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How Sharp(e) is Your Fund?
Efren Ll. Cruz, RFP®
Wow, the Philippine Stock Exchange Index or PSEi is up by some 38 plus percent so far
in 2010! This is on top of a 63% whopper of a gain in 2009. The combined return
would be around 114% on a compounded annual basis! So, if you invested Php10,000
in the same allocation of stocks as the PSEi at the start of 2009, the value of your
investment today would be worth roughly Php21,400 (note: that’s Php10,000 x the
growth of 114% plus Php10,000, just in case you’re wondering about the math).
“Hold your horses”, you say. “I could not have possibly made that much money since I
know squat about the stock market”, you add. In investing, what is important is that
you know your investment objectives and risk appetite. If you are after high, longterm returns and willing to take a significant amount of risk on your money, then stock
market investing is right for you. And since you know little about it, be wise and just
hire fund managers to do the “dirty work” for you. How? By buying into pooled funds
who have in-house professional fund managers. And what are the pooled funds in the
Philippines? These are mutual funds, unit investment trust funds (UITFs), variable unitlinked insurance, pre-need plans and, the latest addition; real estate investment trusts
I just have a few tips for you on buying mutual funds. Mind you, this is not a complete
list. I will give you what this column space will allow.
1. Make sure that the investment objective and risk parameters of the fund are
aligned with yours. You don’t want to be buying into an equity fund when all
you want are investments in bonds.
2. See if the fund fees are acceptable to you. These would include the investment
management, bonus, entry, exit, administration, distribution, custodian, and
transfer agent fees.
3. Review the fund’s historical performance. For mutual funds, you may check it
out from For UITFs, you may visit For the
others, just inquire from the fund provider.
REITs would not have historical
performance as of this writing because they are just about to be launched.
However, you can look at the track record of the investment manager.
remember that historical performance is just like the resumé of a person. It is
the past. The past does not necessarily guarantee future performance.
4. Ask the fund what their Sharpe ratio is. This is a ratio developed by Nobel
laureate William F. Sharpe to measure risk-adjusted performance. To calculate,
subtract the risk-free rate (e.g. like the 10-year rate for government securities)
from the rate of return for a fund and divide the result by the standard deviation
of the fund’s returns. Yikes, stat-is-eeks! I agree. That’s why it is best to just
get it from the fund.
Why complicate matters? Wouldn’t fund performance be enough to gauge how good a
fund is?
Well, The Sharpe ratio shows whether a fund's returns are due to wise
investing or just a product of too much risk taking. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it is only
a good investment if those higher returns do not come with too much additional risk.
The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has
been. A negative Sharpe ratio indicates that a risk-less asset would perform better
than the security being analyzed.
There is so much more to discuss about DuPont analysis and its application on
personal finance.
If you want to know more, attend the Personal Finance Advisers
Philippines Corporation’s (PFA) EnRich training programs. EnRich is both a high and a
long-term impact training program. EnRich includes a 30-day coaching program using
PFA’s proprietary 30-day EnRich Financial Milestones Journal. The journal comes with
daily personal finance tips that are sent via SMS throughout the 30-day coaching
The next EnRich personal finance training program will be conducted on October 16,
2010, Saturday, at Roof Deck of Prestige Tower, F. Ortigas Jr. Road (formerly Emerald
Avenue), Ortigas Center, Pasig City from 8 am to 12 noon for the Cash & Debt program
and 1 to 5 pm for the Risk & Wealth program.
For details on and reservations for
EnRich, including information on PFA’s referral program, please call (632) 216-1541 or
SMS (63917-505-0709). You may also email [email protected] or log on to
Hope to see you at EnRich.
Efren Ll. Cruz is a registered financial planner with the RFPI USA. He is author of the bestselling books, “Pwede Na! The
Complete Pinoy Guide to Personal Finance” and “Pwede Na! The Complete Pinoy Guide to Retirement & Estate Planning.”
He is Chairman and CEO of Personal Finance Advisers Philippines Corporation. Questions about the article may be
emailed to [email protected] or [email protected] Efren may be reached at the same email address for the
scheduling of consultations and personal finance seminars or at (+632-216-1541 / +63917-505-0709). This article
does not constitute nor forms part of any offer or solicitation of an offer to buy or sell any securities. The opinion and
views expressed herein are solely those of the author’s and do not necessarily reflect those of the Personal Finance
Advisers Philippines Corporation.