brettholmesfan
New member
Before I begin my sharing, please take note that I am not a financial advisor and this is a very simple analysis, I invite everyone to share their thoughts and critique this post.
Hi everyone, we are commonly told that if you buy and hold the PSEI or even just local blue-chip companies, you are diversified and primed for steady growth throughout the years. Recently I have started to think that this logic might not apply in the Philippine context because of the small size of the PSEI. It seems that the S&P is both less risky and has higher growth potential than the PSEI.
I have been investing in the PSE for more than 10 years now. Throughout the years I have been buying and holding mostly blue-chip stocks (SM, Ayala, DMCI etc.) and 10 years later I am a bit disappointed with the returns. Comparing prices now to prices 10 years ago, there is a definite gain for some stocks in my portfolio but not all, resulting in mediocre growth overall.
S&P500 vs PSEI
Out of frustration, I compared the PSEI to the S&P 500 as a “what if” scenario and was surprised at the results. For this I looked at the S&P 500 ETF (SPY) and the iShares MSCI Philippines ETF (EPHE)
Note: EPHE is not exactly the PSEI or FMETF but is mostly the same. For this discussion I will assume that the PSEI and EPHE are equivalent to each other. You can see the holdings of EPHE vs FMETF/PSEI here:
EPHE
FMETF/PSEI
Now, in comparing the S&P 500 to the PSEI I used Portfolio Visualizer to look at the past ten years. Please see this link:
Portfolio Visualizer
Please take note that a longer time horizon will lead to better conclusions. It would be interesting to compare the PSEI and S&P especially from 2008 onwards because the PSEI was not that affected by the global financial crisis. Sadly I could not find a website that goes further than 2011 so please let me know in the comments if you find any.
After opening Portfolio Visualizer please scroll down to the line graph. It is clear from the line graph that the S&P 500 outperforms the PSEI. Portfolio 1 (SPY) has a 14.60% CAGR while Portfolio 2 (PSEI) has a CAGR of 2.92%, not even including adjustments for inflation. This makes sense because the most valuable companies in the world make up this index. I think most of us would not be surprised. What stood out to me was how risky the PSEI is compared to the S&P 500. We see this in the Sharpe Ratios of the S&P compared to the PSEI.
Edit: For a longer horizon, please see the comment of @pitcharan where the PSEI beats the S&P from 1985 up to today
Sharpe Ratio
The Sharpe Ratio is used to measure performance after adjusting for risk. A riskier asset should deliver greater returns. We expect that stocks should deliver higher returns than bonds because of the greater risks stocks entail. A higher Sharpe Ratio means an asset is performing well after adjusting for risk.
The S&P has a Sharpe Ratio of 1.73 vs 0.31 for the PSEI. According to Investopedia, a Sharpe Ratio lower than 1 is suboptimal. In a nutshell, the PSEI is way more risky than the S&P 500. Not only does the PSEI have lower returns, but it gets those lower returns while bearing more risk. The PSEI has less stocks, liquidity, and market capitalization than the S&P so intuitively, the lower Sharpe Ratio makes sense. So far the returns of the PSEI do not justify the high risk we are actually taking. We also hear other arguments for investing in the PSEI and I will discuss these below:
“The Philippines is a developing country, so our stock market has huge potential”
I heard this all the time during the 2010’s when we had 6% GDP growth every year. A counter argument to this is that stock markets and economies are not perfectly linked. I think this video explains this concept way better than I could. What really shocked me is the finding that countries with higher GDP tend to have lower stock market returns!
Bonus: The Philippines was one of the countries studied in the paper “Is Economic Growth Good for Investors?” by Jay Ritter of the University of Florida. We actually did pretty well compared to other developing countries. However, Ritter concludes that “Apparently, consumers and workers rather than the shareholders of existing companies gain all of the benefits of economic growth”.
“We should invest in the stock market because we know more than foreign analysts”
While this argument is more debatable than the first, I still do not buy into it. Unless you have insider information on the local companies here, I still believe that we do not know more than the foreign analysts who are paid to do investment research every day. Sorry again for bringing up another Ben Felix video but I think he explains it well here (the first 4 minutes are important, but after that he talks about Canada-specific advice).
Bonus: At least the PSEI did better than Indonesia and Malaysia’s indexes. See here
Final thoughts
Again, this is a very simplified way of looking at the PSEI and I invite others to further analyze this. Also, please do not take this discussion as me saying that we should not invest in local companies. I wanted to challenge the idea that investing in the PSEI is low risk. This notion is widely agreed upon by the local investing community. From what I have seen I just think that this is not the case. Instead, investing in global indexes through brokers or bank feeder funds seems like a good solution.
Edit: For those looking to invest in global index funds, IBKR is now looking like a good option due to the removal of monthly fees.
Links and further reading:
How to Evaluate Your Investing Decisions
Sharpe Ratio
SPY vs PSEI
Is Economic Growth Good for Investors? by Jay Ritter
Home Country Bias
Stock Market vs The Economy
Hi everyone, we are commonly told that if you buy and hold the PSEI or even just local blue-chip companies, you are diversified and primed for steady growth throughout the years. Recently I have started to think that this logic might not apply in the Philippine context because of the small size of the PSEI. It seems that the S&P is both less risky and has higher growth potential than the PSEI.
I have been investing in the PSE for more than 10 years now. Throughout the years I have been buying and holding mostly blue-chip stocks (SM, Ayala, DMCI etc.) and 10 years later I am a bit disappointed with the returns. Comparing prices now to prices 10 years ago, there is a definite gain for some stocks in my portfolio but not all, resulting in mediocre growth overall.
S&P500 vs PSEI
Out of frustration, I compared the PSEI to the S&P 500 as a “what if” scenario and was surprised at the results. For this I looked at the S&P 500 ETF (SPY) and the iShares MSCI Philippines ETF (EPHE)
Note: EPHE is not exactly the PSEI or FMETF but is mostly the same. For this discussion I will assume that the PSEI and EPHE are equivalent to each other. You can see the holdings of EPHE vs FMETF/PSEI here:
EPHE
FMETF/PSEI
Now, in comparing the S&P 500 to the PSEI I used Portfolio Visualizer to look at the past ten years. Please see this link:
Portfolio Visualizer
Please take note that a longer time horizon will lead to better conclusions. It would be interesting to compare the PSEI and S&P especially from 2008 onwards because the PSEI was not that affected by the global financial crisis. Sadly I could not find a website that goes further than 2011 so please let me know in the comments if you find any.
After opening Portfolio Visualizer please scroll down to the line graph. It is clear from the line graph that the S&P 500 outperforms the PSEI. Portfolio 1 (SPY) has a 14.60% CAGR while Portfolio 2 (PSEI) has a CAGR of 2.92%, not even including adjustments for inflation. This makes sense because the most valuable companies in the world make up this index. I think most of us would not be surprised. What stood out to me was how risky the PSEI is compared to the S&P 500. We see this in the Sharpe Ratios of the S&P compared to the PSEI.
Edit: For a longer horizon, please see the comment of @pitcharan where the PSEI beats the S&P from 1985 up to today
Sharpe Ratio
The Sharpe Ratio is used to measure performance after adjusting for risk. A riskier asset should deliver greater returns. We expect that stocks should deliver higher returns than bonds because of the greater risks stocks entail. A higher Sharpe Ratio means an asset is performing well after adjusting for risk.
The S&P has a Sharpe Ratio of 1.73 vs 0.31 for the PSEI. According to Investopedia, a Sharpe Ratio lower than 1 is suboptimal. In a nutshell, the PSEI is way more risky than the S&P 500. Not only does the PSEI have lower returns, but it gets those lower returns while bearing more risk. The PSEI has less stocks, liquidity, and market capitalization than the S&P so intuitively, the lower Sharpe Ratio makes sense. So far the returns of the PSEI do not justify the high risk we are actually taking. We also hear other arguments for investing in the PSEI and I will discuss these below:
“The Philippines is a developing country, so our stock market has huge potential”
I heard this all the time during the 2010’s when we had 6% GDP growth every year. A counter argument to this is that stock markets and economies are not perfectly linked. I think this video explains this concept way better than I could. What really shocked me is the finding that countries with higher GDP tend to have lower stock market returns!
Bonus: The Philippines was one of the countries studied in the paper “Is Economic Growth Good for Investors?” by Jay Ritter of the University of Florida. We actually did pretty well compared to other developing countries. However, Ritter concludes that “Apparently, consumers and workers rather than the shareholders of existing companies gain all of the benefits of economic growth”.
“We should invest in the stock market because we know more than foreign analysts”
While this argument is more debatable than the first, I still do not buy into it. Unless you have insider information on the local companies here, I still believe that we do not know more than the foreign analysts who are paid to do investment research every day. Sorry again for bringing up another Ben Felix video but I think he explains it well here (the first 4 minutes are important, but after that he talks about Canada-specific advice).
Bonus: At least the PSEI did better than Indonesia and Malaysia’s indexes. See here
Final thoughts
Again, this is a very simplified way of looking at the PSEI and I invite others to further analyze this. Also, please do not take this discussion as me saying that we should not invest in local companies. I wanted to challenge the idea that investing in the PSEI is low risk. This notion is widely agreed upon by the local investing community. From what I have seen I just think that this is not the case. Instead, investing in global indexes through brokers or bank feeder funds seems like a good solution.
Edit: For those looking to invest in global index funds, IBKR is now looking like a good option due to the removal of monthly fees.
Links and further reading:
How to Evaluate Your Investing Decisions
Sharpe Ratio
SPY vs PSEI
Is Economic Growth Good for Investors? by Jay Ritter
Home Country Bias
Stock Market vs The Economy
