Best performing unit trust could be your worst investment

I read in the news last week. The worst may not be over for Vietnam’s stock market. Morgan Stanley said Vietnam was heading for a “currency crisis” and Fitch Ratings cut its outlook on the country’s debt rating. The country is experiencing strong inflation and maybe overheating. The once best performing stock index has fallen 55% this year.

I remember that when the market was best performing among the region, the market keep going up and the foreign investor money keep pouring in. It was similar with India, when the valuation is no longer cheap, the money inflow keep the market up.

If we back track a few years more, we can remember the year 2000 bubble. The higher the market went, the more money people pour in until the tipping point. I think at that time, banks were aggressively pushing technology related unit trust and result in many investors losing money. That might explain the poor reputation of unit trust as an investment approach in the local market.

Investor who bought the Vietnam fund might be sitting on loses now. As the over valuation unwind continues, it has more downside to go. That brings an interesting questions: Why did fund house launch fund at the peak of the cycle? Many times, we can see the peak of the market when there are many new fund launch. I remember we had properties fund, infrastructure fund, climate change fund etc etc.

We can look at it using common sense. The business of fund management is to get as many people as possible to invest in the fund. As the asset under management grow, the annual management fee also grow. So, it is in the fund manager interest to attract new investment and to grow the portfolio.

So, when is the good time to attract new investment money? That's when the investor interest is the highest. For example, when properties market was hot, many people wants to get into properties investment. So, that's the good time to launch properties related fund and the brochure would tell you that it present a strong long term investment case. Most of the time, people get attracted by new fund launch and stuck with the under performing fund for many years.

Timing does matter in unit trust. Before buying, it is good to get some basic information about the region you are investing, whether it is cheap or expensive. As we don't usually buy/sell unit trust frequently, buying at low is safer than when the market has run up a lot. Some site actually offers information on market PE which could be an useful indicator.

Otherwise, better to invest in global diversified fund than special sector fund. From my experience, the sector or single country fund does not necessary offer superior return, but you have to bear extra risk. So, avoid chasing hot fund, that could be your worst investment.

Low cost investing, the ETF way

In one of the business news today,

"According to the Singapore Exchange, total trading value of such ETFs amounted to S$99.6 million for the week ending October 19.
The SGX said the increased trading was largely due to strong interest in iShares MSCI India ETF and Lyxor ETF China (Hang Seng China Enterprises Index). " Full story

ETF (Exchange Traded Fund) is a cost effective way for gaining exposure to a particular market. For unit trust, you give your money to fund manager and let them manage for you. The catch is they would charge management fee which is typical 2% a year, after all expenses. Some people argue that given the cost structure, unit trust is unlikely to outperform the stock market index. The born of ETF is a way for investor to buy into underlying index stock, with a fund like structure. The good thing is investment amount is small and cost is low.

Given the high valuation of India and China market I won't be interested in investing in these ETF mentioned. However, if the market is substantial coming down, this would be a fast and low cost way for participating in their growth. If you have no time to do stock picking, these would be a good alternative. Of course, not to forget that, STI itself also has an ETF.

Model unit trust portfolio

I do unit trust investment with CPF money. Since CPF is meant for retirement and we cannot take it out until x years later, it is good to generate better return with it. I usually buy once or twice a year, when I have money and when the market is down for some reason. I think it is good to set up a model portfolio to test my unit trust skill.

Assume start up capital of 5k. Frankly speaking, I am aggresive investor, not everyone is suitable with the following allocation. The buy price is base on 31 Aug market price and sales charge of 2%.

Aberdeen Pacific Equity - 499.89 x 3.9209 = 2000
Aberdeen Thailand Equity - 208.78 x 4.694 = 1000
Prudential Pan European - 692.58 x 1.415 = 1000
Lion Capital Japan Growth - 1140.86 x 0.859 = 1000

I would add more money to this theoritical portfolio when there is market crash or correction. I would also sell some holdings if the market become overvalued. Let's see after few years whether this portfolio can achive above 15% return per year.

Layman investing

I have two female friends. I met friend A some months back, she was buying insurance and does not have any unit trust or stock investment. The insurance maybe investment linked or whole life which actually yield lower return. I asked her why don't you invest in unit trust, the return is better. She said "scared leh, money is hard earned one". That's the point, because it is hard earned, you should make it work harder for you.

Friend B told me to recommend her some good stock last year. I told her to open the trading account and read up some investment basic. After half a year, she did nothing. As the stock correction now is an oppoturnity to buy, I alerted her again. She said "need to discuss with you, I am afraid of losing money". She is influenced by people earning quick money in the bull run, yet when there is a stock sale, she is afraid to participate.

Investing is one component of good financial planning. Save some rainy fund, buy some insurance, take the money that you can afford to lose to start investing. Ultimately you would be rewarded with risk that you took. Rather than let the inflation erode your spending power in bank deposit, why not buy a good company. Although not without risk, you can participate in earning growth and dividend. Exchange some of your shopping time to read on investing, surely it yield more than the satisfaction of bringing shopping bag home.

If you don't know stock and don't want that to bother you, buy unit trust. The 21 century belongs to Asia. Buy some Asia fund, hold it for 5 years, I believe you would be doing ok. Some of my colleague, although have no use with their CPF, they just leave it inside the account earning the 2.5% interest. Take some to invest, you won't be wrong.