Martin Lee @ Sg
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Managing Unit Trust Investments

Question from a reader:

Hi Martin

I wonder whether you could enlighten me. Being novice in the financial market, upon the recommendation of my banker I bought about $100 K of UT wth cash in July 07 and $40K in Jan 08 with CPF OA funds.

Unfortunately that banker has now left the bank so I have to seek the advice from friends and other financial advisors/ bankers regarding UT investment. However, I am quite confused by the different recommendations I received regarding the unit trusts I am holding. Some advised me to sell all asap as the prices will plummet further. With the money received from the sale, re-enter the market to buy value stock since their prices are historically low at the moment. Another reason being the fund size will get smaller and those investors who had not sold their unit trust will have to pay higher management fees.

But another group felt this is suicidal move. I might be selling almost at the bottom and then may missed out on the rebound. This group felt that it would be better to hold the unit trusts since I have already “missed the boat” to sell, I might as well wait it out. The third group suggest that I do reallocation of my funds by switching. Most of my unit trust funds are invested in the Asia markets. I am not keen on switching as it involves extra cost such as service fee and the realisation of the loss in value of my investment. Moreover I find those funds recommended to me are not moving anywhere except down although maybe at a slightly slow rate than those funds I am holding. Is there such thing as the right approach or strategy in investing in unit trust.

When I first invested in UT, I thought this would be easier to handle than shares. However, my relatives who invested in shares said I had made big mistake in not investing in those valued stock which gives dividends. Buying into such shares would be me give liquidity and income. There is no need to pay 3-5% of service fee and yearly management fees regardless the market situation. I would only have to pay brokerage fees for buying and selling which are cheaper than those paid for investing in UT. Is their advice valid?

Is it wise also to leave my investable funds with a reliable investment firm/ financial advisor with a guarantee of reasonable return per year. Of course, I understand I would have to pay a certain %age of my profit earned as management fees. Would this be better than I invest my own money since I find it difficult to manage it.

I am sorry for this long letter but I guess you seem to me to be the only unbaised source of info. Looking forward to hear from you soon. Thank you.

Lim

My reply:

Hi Lim,

You bought up many points which I will try my best to address. I can’t make specific recommendations as to what you should do without knowing your profile. However, I will provide some pointers which hopefully will be useful to you.

1) It is impossible to time the market bottom. Should you sell now, do you have a plan for re-entering the market again? Do you buy again when it drops another 5%, 10% or 20%? Or will you instead wait for the market to show signs of recovery before you buy? Does that mean waiting for prices to go up 10% or 20% from the current levels? 

2) True, the expense ratio for funds would be higher if the fund size was smaller. This is because they have certain fixed operating costs. However if the fund is big enough, it shouldn’t be too much of a problem. So, you might want to refer to your fund fact sheets to see how big they are.

3) A proper unit trust portfolio should be diversified across different geographical regions and asset classes. If you have three funds all investing in China, that is not diversification at all. A diversified portfolio (with regular rebalancing) helps to reduce portfolio volatility and enhances your returns. Having said that, it still won’t escape the massive selldown that occured in the past few months.

4) Stocks or unit trusts? With stocks, you have to do your individual research, make your own stock selection and monitor them regularly. With a capital of say 50k, you can probably diversify to about 5-10 stocks. If you do not want to do that, you will have to go for either unit trusts or exchange traded funds (ETF). ETFs are passively managed funds with lower fees than unit trusts. You can find a list of exchange traded funds that are traded on SGX here.

5) You do not really lose out on the dividends when you hold unit trusts. Ultimately, the unit trust owns the stocks and will collect the dividends (on your behalf). This will be reflected in the fund’s NAV. Some funds do give out dividends to their investors. Usually, they are automatically re-invested in the form of more units for the investor. If the regular cashflow is important to you, then you will have to look into stocks with regular dividends. 

6) Nowadays, you can buy unit trusts for only 2% upfront fee. Two platforms that are popular with DIY investors are fundsupermart and dollardex. You can even transfer your existing holdings to them. They allow you a certain number of free switches (peer to peer) every year, so you won’t need to incur extra fees to do your re-allocation of funds.

7) If you transact through an advisor, you are looking at around 2-3% upfront fee and 0.5%-1% annual fee. Ultimately, you are paying for his time and expertise. However, I don’t think any firm or advisor can guarantee you a fixed return per year when it comes to equity investments. If you are looking for guaranteed returns, certain low rates of returns can be achieved through other products.

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1 comment
Bernard Lim says 10 years ago

Phillips also offered UT as a much lower sales charge of 1.5% (http://www.eunittrust.com/).

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