Retirement/Pension advice (for a youngster)

[fletchsmile]

What Fletch posted set me wondering. Clearly with LTFs one can reinvest every 5 years and get the tax benefit over again. However, that's not possible with RMFs which must be held until 55. So, what is the break even point for fund versus ETF? Repeating Fletch's calculation for the more expensive fund (yes, it's an LTF not an RMF, but that doesn't make any difference to the calculations) and the ETF, the figures are as follows:

5 years 10 years 15 years 20 years 25 years

Thai Good Corp Gov LTF 1300 1173 1046 919 792

iShares MSCI Thailand Capped ETF 969 938 907 876 845

In other words, the break even point is somewhere between 20 and 25 years holding for the higher charges of the fund to wipe out the tax benefits of the LTF.

Notes:

The model assumes that neither the fund nor the ETF grows at all over the period. That's most unlikely. However, it appears sufficient to illustrate the point.

The model doesn't include any allowance for the fact that the ETF will only deliver slightly-less-than-average performance. A carefully selected fund could well outperform significantly over the period.

Fund charges are relatively high in Thailand. In all probability they will reduce over the coming decade or two, pushing the break even point even further into the future. There's much less scope for the ETF to reduce its charges.

I think we were posting about the same time for my above post below yours. Just had lunch:)

You raise exactly the points people should consider.

A few add ons:

A)I make the break even between 25 and 30 but closer to 30. Hence outside the lifespan of the RMF.

One of us may have a simple error.

5 year though should be 1305.88 not 1300 think you have a typo plus I also rounded.

5 year 1,428.57 × (.9822)^5 = 1,305.88

25 year 1,428.57 x (.9822)^25 = 912

vs.

25 year 1,000 x (.9938)^25

=856

I.e the onshore active is still higher at 25 years

Have a quick check could be me...

B )

This is why I included the Thai onshore tracker in number 2. TER 0.88% onshore vs. TER 0.62% offshore. Like for like

offshore is only 0.26% per annum cheaper.

After 25 years it is worth more than the offshore tracker at 1,145. I.e charges only this is best.

This is important as there are low cost options here too. It is fairer to compare like for like passive funds if excluding returns.

Yes Thailand is a bit more expensive but not much.

Your comparison is valid but is active onshore vs passive offshore. It throws extra light to show passive onshore. I.e bit dearer onshore but not much.

If you compare the slightly higher onshore tracker charges LTF or RMF to offshore I make it well over a hundred years to break even.

0.88% charges with 30% tax relief is better than

0.62% charges for anything less than 100years

Conclusion: for the like for like tracker comparison the offshore Thai equity version lower charges will never compensate the tax relief on the onshore tracker version while we're alive

Add the third fund in your table to see this

Cheers

Fletch:)

Edited March 19, 2015 by fletchsmile

[fletchsmile]

So we already established

Onshore tracker + tax relief beats offshore ETF tracker every time in our lifetimes.

Charges on offshore ETF tracker wouldnt compensate tax relief on onshore active fund over 5 years for LTF. Closer decision for RMF but onshore still probably better.

Taking tax relief you can change strategies later.

That just leaves the active vs passive debate as usual.

Over 10 years the annualised return of Thai Good Governance topped the table at 16.22 % p.a

1,000 becomes 4,495 after 10 years before charges.

SET TRI in that period turned 1,000 into 3,240

Gross those up for tax onshore and then reduce for charges the rankings are

1. Thai active managed LTF

2. Thai passive onshore LTF

3. Offshore ETF

I.e superior performance in the active fund can compensate higher fees if you know you way around.

So if someone wants lowest cost:

Pick onshore tracker LTF or RMF

For highest net return (eg over last 10 years) pick onshore active LTF/RMF could likely be better if you know how to pick your funds and seek total return after adjusting tax and charges.

The offshore ETF will never in our lifetime be the optimal option (or best/winner of 3) where tax relief is given for OP.

QED.

Cheers

Fletch

Edited March 19, 2015 by fletchsmile

[fletchsmile]

What Fletch posted set me wondering. Clearly with LTFs one can reinvest every 5 years and get the tax benefit over again. However, that's not possible with RMFs which must be held until 55. So, what is the break even point for fund versus ETF? Repeating Fletch's calculation for the more expensive fund (yes, it's an LTF not an RMF, but that doesn't make any difference to the calculations) and the ETF, the figures are as follows:

5 years 10 years 15 years 20 years 25 years

Thai Good Corp Gov LTF 1300 1173 1046 919 792

iShares MSCI Thailand Capped ETF 969 938 907 876 845

In other words, the break even point is somewhere between 20 and 25 years holding for the higher charges of the fund to wipe out the tax benefits of the LTF.

Notes:

The model assumes that neither the fund nor the ETF grows at all over the period. That's most unlikely. However, it appears sufficient to illustrate the point.

The model doesn't include any allowance for the fact that the ETF will only deliver slightly-less-than-average performance. A carefully selected fund could well outperform significantly over the period.

Fund charges are relatively high in Thailand. In all probability they will reduce over the coming decade or two, pushing the break even point even further into the future. There's much less scope for the ETF to reduce its charges.

Forgot to mention earlier we should also think about average holding periods.

While for a 30 year old he needs to tie up 25 years in RMF to get the tax benefit in the first year, in following years it will decrease. I.e aged 31 only needs to hold 24 years.... etc aged 50 only needs to hold 5 years. So each year's investment needs 1 year less to get the tax if doing regularly.

So the average holding period will be more like 15 years.

This would tilt even more to onshore. Age 55 nice pot tax free.

For me I always maxed out LTFs for tax relief for only 5 years each year as top priority.

I started RMFs closer to retirement.

As a 35% tax payer each 1000 cost only 650 so I get an uplift of over 50% each year.

As you know I also use offshore funds too including sometimes low cost ETFs. But as a youngster OP would get most bang for his buck from LTFs.

Cheers

Fletch

[fletchsmile]

...

Low cost ETFs are the way to go over a 35 year period in your case the difference between a 0.2% annual fee and a 2% annual fee will be 100,000sUS$. Also i would go overweight for riskier ETFs at this stage in your life to aim for higher returns- emerging markets, frontier markets, junk bond ETFs, REITs.

Could you expand on the best way for OP to achieve that from Thailand?

He is saving THB 40K to THB 50K a month.

Are you aware of any low cost ETFs at 0.2% p.a., emerging market funds, frontier markets, junk bond ETFs in Thailand?

Presumably you're suggesting he transfers money out of Thailand to save?

What do you think about the FX conversion costs? and bank transfer costs for doing that on smaller monthly amounts like that? Would they eat into annual savings on costs of offshore funds?

How about tax and admin?

Setting up and maintaining the accounts outside Thailand?

How could he boost his savings with tax relief if saving outside Thailand?

AyG mentions LTFs and RMFs from Thailand. These are very useful tax efficient vehicles to buy funds. OP says he's living and working in Thailand. Assuming he's doing that legally he'll be paying tax. If OP can save THB 50K a month I'm guessing he has taxable earnings of at least 1mio a year more likely more. That would mean his marginal tax rate is at least 20%. Possibly up to 30% or even 35%.

So if buying say THB 500K a year (GBP 10K) he could save 20% to 35% in tax by buying onshore LTF or RMF funds in Thailand. Thats THB 100k to THB 175k GBP 2 to 3.5k a year to add to his pot. A massive amount over 35+ years he would be missing out on. How would he get similar uplifts offshore?

While what you recommend may be useful to some people and a good solution. Could you expand how it fits OPs circumstances and addresses the above concerns?

Cheets

Fletch

Yes, OP would have to open an online trading account in his home country (etrade, fidelity etc)- thats where the low fee funds are - over his lifetime given he is young, the money saved in fees will far outweigh the tax savings you are talking about.

Fletch- i would recommend that you do some research into fund fees and compounding over time ( i dont mean that in a condescending way, many people dont grasp the concept initially!) . To try and tell a young investor that low fee funds should not be his starting point is rather naughty (though i understand its fun to play the devila advocate!).

Hopefully AyG's email would have helped set you on the right track. eg Looking at break-evens. The diffs in his and my numbers by the way is he used a quick and ready linear/straight line solution compared to compounding. His will give quick and dirty results which are reasonable, but the longer the time horizon the less accurate linear becomes.

The question also come up (thru PMs received as well as above posts) of:

- what difference no growth vs growth make?

- what difference does single vs lump sum investments make?

- what happens if we used actual returns vs actual fees;

and then extrapolate

Now here are the facts, with real life examples, and 3 real funds

Basically:

- What you said about fee savings on the offshore ETF vs onshore LTF I recommended is just plain wrong over the lifetime of an LTF (5 years) or even RMF in OP's case

Attached is a quick spreadsheet knocked together in about 15mins to help you understand. Forgive me if there are typos, but the conclusions will be valid. Remember these are real funds with real charges, and one of the real LTFs I recommended

Some key facts:

A) Over the 5 year life of an LTF the lower charges on the offshore ETF doesn't have a cat in hell's chance of compensating for the tax relief on the 2 onshore LTFs

Over 25 years the lower charges on the offshore ETF are unlikely to compensate for the tax relief for an the two onshore LTFs/RMFs with similar structure

C) Once the locked in period expired a knowledgeable investor could switch strategies if they wanted. i.e take the LTFs and RMFs for tax benefit then switch offshore later if you believe that is best after 5 or 25 years

D) Other variations include investing in an LTF then after 5 years re-invest in RMF to get 2 sets of tax relief

E) Whatever assumptions you make the low charge offshore ETF will never beat the onshore LTF/RMF tracker. 0.22% savings in charges just can't compete with 30% tax savings in a 100 year time frame

From the attached workbook, key points and learnings for you:

F) Sheet 1. shows it would take between 30 and 31 years for a single lump sum, assuming no growth, invested in the offshore ETF to break-even vs the LTF. By this time you have already switched, see C) or D) above once the LTF or RMF matured. Result offshore ETF couldn't make up the tax benefit

G) Sheet 2. Learning point: Shows on a single lump sum, it actually makes no difference to the answer what the growth rate is on the funds, as multiplication is associative/commutative

H) Sheet 3. If making lump sum investments wth no growth rate, then it takes 68 - 69 years for the low cost ETF lower charges to better the onshore Thai active fund. The break-even would never be reached as you pass 55 so can't do anymore and see C) above

I) Sheet 4. Learning point: on regular interval investments the growth rate will affect the outcome. In this example 10% growth shortens the break-even in H) to 40-41 years.

J) Sheet 5. This is most interesting for me as it looks at actual returns for each fund (after charges), i.e actual charges for each fund, plus factors in tax relief. This looks at the big picture not just what is cheapest

This is for more sophisticated investors.

Up until this point both LTFs onshore beat the offshore ETF with lower charges for the life of an LTF or RMF

But, the passive onshore tracker LTF looks better than the onshore active managed under the 4 worksheets above

Here we see the picture change. The annualised return after charges for the active managed fund is 16.22% (vs 12.48% for the index). Note these are after charges so I use 1 as the charge adjustment factor to multiply by given returns are after charges. I made a mistake earlier by saying before charges. (Note 2 I should probably adjust the onshore tracker down further for the diff in charges, but couldn't be bothered as I want to compare offshore ETF and onshore active LTF )

Sheet 5 shows that on 1,000 single lump sum, after charges and actual returns.

After 10 years

i) active LTF = 6,423

ii) passive LTF = 4,631

iii) offshore ETF = 3,242

Key point is that over 10 year the onshore LTF + tax benefit actual returned double your offshore ETF. This is real money and what really happened

This is because of the superior performance if you can identify the right fund. You believe you can't. I believe I can, and incidentally did do and continue to do.

After 35 years, extrapolating the superior returns

i) active LTF = 275,253

ii) passive LTF = 87,607

iii) offshore ETF = 61,325

The superior performance + tax benefit results in a more than four fold return (4.5x the cheaper option)

Sheet 6 shows regular lump sum contribution with the superior performance factored in

i) active LTF beats the other 2,

10 yr

(i) active LTF 35,783

(ii) passive LTF 28,861

(iii) offshore ETF 20,703

i.e active LTF beat the tracker by 1.75 x over 10 years lump sums. This is real money and what really happened.

35 yr Again you can extrapolate the returns and

(i) active LTF 1,962,016

(ii) passive LTF 776,709

(iii) offshore ETF 543,696

That's again a massive diff of 3.5 x

Sheet 7, This should really hit home in THB terms investing 300k a year (25k a month which I estimated and recommended)

Over 10 years

(i) active LTF became 10,735,000

(ii) passive LTF became 8,658,305

(iii) offshore ETF became 6,060,813

Now these are real numbers based on actual facts. If OP had invested 25k a month or 300k a year over the last 10 years he would have been 77% better off with the LTF fund I recommended than under your recommendation

That is THB 4.7 million better off!!!

The reason I made my statements is based on experience. I've been investing in LTFs since they came out in 2004. I've personally held Aberdeen LTF for over 10 years (one recommendation) and Thai Good Corp Governance for over 7 years.

You're way off mark implying I don't understand your simple fee level calcs. The fact is you don't see the full picture: tax benefit + performance - fees

I also did these calcs way before LTFs even came out. I've shown you before on Aberdeen Growth how I made 6-7 mio more over 15 years or above a tracker, even without any tax benefit as when I started they weren't around.

We're talking millions of baht possible difference here, and in my case much of it has been actual.

BTW Over 35 years, extrapolating you'd be frightened at the massive difference it could make

Lastly on sheet 8.

I don't believe 16.22% p.a. and 12.47% p.a. would be attainable. I do believe my fund will continue to outperform, and if it waivers I'll find the others.

So I assumed 10% return on the active fund and 7% for the tracker (only 3% more compared to 3.75%)

Projecting forward, the outperformance + tax benefit on the active LTF would dwarf the fees on the offshore ETF:

THB 7.5mio vs THB 4.4 mio over 10 years

or THB 127mio vs THB 44 mio after 35 years

You can play around with numbers.

The key facts are though:

Over 5 years, the minimum holding of an LTF, the offshore ETF doesn't have a cat in hell's chance of beating the LTF I recommended or any other LTF for that matter if OP gets the 30% tax

Historically over 10 years choosing the top active LTF onshore did beat the onshore tracker by several million THB and would have trounced the offshore ETF by over THB 4 million if investing THB 300k a year.

The onshore tracker with tax benefit of 30% will always beat the offshore tracker because of the tax benefit.

Cheers

Fletch

{Edit Sorry couldn't upload .xlsx so had to save down a version

Edited March 19, 2015 by fletchsmile

[Neeranam]

I haven't paid any contributions since 19993. I have 20 years until retirement age. Interesting thread. If I start paying now(if they allow me), I'll get a full pension. Alternatively, as a friend once suggested - use the same money to buy lotto tickets as the future is too uncertain.

[ExpatJ]

Fletch. Ayg. Been busy last few days. Looking at your posts your analysis uses the 16% per year Thai gov. Fund and compares it to a Thai index linked etf. Selecting the highest performing active fund that you could find is hardly the sort of objective analysis the OP is looking for (I'd venture to guess

Obviously comparative analysis only works if you assume the active v low fee funds have the same returns. Only then can you compare fee/tax costs and compare. Otherwise it's useless as a comparison.

Edited March 23, 2015 by ExpatJ

[fletchsmile]

Fletch. . Been busy last few days. Looking at your posts your analysis uses the 16% per year Thai gov. Fund and compares it to a Thai index linked etf. Why did you pick an active fund that made 16%-hardly a representative sample?

If you look again and understand the worksheets I did about 8 different scenarios.

Based on single investment, regular investment, same growth for all, no growth for all etc.

Using 1,000 as the investment. These are all theoretical projections which hold certain variables constant to look at the individual variable, eg fees, growth, tax benefiy, They should impacts of what could happen.

Then I used actual returns and actual fees and then actual 300k. 16% was the actual 10 historic return for one of the 3 funds I mentioned vs actual index return which was lower.

It also highlights that someone like myself who actually walks the walk and practices what he preaches ended up ball park THB 4mio+ better off in practice

No I didn't just pick the highest performer from a table. I picked a fund I have personally invested in and recommended to OP. For the last 10 years most of my LTF money went into Thai Good Gov fund and second most into Aberdeen LTF although that was the first one I ever picked as I knew the fund management house and a comparable existing fund.

Cheers

Fletch

Edited March 23, 2015 by fletchsmile

[fletchsmile]

Obviously comparative analysis only works if you assume the active v low fee funds have the same returns. Only then can you compare fee/tax costs and compare. Otherwise it's useless as a comparison.

I guess you didnt understand the first 4 worksheets then as thats exactly what they do.

As I also said, after looking at costs and tax a more sophisticated investor will then also consider returns and look at the bigger picture of how they all fit together:)

So basically there's enough info in there to look at single factor analysis dual factor or multi factor bigger picture. Up to someone how they interpret and use.

Cheers Fletch

Edited March 23, 2015 by fletchsmile