UNIT TRUST INVESTMENT INFERIOR TO SHARES?

CHAPTER 4:
UNIT TRUST INVESTMENT INFERIOR TO SHARES?
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UNIT TRUST INVESTMENT INFERIOR TO SHARES?
Is it Possible for an Individual Who Invests Directly into Shares to Out-Perform Unit Trusts?
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One basic fact about investing that most investors forget is that:

Investing is a personal goal.

Many a time we forget that when we invest, we are striving to achieve a personal objective or goal. Unit trusts and shares are two of the many tools to achieve one’s personal investment objective.But what usually happens is this. Assume that we aim to achieve 20% return from the share market, and we chose to invest in a unit trust. And if in the end we achieved this target, we should be happy that we have met our objective.

However, the “problem” starts when we start comparing our returns with others. If our neighbour is getting 30% returns from investing in shares of a certain company, we start to get upset and dissatisfied. Why did I invest in this unit trust? Why is the return inferior? Why didn’t I invest in that or chose something else instead?

So, the problem may not be the types of investment vehicles, but perhaps the investor themselves instead.

For those who have the interest to analyse companies and manage their own share investments, they will definitely opt to invest directly into the share market. Note that the key word is “interest”, and not “capability”. For someone to be capable, they must first have the interest.

For others who wish to have investments in, or exposure to, the share market but don’t have the interest to do their own research, a collective investment scheme would be the best option for them.

The table below shows the performance of Malaysia-centric unit trusts in Malaysia.

 

Table 1: Performance of Malaysia-centric Unit Trusts in Malaysia
	5-year average return ending 30 Nov 2017			10-year average return ending 30 Nov 2017
	Total	Top 5	Bottom 5	Total	Top 5	Bottom 5
Equity Malaysia	35.42	108.83	1.34	66.48	203.39	(0.74)
Equity Malaysia Diversified	42.81	68.14	15.12	78.98	146.95	26.41
Equity Malaysia Income	31.62	57.16	4.26	83.01	124.76	36.86
Equity Malaysia Small & Mid-Cap	74.96	119.49	37.46	119.39	177.53	66.17

Source: Compiled from Lipper Investment Management

There are a lot of discussions on the performance of unit trusts, of which many are saying the performances are not on par. Based on data derived from Bloomberg, the return of Malaysia’s main index for the same 5-year period was 24.48% while the 10-year return was 73.59%. Thus, the average performance of unit trusts is commendable.

However, this does not mean that investors can just jump into any unit trust and expect to do well. As the table shows, there is still a gap in terms of performances between different funds. Ultimately investors must do their homework before investing. That is why we have been stressing that it is important to know your fund manager.

 

 

Is it Possible for an Individual Who Invests Directly into Shares to Out-Perform Unit Trusts?

The answer is yes, it is possible, but there are always exceptions.

Consider this example. Both Investor A and Fund B invested in Company C.

Investor A puts all his net worth in Company C. Fund B invests 5% of its funds in Company C. Fund B would not be able to invest in a similar manner as Investor A, as funds would usually have regulatory requirements which restrict the funds from having more than 10% of their net asset value in a single counter.

Assume Company C subsequently became a star performer, generating 35% return in that year. Investor A, who has only Company C in their portfolio, will record a 35% return for his or her investment.

For Fund B, since Company C represents only 5% of the portfolio, Company C’s performance translates to a 1.75% gain (5% x 35%) for Fund B.

However, on the flip side, what if Company C failed to deliver and its share price went downhill? Or even went under, i.e. losing 50%?

For Investor A, his or her net worth will be cut by half. Whereas for Fund B, the fund only loses 2.5% (50% x 5%). In addition, Fund B has 95% of its fund invested in other companies, which can make up for the losses from Company C.

This is why investing in unit trusts is a good method for asset diversification. The concept of “diversification” is most commonly explained as spreading your eggs across various baskets versus putting all your eggs into one basket. The former is definitely a safer option, which is the idea behind asset diversification.

As such, there is no right or wrong between investing on your own and investing in funds.

I have met investors who achieved their financial goals with unit trusts. I have also seen investors who have succeeded in meeting their financial goals by investing directly in shares.

There are also investors that I have come across who have adopted a prudent approach – even though they are investing on their own, they still allocate a portion of their net wealth in funds. This is their way of diversification.

This concludes Part I of this book. As a summary, Part I focuses on introducing investors to unit trusts. As with any investments, unit trusts do come with its pros and cons. But what is more important for the investor is whether or not the investment vehicle suits them in achieving their financial objectives. If investors do their homework before investing, unit trust can be a good investment vehicle.

For investors who are more inclined to invest directly into companies listed on the stock market, Part II would be suitable for them. This section will focus on the basics of financial statements, their meanings, financial ratios, and other information that are helpful to know when investing directly in the stock market.

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