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

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 and that track the PSEi.

The only fund that explicitly mentions this index licensing policy on their page is Security Bank’s SB Philippine Equity Index Fund:

In line with the Philippine Stock Exchange’s (PSE) implementation of their new Index Licensing Policy (PSE letter dated September 5, 2018), this is to inform that we shall be subscribing to the said service for our SB Philippine Equity Index Fund (the “Fund”), the Fund being an Index Tracker Fund

The PSE shall be charging users an Index Licensing fee equivalent to three basis points per annum (0.03% p.a.) calculated daily based on the Fund’s total Net Asset Value. The fee will be classified as “special expenses” as indicated under Section 3 of the Fund’s approved Declaration of Trust (the “DOT”) on “Fees and Expenses of the Fund”, said licensing fees are considered as “special expenses if the same is necessary to preserve or enhance the value of the Fund”. As advised by the PSE, subscription to the new Index Licensing Policy and charging of the PSE Subscription Fees to the Fund shall be made effective on March 1, 2019.

SB Philippine Equity Index Fund

Too bad that Security Bank’s transparency about this fee does not negate the expensive 1% trust fee it charges for its fund.

BPI’s equity index fund is probably the biggest with almost PHP 49 billion pesos in assets. If the PSE collects 0.03% of that amount, that’ll be PHP 14 million in new revenue they didn’t have last year. Now, the PSE, itself listed in the stock exchange as a public company, has to deliver for their own shareholders so this is not really a surprising move. The PSE claims that index fees in neighboring countries reach as much as 0.06% to justify its 0.03% rate. Needless to say, this index licensing fee is passed on to the fund’s investors, since I haven’t seen any index fund lower their management fee to offset this new fee. It’s difficult to blame the PSE for this money grab when they see fund managers charging 0.5% to 1% for simply copying the index. Unfortunately for Filipino investors, this results in index fund TERs going up, in contrast to overall worldwide trend towards low-cost funds.

In enforcing this new fee, the PSE is acting in its capacity as a newly minted fee-charging index provider, not necessarily as the stock market operator. In both capacities, the PSE has an effective monopoly. The 15 funds freely using the PSEi before this year formed a captive market. These funds cannot really do anything but whine if they want to keep their fund’s objective of replicating PSEi’s performance. There’s only one PSEi, after all.

In U.S., fund managers like Vanguard are aggressively cutting down on their fund’s fees by switching index providers. For example, in 2012, Vanguard switched some of its funds from MSCI, one of 4 largest index providers in the world, to CRSP, a research center based in the University of Chicago. They are able to switch a fund’s index for another that offers a similar asset allocation. Of course, Vanguard cannot do this with their fund that tracks the S&P 500 index. There is only one S&P 500, and that index is provided by S&P Global. Incidentally, the largest ETF in the world, SPDR S&P 500 Trust ETF (SPY), supposedly pays S&P Global a 0.03% fee to use their index. That’s 0.03% of its $280B in assets. For context, SPY’s total expense ratio is 0.09%.

The largest index providers in the world like MSCI and FTSE also cover the Philippine market. They identify companies to include in indices for emerging markets, specific sectors, and value stocks, among others. They also provide indices for the Philippine market as a whole. MSCI has a Philippines Index and a Philippines Investable Market Index. The MSCI Philippines IMI is the one used by the U.S. ETF, iShares EPHE. Recently, Philequity launched a mutual fund that tracks the MSCI Philippines Index. The latter only has 23 components, compared to PSEi’s 30. First Metro also launched another mutual fund based on a new First Metro Index based on MSCI Philippines IMI. The First Metro Index only has 18 components. It’s encouraging that local fund managers are now using well-established index providers like MSCI, as alternative to the PSEi. Of course, like the PSE, MSCI probably does not provide its services for free. Interestingly, FTSE is involved in providing the main country benchmark indices in Singapore (Strait Times Index) and Malaysia (Kuala Lumpur Composite Index).

To close, yes, the PSE may now be collecting a 0.03% fee from your PSEi index fund. This fee is coming out of your investment because fund managers refuse to lower their management/trust fees to offset this new fee.

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