A new study by Personal Finance Advisers Philippines (PFA) shows very few mutual funds and unit investment trust funds were able to outperform the Total Return Index (TRI) of the Philippine Stock Exchange Index (PSEI).

The TRI takes into account all earnings from the 30 member companies of the PSEI including dividends, whereas the PSEI’s own movements only accounts for capital appreciation or depreciation.

PFA CEO and Registered Financial Planner Efren Cruz said it is more accurate to compare the PSEI TRI with the performance of funds, because funds also earn all of the dividends of the stocks they hold.

Last year the PSEI shrank 7.81 percent. The PSEI TRI’s annual average return over the last 5 years was a decline of just 3.44 percent, based on PFA’s calculations.

Looking at the 15 year average, the PSEI TRI’s average annual return rises to 6.65 percent, which is better than the full year headline inflation average for 2022 of 5.8 percent.

"When you talk about inflation, inflation was 8.1% last December 2022 as compared to December 2021. But the long term average inflation rate of the Philippines is around 5 percent. And if you compare that to the long term return of the stock market, the stocks in the stock market, it is 7 percent. So that is positive. It is just that for the past few years, the returns of the market and funds are really so terrible. If you look at the 15 year return, that is almost 7 percent, 6.65 percent, and I am talking here about the PSEI TRI, and it is good that people will know, that when they buy into equity funds, that their equity fund should have as a benchmark PSEI TRI, the Total Return Index. Because funds will earn dividends, and they will reinvest them. The PSEI alone does not cover reinvesting of dividends,” Cruz said.

Which funds did better than 6.65 percent in those 15 years?

Cruz said, "Not that many funds were existing in the past 15 years, you probably have 2, I think only 2 of the 20 funds existing at the time, equity funds, that outperformed the PSEI TRI. The rest did not outperform."

In fact, PFA data show very few mutual funds managed to outperform the PSEI TRI’s average annual returns for the last 5 years, and the last 10 years.

"We have to accept the fact that it is very difficult to really outperform the market. What you can do is at least earn something that is decent. What is decent is not necessarily what the market is doing. Because as financial planners, we always say you should be earning what you need to earn, not what the market is earning.”

In other words, the targeted investment return of each individual is different depending on the specific goals.

Cruz has 3 easy rules to follow when determining what kind of mutual fund or UITF to buy after determining the value needed to realize life goals such as a college education for the kids or a retirement fund.

First, buy a fund that is denominated in the currency you plan to use when you reach your goal.

"You have seen what has happened, the peso depreciated but there are times when it has also appreciated. So you are taking on currency risk that way," Cruz said.

Second, aim for decent returns that match your timetable and financial goals. If you are saving up for a retirement nest egg worth P10 million, and you already have P9 million with a full decade to go before 65, you don’t need to take unnecessary risks and search for high returns.

Third, find a fund manager that you can deal with over the entire term of your investment horizon. They need to be able to satisfy your needs, including friendly service, and on-demand information.