In unit trust, do we trust?

A recent, article caught my attention over the week end and i would like to share some thoughts about it. The article was writtern by one of my investment idol, which she tackled on the question on whether actively managed funds (or unit trust) that invested only in Singapore equities added any more value to investors as compared to someone who just invest in a passive index fund such as the STI ETF.
To start off, lets go to the basics. Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. Investors or mutual funds that do not aspire to create a return in excess of a benchmark index will often invest in an index fund that replicates as closely as possible the investment weighting and returns of that index; this is called passive management. Active management is the opposite of passive management, because in passive management the manager does not seek to outperform the benchmark index.-Wiki

So coming back to the question as to whether an active fund beats a passive fund in terms of adding value , her findings indicates that most actively managed funds do give a higher return. 12 out of 15 unit trusts beat the passive STI ETF!

According to the chart above:
The STI ETF returned 5.26% a pear over the last five years and only two other unit trusts fared worse than it, all about 0.9% points lower.. among the top is Aberdeen's Singapore fund topped the five-year performance table with a return of 9.78% a year, which means to say if you invested $10,000 in that unit trust, it would be worth $15,945 today in that fund.

Now this findings isn't good news to the lazy value investors out there who are basically people who knows abit of value investing but no passion to be dedicate in studying the stocks individually hence they just invest their money into a passive fund index like the STI ETF. It is also not good news for me personally, as i always advise lazy value investors to just invest in a passive ETF and not waste their time trying to find a unit trust to put their money in. Why i advice thee is beacuse Warrent Buffett mentioned that if an investor has no interested, no time, no mood to do stocks pickings then just invest in an index. Could he be wrong based on this findings? As one lazy value investor gleefully pointed out this saying that he can just anyhow pick one actively managed singapore equity unit trust fund and still beat the market and thus wanted me to question this stand and justify it.

Well my stand is still the same as WB, is that for lazy investors just invest in a passive ETF. The justifcations are these

1)Active fund managers may make bad investment choices or follow an unsound theories in managing the portfolio, this leads to extra risks like following the herd during times euphoria or captipulation.

2)The fees associated with active management are also higher than those associated with passive management, even if frequent trading is not present. Notice, the two words "higher fees", so let me bring your attention to the chart above (click on the picture if you can't see it) , if you see the top active fund Aberdeen SP Singapore Eq which gave a 9.78% return in the average of 5 years less off the management fees paid (say about 2-3%) this reduces its real returns to investors to about 6plus%. If this holds true, then we say the difference between the passive ETF which is 5.78% and the top unit trust returns are only marginal (1-2% different)!

3) The standard advice is that if you want to invest in an active fund, you should evaluate and analyze the fund's prospectus carefully , looking at it's track record, it's purpose, functions, limitations, rights to do certain things and future plans. Likewise, the time spent researching and findings a good active fund is like doing your own research on your own stocks! Why not just use the time and create your own portfolio of value stocks which you have more control over?

4) Lastly, when WB advices lazy value investors to invest in a passive ETF, he probably also meant it for them to follow another advice which is to invest in times of great fear. If we include this assumption, that lazy value investors, invest in ETFs only during down times and dollar cost average downwards, the returns as compared to the overall average active managed unit trust should be much more in terms of real returns to investors.

Once again, i have no trust in unit trusts, unless i can find a value investing kind of a unit trust that invest in Singapore then maybe can consider putting money in it.. how about you? =)

1 comment

Xeo Lye Wen Song said...

The Unit trust returns seen on factsheets and published pricing is already net of the management fee. I believe those figures reflected the returns already net of management fees. Do help verify. Thanks!

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