Why should I invest with those Recompound n00bs over established funds?
Why should I invest with those Recompound n00bs over established funds?
Why not?
Disclaimer: all stocks mentioned in this post is not an invitation to buy, sell or hold. Never construe anything in this post as investment advice. All opinions stated are the author’s and do not necessarily reflect the company’s views.
How can I trust Recompound?
I mean look at them…
How to invest your money is an important decision we’re all going to make at some point. You want to make sure to invest with someone competent and trustworthy, so you should probably go with a respected financial institution with well-established mutual funds right?
Wrong.
After years working in an asset management firm, I can confidently claim that there are serious fundamental flaws with Indonesia’s mutual fund space. Here’s why.
Out of the 303 equity mutual funds listed, only 22 of them managed to beat the index over the last 5 years. And those that currently have strong performance is unlikely to stay that way, as almost no funds in Indonesia has produced consistent good returns year after year. It is very, very hard for a mutual fund to beat the index over a long period of time. It’s not because those mutual fund managers are not capable, but they operate with so much fees and constraints that it becomes structurally difficult to perform optimally.
And Recompound was found to address those shortcomings.
P.S. You can check how we performed compared to IHSG in this blog post.
Why most mutual funds underperform reason #1
Fees, fees & more fees
Below are some fees you will be charged by mutual equity fund managers and how much you will be charged:
Subscription fee 1-2% (charged when you first deposit)
Redemption fee 1-2%
Management fee 3-5% (charged daily because AUM fluctuates)
A lot of people underestimate how much they’re really paying in fees because they don’t appreciate how compounding works in the long run.
IDR 100 million invested will turn to IDR 99 million after your subscription fee. Assuming your fund manager can generate 12% a year (a very optimistic assumption; only 8 out of 1369 mutual funds managed to get this returns over the last 5 years), you will net just under 9% a year after 3% annual management fee.
Assuming a 5% annual management fee, if you buy equity mutual funds:
After 10 years, your investment will grow to IDR 99 million x (1.07)^10 years = IDR 156.7 million
Now notice how much more you will have without all the fees imposed on you:
The same IDR 100 million that grows 12% over 10 years will grow to IDR 100 million x (1.12)^10 = IDR 310.5 million
In our example, over 10 years, you are really paying almost half what your investment could be. Most people are unaware the true price of what they’re paying by agreeing to all these fees. Investors (a.k.a. you) are getting ripped off and most aren’t even aware of it.
Why most mutual funds underperform reason #2
Most fund managers do not have the incentives to generate high returns
The returns of most fund managers are compared the return of the index (IHSG). And their reputation (and often their compensation/bonuses) depends on their performance relative to the index. Most fund managers are therefore pressured to structure their funds similar to the broad index.
For example, say BBRI has about 9% weight in the IHSG. Fund managers will be compelled to also own BBRI, because they would underperform if BBRI were to go up and they do not own it.
So what does this mean??
It means fund managers are more likely to choose stocks that have high weighting in the index because they fear missing out. Worst of all, they are mostly able to get away with poor performance if it means the poor performance comes from tracking the index. GOTO and BREN are recent examples of stocks fund managers bought to keep up with the index. YTD returns for both stocks are dreadful (BREN -28.95% and GOTO -25.29% YTD, as of 26 March 2024). But these guys mostly don’t care about losing your money as long as the broader index dropped with their funds. Their thinking is
“It’s ok for me to lose money and I can’t be faulted if the index is down within the same period. I won’t be blamed and my compensation won’t be at risk”
Do you really want someone who manages your money to have these kind of values?
Why most mutual funds underperform reason #3
Regulations make it near impossible for fund managers to invest optimally
The financial sector is heavily regulated, and rightfully so. Indonesia is unfortunately notorious for financial frauds. Regulations are often well-meaning, and they usually come after past misdeeds that caused harm to the public.
But the downside to all these regulations is that it imposes heavy restrictions on fund managers who genuinely want to generate optimal returns for their investors. There are many restrictions that would fall under this category, but I’d like to focus on one in particular that I find to be the biggest pain the ass:
All public equity and balanced funds are not allowed to have more than 10% of their portfolio in a particular position.
So if a fund manager comes across a stock that he/she really really likes, the regulations would prevent him/her from investing more than 10% of their total portfolio in that stock. This means at any given time, fund managers need at least 10 positions invested if they want to deploy all their cash.
A good stock doesn’t come by very often, and there are many occasions when fund managers wish they could buy more than what is allowed by regulators. Because in reality, finding 10 good ideas is extremely hard. Consequently, equity fund managers (who are by law required to invest 80% of their portfolio in stocks at any given time) often have to settle for less than ideal stock picks to satisfy these regulations.
So another common thinking among fund managers, especially those that manage equity funds is:
“I don’t love this stock. It’s not bad but I would rather not buy it if I could. But I’m gonna buy it anyway because regulations require me to do so.”
Again, do you really want someone who manages your money to invest based on such strategy?
Official alternative to Reksadana: Kontrak Pengelolaan Dana (KPD) a.k.a Discretionary Fund
Yes! In Indonesia you can build a discretionary fund and bypass all the Reksadana restrictions I just mentioned. For more details: https://sikapiuangmu.ojk.go.id/FrontEnd/CMS/Category/78
However, there is an important caveat:
The minimum cheque size to invest in a KPD is 10 bio IDR, which is equivalent to ~600k USD.
If we are being realistic, not many people have 600k USD of investible asset and this limits the accessibility for most Indonesians.
How about those Robo-advisory platforms?
In OJK terms, these platforms are essentially Wakil Agen Penjual Efek Reksa Dana (WAPERD). More information can be found here.
In other words, they are just distributors for reksadana that Recompound is trying to disrupt at the first place.
No matter how much “cutting edge robot algorithm” they claim to use, their underlying asset is still reksadana, riddled with restrictions I explained above.
Summarising my points in 1 graph
Why I want to be a part of Recompound
As someone from an institution, subjected to such restrictions, these things frustrate me a lot. When the market is broken, it means that lots of people are under-served.
Sure, using a KPD, I can open up a discretionary fund and just let my rich friends and families invest (which I already did, btw). However, as a fund manager and also an opportunistic entrepreneur, this signifies a large untapped retail market, which is currently inaccessible by official instruments.
Therefore, I see Recompound as an opportunity to tap into the huge retail market. Just think about it, the equity mutual fund market has a value of USD 1 billion, while that of the money market fund is USD 74 billion. I am not altruistic. I am just seeing this USD 73 billion of opportunity.
Recompound exists to fix these broken parts so that we can serve retail investors who (1) have tried the existing products and become disappointed or who (2) have not even ventured into the investing world at all.
In particular, even for me, the reasons why I think Recompound would be able to serve retail investors better are:
We let our clients hold on to their money — you can be sure we will not run away with your money because we can’t touch your portfolio without your approval
We only get paid when you make money — we will do our best to make money for you guys, not out of altruism but because we want to get paid. This means the mindset that we have is the total opposite of your typical fund managers’
Our mindset: my goal is infinity returns for my clients
Typical fund managers’ mindset: I just need to beat the index by 1%. IHSG’s return is -11% and I’m at -10%. I’m all good!
Your portfolio stays with you and is yours to control, so regulations are lighter on us (Recompound). We have a lot more flexibility in how we can invest. This means we have a structural edge against public mutual funds.
True story of Recompound (3 months ago)
Market is shit right now.
Budi: What stock should we buy?
*Erik: No good stock yet. Market is shit. Don’t buy and stay cash.
True story of Recompound (2 weeks ago)
Erik: I’m super bullish on XYXY. Allocate 100% to XYXY*Budi’s girlfriend, Gracia, referred her friend to Recompound. Let’s call her Alice
Alice asked Gracia: Gras, did you also get told to buy 100% of XYXY. Is this real?
Gracia: Ummm….. I guess we entered at different timing, so we have different stock allocations…
Those are some of the reasons why we are confident that we can deliver better value and performance than traditional financial institutions.
If you’re reading this, there’s a good chance you know at least a handful of people who have lost money in stock market.
Our value proposition is simple, let us be your CIO and our goal is to deliver growth over the long run, period. This hopefully would be a massive improvement from suffering significant losses that most investors went through.
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