ETF). So under which category does FMETF fall?

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Avoiding home-country bias in the Philippines

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Home-country bias is the tendency of an investor to over-invest in his/her country’s domestic equity market in a scale that significantly exceeds the proportion of the size of the domestic market relative to the rest of the world.

Considering that even Americans, whose own stock market is 40% to 50% of the world market, can be guilty of home-country bias, it is not a surprise that investors from much smaller markets like the Philippines also exhibit this behavior. This is shown in the chart below, which visualizes data collected by Sercu and Vanpée from CPIS (December 2005) and World Federation of Exchanges, in their paper, Home bias in international equity portfolios: a review. When that paper was published, Filipinos’ equity portfolios were 99.5% domestic while the domestic market was just 0.1% of the world market cap.

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Thoughts on PERA in comparison to US retirement accounts

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I have just started to read about PERA retirement accounts that have been recently made available to Filipino workers, including those working abroad. There have already been many articles written about PERA all over the web so I won’t bother with all the nitty-gritty details. You can read a good introduction on PERA from Katie Scarlett Needs Money.

PERA stands for Personal Equity and Retirement Account. They are often described as the Philippine version of American retirement accounts like 401(k) and traditional IRA accounts. I still have my own 401(k) and traditional IRA accounts from my time working in the U.S. so I find these comparisons interesting. In this post, I’d like to explore these comparisons in more detail.

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Are gains from US equity feeder funds taxable by the BIR?

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I previously wrote about the lack of information on how the Philippine Bureau of Internal Revenue taxes foreign capital gains, dividends, and interest income. We know that the U.S. imposes a final withholding tax of 25% and 15% on dividend and interest income, respectively for Philippine residents based on the U.S.-Philippines tax treaty. On the other hand, capital gains received by non-resident aliens are not taxed by the U.S.

The BIR has no published rule that sets an explicit final tax rate on foreign capital gains income. Local stock market sales are taxed based on the gross sales amount. Capital gains on shares on unlisted domestic corporations are taxed at 15%. The going assumption then is that any income not subject to an explicit final tax rate is subject to the graduated personal income tax rates.

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Is it worth investing in a US Equity Index feeder fund from the Philippines?

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If you’re a Filipino investor and you want your investment portfolio to diversity into U.S. index funds, you have at least two options. One option is to open a trading account with a company like Charles Schwab. This will give direct access to thousands of U.S. stocks and ETFs.

An easier option is to invest in a unit investment trust fund (UITF) that acts as a feeder for a U.S. index fund. One such feeder fund is the BPI Invest U.S. Equity Index Feeder Fund (BPIUSFF). This fund invests directly in the largest ETF in the world, the SPDR S&P 500 Trust ETF (SPY). This ETF has total assets of almost $280 billion as of November 2019. It simply aims to track S&5 500 index of U.S. large cap companies. One reason why people like to invest in index funds is the low expense ratio. SPY’s gross expense ratio is only .0945%.

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On online trading commissions in the Philippines

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When I first looked into trying my hand in the Philippine stock market and opening an online brokerage account, I was pleasantly surprised by the number of online platforms available to retail investors. There are 31 online brokers on this list on the Philippine Stock Exchange website. Quite a few are backed by major Philippine banks like BDO, BPI, and Metrobank, while many more are independent brokerage houses. At least nine of them run on the PSETradex platform provided by the Philippine Stock Exchange itself.

Before this, my only experience with trading stocks was in the U.S. with brokers like Ally, Robinhood, and now Charles Schwab. Recent competition among U.S. online brokers have driven down the cost of trading commissions to the bare minimum: $0. Charles Schwab charged $29.95 per trade in 1998. Before dropping the rate to $0 in October 2019, it was charging $4.95 per trade.

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