Looking at Fund Investing (Part 2)

This is a continuation of the previous post done here.

After the previous post that described at Public Enterprises Bond Fund, this post would be dedicated to the brief review of Public Healthcare-Global Equity Fund, as I recently had the opportunity to do so.

Public Healthcare-Global Equity Fund is an equity mutual fund that invests in malaysia and other various countries. While the exposure would be primarily on equities (not limited to Malaysia but also other countries), the key selling point would be the targeted healthcare exposure of at least 30%. Main reason would be due to the current COVID-19 pandemic which gives rise to the valuation of healthcare related stocks and companies that are trying hard to engineer a vaccine for all. Other key reasons are increasing life expectancy and increased demand for healthcare quality.

As per previous post, let me emphasise that this is not an investment advice and please seek an appropriate, certified advisor for guidance on investment. This is posted up out of interest and bear in mind, all investments may entail loss in principal due to the need to undertake risks to generate return.

A Brief Look At Equity Fund

Equity is nothing more than having a claim in a business after the business effectively pays it its other capital providers, which includes both creditors and preferred share holders. Assuming a business defaults and from a claims priority, equity holders would fare last after creditors but their upsides would be unlimited, should be business flourish. Therefore, equity investors can be seen as parties that take up larger risks as compared to creditors (that receives fixed payments), when it comes to capital provision.

An equity fund generally pools funds from various investors (including individuals) in order to invest in strategies that makes sense from an enlarged pool of money while having access to potentially lower investing cost (excluding fees) as compared to outright, small ticket investment size.

The few benefits of investing via equity mutual fund are:

• Access to potentially investment opportunities that would only be made available to large investments
• Potentially lower investment cost
• Access to manager with potential domain expertise
• Delegate potential complex investment matters that are time-consuming to dedicated personnel to look at it
• Potentially to diversify specific/non-systematic risks (in the investing world, risk is defined as volatility; some may agree, some may not)

Back to Public Healthcare-Global Equity Fund, like previous posts, one ought to strive to understand the exposure that this fund has alongside with the underlying fees. From the fund’s product highlight sheet, the fund strives to invest 75-98% of its NAV in equities and/or equities-related securities (balance would be in money market instruments and deposits). From its equities exposure, at least 30% of it would be invested in healthcare related stocks and collective investment schemes (think of it like a fund invests in another fund). In addition, these equity exposures would be primarily in countries such as USA, South Korea, UK, China, Germany, Japan, France, HK, Switzerland, Taiwan, Spain, Italy, Singapore, Luxembourg, India, Australia, Philippines, New Zealand, Thailand, Netherlands, Indonesia, and Malaysia. As per the previous post, one needs to consider country’s exposure, FX risk, obligor’s risk, interest rate risk, and potential growth of the underlying exposure. As usual, aside from those, the fees would be very important as well:

• Trustee fee
• Management fee
• Sales charge
• Switching fee
• Distribution policy

As usual, let’s zoom into the risk factors considered.

Risks

• Country credit risk: USA (Developed Market), South Korea (Developed Market), UK (Developed Market), China (Emerging Market), Germany (Developed Market), Japan (Developed Market), France (Developed Market), HK (Developed Market), Switzerland (Developed Market), Taiwan (Developed Market), Spain (Developed Market), Italy (Developed Market), Singapore (Developed Market), Luxembourg (Developed Market), India (Emerging Market), Australia (Developed Market), Philippines (Emerging Market), New Zealand (Developed Market), Thailand (Emerging Market), Netherlands (Developed Market), Indonesia (Emerging Market), and Malaysia (Emerging Market) - 16 DM vs 6 EM
• Obligor credit risk: Various corporates
• FX risk: USDMYR, MYRKRW, GBPMYR, CNYMYR, EURMYR, JPYMYR, HKDMYR, SGDMYR, CHFMYR, TWDMYR, AUDMYR, MYRPHP, NZDMYR, MYRTHB, MYRIDR - appreciation of foreign currency against MYR (prior to investing)
• Interest rate risk: Low interest rate environment, lower discount rate and higher valuation)
• Potential growth of underlying exposure:
  • While growth in most developed market largely slowed, subject to underlying companies, related equities' growth may increase if the companies are able to capture market share from its competitors or are investing in frontier markets
  • Given the healthcare aspect of this fund (at least 30% of NAV), the potential increased growth of healthcare sector will also contribute to the fund’s growth
  • Factoring in several key demographic considerations (ageing population in many countries, increased retirement age, etc.), this would contribute to the increase economic growht to the healthcare sector as well

Fees or Related

• Trustee Fee: 0.06% p.a. of NAV
• Management Fee: 1.80% p.a. of NAV
• Sales Charge: 5.5% of NAV per unit
• Switching Fee: Minimum up to 0.50%
• Distribution Policy: “Incidental” (i.e. at the fund’s discretion)
• Benchmark:
  • 40% S&P 1200 Health Care Index
  • 25% Dow Jones Industrial Average
  • 20% Customised index by S&P Dow Jones Indices, LLC based on the top 30 constituents of the S&P BMI Asia Ex-Japan Index
  • 10% 1-month KLIBOR

Details can be found here.

Time for some qualitative exercises:

• Country credit risk: Presumably a lot of the fund’s NAV would be weighted for overseas stocks and largely in developed market, credit risks of such countries are generally than emerging market and regulations tend to be investor-friendly
• Obligor credit risk: This is subjective, depends on the underlying stocks which the fund invests in (e.g. AstraZeneca, Pfizer, IHH)
• FX risk: Assuming if fund manager is still investing out, if foreign currency appreciates against MYR, it would adversely impact the unitholders
• Interest rate risk: As the world is in low interest rate environment, generally this should stimulate credit growth and cause incremental cost of borrowing to be lower (with existing borrowing cost lower as well, assuming companies may leave a portion of it unhedged)
• Benchmark: While the fund uses some customised benchmarks as above, I prefer to cross-reference with how other healthcare related fund does. Looking at Vanguard Health Care Fund Investor Shares, their existing benchmark is now MSCI World Health Care Index that measures the large and mid cap segments across 23 developed markets, globally. While S&P 1200 Health Care Index is a decent yardstick as well as it covers China, the weightage introduced for this Public Healthcare-Global Equity Fund, is questionable, given the 1-month KLIBOR drag, using Dow Jones Industrial Average, etc.
• Potential growth of underlying healthcare exposure: Would not elaborate much as this requires much more in-depth exercise and would be right for investors to do their own exercise and discern from it.

Looking at the fees alone, it may be quite interesting to note that the total fees on NAV basis is estimated at 1.86% p.a. and this is excluding the sales charge imposed of a whooping 5.5% of NAV. When looking at Vanguard Health Care Fund Investor Shares' summary prospectus, the sales charge on purchases is zero. Lets not go to the fact that the Vanguard fund’s expense ratio (which is really name fund management fee), is circa 0.32% p.a. of NAV. Lastly, the distribution by Vanguard’s Health Care Fund is committed at an annual basis.

If the exposure of this Public Healthcare-Global Equity fund is namely overseas exposure, aside from paying the required management fee to take on the same exposure to be offered by other global providers, there may be a higher potential for investors to opt for the latter. Even if local investors may find it tough to open an overseas investment account for mutual funds, investors can still open a brokerage account and obtain a healthcare exposure via Vanguard Health Care ETF.

Closing Words

While there is always a thoughts of lack of sophistication to analyse a single stock, investors should not be disheartened as now there a barrages of instruments available that tracks indices (passive investment). These instruments which tracks equity indices (be it sector or investment types), are very worth while as given it is passive, the fees are so much lower than active investment management (e.g. mutual fund). Take for instance, Vanguard Health Care ETF management fee is circa 0.10% as compared to its mutual fund counterpart of 0.32%. Hence, investors can enjoy the benefit of a fund while taking the advantage of lower fees too.

If passive investment is not your cup of tea, active investment management is always available as well.

Stay safe and stay informed in investing!

While I advocate Vanguard a lot, I am not affiliated with the company in any manner. I felt their mission to provide low-cost investing to investors is a noble mission and worth sharing to all.