In an earlier article, I talked about the many ways you can invest in the local stock index or Philippine Stock Exchange index (PSEi). I decided to make a separate article on earnings from stock index investing for people who may be looking for a more in-depth discussion.
This is going to answer the following:
- how did stock index investing perform in the past?
- in what ways can we forecast future earnings?
- what is the ROI of investment funds that track the PSEi?
Stock index past performance
So the first thing is to check the data of the past return on investment (ROI) that the stock index posted. The ROI tells us how much it gained over the past years.
The table below shows the compounded annual growth rate (CAGR). The CAGR is like the yearly interest that the investment has grown. Also, you will see the cumulative growth. It is obtained by dividing the current and past index level. (Data is updated until July 22, 2019)
It’s also worth noting that the 10-year ROI is at 12.21%. So if you’ve invested a decade ago, your money would’ve tripled by today.
While saying that, it is sobering to see that the 5-year and 3-year returns have not sustained the double-digit growth. This is perhaps the market sentiment on inflation in the previous years and the government’s massive infrastructure plan through Build, Build, Build as well as foreign forces that were at play.
Stock index earnings forecast
Now that the ROI over different time periods is known, then it’s time to estimate future PSEi earnings. There is a question, however, on which ROI to use.
It’s quite tricky how far in the past we can go that would still make sense. That’s because the business climate is different today than in the previous decades, and the companies that make up the PSEi, even the market, have also changed considerably.
Going too far back might not necessary or even sensible.
Also, relying on recent performance may also not make sense. We might be riding on the high, and if we’re going to use that data it may make the forecast limited in the sense that it doesn’t take into account volatility of the stocks for the past few years.
10-year stock index returns
That’s why we’re going to use the 10-year PSEi returns. This way, the ROI includes both the high and the low over the past years and we assume that somehow it is going to perform similarly in the future.
So if you’ve invested P1 million 10 years ago, this is how much your money would’ve grown over the years since 2009.
So an investment of 1 million pesos in 2009 would’ve been 3,165,722 pesos in July 2019. That’s over two million pesos more.
But as you can see, it isn’t upward trend all the time. Compare 2016, 2017 and 2018 for instance. Data like this drives home the point that even with a diversified portfolio like the index, stock as a form of investment is generally volatile. It may swing up or down.
Another thing to conclude from the table is that there is value in long-term savings. While it’s true that 2017 and 2018 weren’t great, seen from the 10-year period, you still walk away with a gain.
Stock index investing forecast
But the above table is the historical earnings. Which is sad as no one has the ability to turn back time.
So let’s do an estimate. We’re going to make the forecast using the ROI for the next 10 years. The reason it’s restricted to just a decade is to avoid going too far into the future as business climate and economic fundamentals of the country might completely change by then.
Let’s assume that you’re going to save P100,000 or P200,000 per year for the next decade. Fees and taxes are going to be disregarded in the computation.
So how much can you earn through stock index investing? As you can see, you may gain almost a million more if you save 100k annually for 10 years, or almost two million more if you save 200k annually for 10 years.
There’s just one thing to remember. Past performance does not guarantee future returns. Is the forecast then wrong? Actually, it’s a standard practice.
Forecasts like the one above is used as an illustration. It can be helpful when comparing between options as well as when you want to get a picture of what you’re getting into. What’s important is to always remember that forecasts and actual performance are not the same.
Investing in stock index
We’ve already proven that it’s quite hard to buy individual stocks if your only goal is to duplicate the returns of the PSEi. It would require huuuge capital and a skill to re-balance your own portfolio regularly.
That’s why there are many alternatives that exist such as the following.
- First Metro Philippine Equity Exchange Traded Fund (FMETF)
- Mutual fund
- Unit investment trust fund (UITF)
- Personal Equity and Retirement account (PERA)
- Variable universal life (VUL)
These investments funds have low initial capital requirement compared to buying direct stocks. A fund manager also does the trading for you so that anyone who has no background in securities analysis can participate. And that leaves you to earn passive income.
The table below shows a comparison in 1-year, 3-year and 5-year returns of the PSEi and the investment funds that mirrors its performance.
|Philippine Stock Index Fund Corp.||Mutual fund||12.08%||0.81%||3.68%|
|Philippine PSE Index Fund Inc.||Mutual fund||12.03%||1.09%||3.71%|
|Sun Life Prosperity Philippine Stock Index Fund, Inc.||Mutual fund||11.50%||0.75%|
|PAMI Equity Index Fund, Inc.||Mutual fund||12.03%||0.12%|
|Atram Philippine Equity Smart Index Fund||UITF||10.18%|
|BDO Equity Index Fund||UITF||9.74%|
|BPI Philippine Equity Index Fund||UITF||10.40%|
|Landbank Equity Index Fund||UITF||6.49%|
|Metro Philippine Equity Index Tracker Fund||UITF||10.28%|
|PNB Phil-Index Tracker Fund(Formerly Pnb Enhanced Phil-Index Reference Fund)||UITF||10.07%|
|SB Philippine Equity Index Fund||UITF||9.84%|
|UCPB Philippine Index Equity Fund||UITF||9.88%|
|Unionbank Philippine Equity Index Tracker Fund Portfolio||UITF||10.38%|
|BDO PERA Equity Index Fund||PERA||9.25%|
So for the rest of this page, we’re going to explore how each of the above actually performed. We’re also going to try to make a forecast future earnings.
First Metro Philippine Equity Exchange Traded Fund (FMETF)
First Metro Philippine Equity Exchange Traded Fund (FMETF) is the only exchange-traded fund in the country. It is actually a stock that’s traded on the exchange.
However, what it is is it contains all the stocks on the PSEi. This is because its investment goal is to track the returns of the PSEi by acquiring all blue chip companies and matches their composition on the list.
The result is that its past returns closely resemble that of the index.
And this is the return on investment (ROI) of FMETF for the past few years.
As you can see, the compounded annual growth rate for the past 5 years is 4.72%. And if you invested your money in FMETF in 2015, your money would’ve grown 25.95% today.
FMETF past earnings
So let’s assume that you invested 1 million pesos five years ago. What would be your money today if you invested in FMETF? As you can see, your money would be 1,259,459 pesos as of July 2019.
FMETF earnings with annual savings
Now that we know the past returns, let’s try to make a forecast into the future. We’re going to use the 5-year ROI to make projection for the next five years. Again, we’re going to exclude fees and see the growth of 100k and 200k savings respectively.
Mutual fund – index fund
Investment funds (such as mutual fund, UITF, PERA, and VUL) that track the returns of the stock index are called index funds.
In particular, I found four mutual fund companies whose index funds are posting returns for the past few years: ALFM’s Philippine Stock Index Fund Corp., Philequity’s Philippine PSE Index Fund Inc., Sun Life Prosperity Philippine Stock Index Fund, Inc., and PAMI Equity Index Fund, Inc.
The fund that posted closest to PSEi 5-year return is Philippine PSE Index Fund from Philequity, which posted 3.71%.
Mutual fund – index fund past earnings
The table above shows how much an initial investment of 1 million pesos five years ago would be worth as of middle of 2019. It would’ve earned at least 199,784 pesos in capital gains.
Mutual fund – index fund earnings with annual savings
And again, we’re going to make a 5-year forecast. We’re going to check the growth of 100k and 200k annual investments.
So if you set aside money every year and put it into an index fund in a mutual fund company, you may be able to expect to earn should the same performance continues in the future.
For half a million pesos, it may grow to become 558, 481 pesos or for a million pesos, it may gain 116,961 pesos.
Unit investment trust fund (UITF) – index funds
Index funds are also available through unit investment trust funds (UITF).
As of the moment, I can only find 9 UITF companies: Atram Philippine Equity Smart Index Fund, BDO Equity Index Fund, BPI Philippine Equity Index Fund, Landbank Equity Index Fund, Metro Philippine Equity Index Tracker Fund, PNB Phil-Index Tracker Fund (Formerly PNB Enhanced Phil-Index Reference Fund), SB Philippine Equity Index Fund, UCPB Philippine Index Equity Fund, and Unionbank Philippine Equity Index Tracker Fund Portfolio.
Let me mention that unfortunately, I can only find one-year returns for all of these funds.
In which case, there’s actually of little use to check on past or future earnings. The only sensible math we can come up is either the past one year or one year into the future, which is actually pretty straightforward.
For example, if we use the BPI Philippine Equity Index Fund’s return of 10.3955%, then a 1 million pesos a year ago would be worth 1,103,955 pesos today.
PERA – index fund
The Personal Equity and Retirement Account or PERA is a the Philippines’ version of the US 401 (k) program. It is designed specifically as a voluntary savings plan for Pinoys who would want to prepare for their future retirement.
As of the moment, there’s only one PERA index fund that’s permitted by the Bangko Sentral ng Pilipinas, the BDO PERA Equity Index Fund. And just like the UITFs, I can only find the 1-year return at 9.25%.
So making a historical or future PERA earnings would not be of any use as we only have limited data. Again, we’re restricted to track past 1-year for computation.
A 1 million-peso investment made a year ago would be worth 1,092,500 pesos today.
Variable universal life (VUL) – index fund
The variable universal life (VUL) is a type of life insurance that has an investment component. I am not going to explore any more details into their index funds. That’s because different insurers have many funds that they offer to consumers.
Additionally, the way that these policies are structured isn’t as simple as the other investment funds. For instance, there are many fees and charges involved.
Also, there’s varying ways insurers take the portion for insurance from the premium and another for investment. To be sure, set an appointment with a duly-licensed advisor.
- Wall Street Journal. Accessed July 24, 2019
- Bloomberg. Accessed July 24, 2019
- Philippine Investment Fund Association. Accessed July 24, 2019