Market Commentary: Antitrust updates | ETF expense ratios

23 October 2020

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning and Partnerships, discuss the latest global events and their impact on the markets.

In this episode,

  • New developments in the antitrust arena [0:17]
  • How ERAA® looks at economic environment [2:03]
  • What’s the best split between income and growth portfolios? [4:13]
  • Are low expense-ratios the deciding factor when choosing an ETF? [5:54]

FULL TRANSCRIPT00:01 | Philipp

Hello, and welcome everyone to another weekly market commentary from StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Hey Freddy!

00:10 | Freddy

Hey guys! Time passed quickly, it's another weekly commentary again, I felt like it was just yesterday.

00:17 | Philipp

Yes, it does feel quick. And slowly but surely approaching the election in the US, so we're getting closer. And with that being said Freddy, I think last week we covered quite a few topics. Do you want to give the listeners maybe a little bit of a background of that and also if there are any updates?

00:41 | Freddy

Well, what we did last week was, we did a scenario analysis on election outcomes and we mentioned that in the Democratic sweep of both chambers of the US Congress, the risk of antitrust-- stringent antitrust measures on US Big Tech-- goes up a lot. As an update, this week we've seen-- even without that-- we've seen more and more pressure on the same topic. Google is already now in an antitrust suit with the government and this time it's actually brought on by the Republicans. But this is not a systemic issue. This is a very specific issue. It's been there for a while the last few years, initiated by Trump and William Barr, the Attorney General of the US, and it's just an ongoing thing. But, this can escalate even further with the Democratic sweep. Last week, we also talked about, however, the flip side of things in the Democratic sweep is that, you get larger fiscal stimulus, more stimulus, and that is welcomed by the stock markets, but perhaps not as much by the US Dollars. So, those things remain unchanged. But just as a recap, an update.

02:03 | Philipp

Yeah, and because we did get quite a lot of questions that we couldn't get to the last time Freddy, so let's get to them. And if you ever want to have your question featured on our weekly videos, just put them into the comments section below and the team and I, and Freddy will pick them up. So, the first one, from Darius Cheong and he's saying, "Hey Freddy, I have a question regarding StashAway's ERAA® valuation methods. Given the fact that ERAA® was built on historical data, how do you ensure that the valuation metrics coefficients remain effective in the future?".

02:38 | Freddy

Well, contrary to standard equity ratios and metrics, like P/B (price-to-book) ratio, P/E (price to earnings) ratios, those are very traditional metrics that we do not look at because those metrics are static in nature, they're unbounded. They do not account for change in economic environments. Instead, what ERAA® does is, it directly goes to the economic environment and looks at those big regime changes and those are the majority of returns. And I think that's a better approach than looking at a particular indicator. So, the framework is no indicator, right. And the combination of growth-inflation data itself, gives you the specification for the environment we are in for example, high growth, low inflation, we call it good times. High growth with inflation actually running faster is good, but less good than before, we call that inflationary growth rate. You have stagflation, which is a really serious matter, which happened in the 70s and simultaneous occurrence of a recession and high inflation. So, we're looking at the big, big changes in the environment rather than an indicator or a historical data, the full history that does not differentiate this part of the history from the other one. Because in the historical chart, slices of it correspond to different environments. And that's what we're trying to account for, the big, big, big changes.

04:13 | Philipp

Thanks Freddy, the next question was from Marc Tan and he says, "Hi again Freddy and Philipp, I have a question on the split between income and growth portfolios. Generally, if I have a sum of money or a steady income stream, what are the principles to allocate between income and growth?".

04:32 | Freddy

In general, at the risk of overgeneralising, this is a function of your age or working age. As you head towards retirement, you want to have more recurring income, more passive income and potentially less market exposure. When you are younger, you've got more time. And if any surprises happen to the markets, you have more time to recover too. And we generally recommend younger folks to be more growth-oriented. But over time, that mix would start shifting as you head towards retirement. So Marc Tan, I think he's got it exactly right, but the ratio between it is non-scientific, and you have to review it yourself theoretically, and it's a function of your risk tolerances, but your risk tolerance is not going to be staying constant. When you're younger, maybe it's higher and as you head towards retirement, you start becoming more conservative about your cash flows. But again, I could be wrong. There could be a lot of people who are starting the other way, more conservative when they're young. They feel like taking more risks as they get older, more knowledgeable about the market. So, it could be a lot of situations. But in general, I think Marc's comment is exactly spot on, the mix of income and growth.

05:54 | Philipp

Yes, absolutely he's spot on and I think this is a question we get quite a lot and it's also very personal as well, right? So there's a general thought about it and thinking that you and himself wrote down. But then you also have your own personal preference, risk profile, and background of where your money comes from and things like that to take into account. The next question, Freddy, was from Xianxian Hong and he's saying, "Hey Freddy, would you consider switching KWEB ETF to HKEX ETF instead? The expense ratio is 0.25%, so much lower than KWEB's 0.73%.".

06:35 | Freddy

So, I think he's talking about the newly launched HKEX 3067, that's the ticker.

06:41 | Philipp


06:43 | Freddy

The index itself is very new, but only time will tell how they do. We can't run a massive platform where the ETF has only two months of track record. And also we are actually observing these developments a lot. We're always on the lookout for more ideas. So, thanks for actually flagging it to us. But we do have to first observe the liquidity conditions of the ETF given that it's very new. It hasn't been stress-tested back in March, it didn't exist. Back in March, there was a lot of liquidity pressure for a lot of ETFs, even the big ones. And so, we need them to stand the test of time. Expense ratio is one parameter. There's tracking error in upmarket, downmarket. There's liquidity conditions: whether you get the money back whenever you wish. So, there's a lot of factors that go into this but thanks for flagging it to us. But, I do not think we will change this any time soon because of the expense ratio, we do need to see more data on those fronts.

07:50 | Philipp

Yeah, thank you and thanks to everyone for asking those questions, super interesting questions. Again, if you want to ask questions yourself, put them in the comments section so that we can pick them up over the next couple of weeks. Before we wrap it up, we also have our upcoming webinar, and it's actually a joint one across Singapore and Malaysia. It's actually run by Freddy, it's called A Deep Dive into StashAway's ERAA® Framework. So, a lot of the things Freddy already mentioned, if you want to learn more about those, get deeper knowledge about them, you can join us on 29 October. That's a Thursday at 7.00 pm Singapore time, but it's available for both Malaysia and Singapore listeners. So, go to our website to sign up. There's also some links to sign up in the show notes below. And we're looking forward to being back with you next week. Thank you so much.

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