If you are still wondering why your unit trust investments are losing money or not profiting as much as you were told after many years, you are at the right place. Maybe you have tried to get an explanation from your consultant. However, the answer you always get is: “the market is not doing well, we’ll just need to wait a little longer”.
Don’t get me wrong, I am not saying that your consultant is totally wrong. In fact, I believe that there are opportunities in every market situation and we can profit with the right planning. In my years of experience, I noticed most of the underperformed portfolios are due to the following reasons:
- The investor is relying solely on one fund;
- Lack of management;
- Doesn’t understand the idea of dollar-cost average;
- Emotionally attached and timing the market;
So in this post, I will be discussing the problem with just relying solely on one fund. I will also share with you how we can benefit from all market situations in long run with a better foundation for our investment.
Understanding The Unit Trust Funds
A fund may include one or a combination of asset classes (equity, bond and other liquid assets) which forms a different investment strategy. Let us first identify the common strategies of the available funds:
Regular Income & Capital Preservation
- Income Strategy – Money Market: Similar to fixed deposits, it invests in highly liquid and short-term instruments. Usually including cash, cash equivalent securities and high-credit-rating, debt-based securities with a short-term maturity.
- Income Strategy – Bond: Invests primarily in bonds (government, municipal, corporate, convertible) and other debt instruments.
Regular Income & Capital Appreciation
- Income Strategy – Dividend Equity & Reits: Equity income strategy invests primarily in stocks that pay regular dividends. Other income-producing strategies include those focused on real estate investment trusts (REITs).
Capital Appreciation
- Dynamic Strategy: This strategy frequently adjusts the mix of asset classes to suit market conditions. Adjustments involve reducing the allocation of the worst-performing while increasing the better-performing assets.
- Balanced Strategy: Aiming for more stable return and capital growth through a balanced asset allocation approach. Usually maintaining 40% to 60% of investment in equities while the balance in debt securities and liquid assets.
- Growth Strategy: Invests in companies with above-average growth that reinvest their earnings into expansion, acquisitions, and/or research and development (R&D).
- Small-cap Strategy: Target investment in small-cap stocks that offers higher growth potential.
- High Conviction Strategy: Includes a small number of stocks that fund managers have picked as their best high-performance bets for the next several years.
Forming A Unit Trust Portfolio
Besides the strategies, each fund’s risk profile may be different due to the exposure to the market sectors and as well geographical factors. Hence, funds with different strategies may perform contrastingly in different market situations, forming opportunities. By understanding its characteristics, we can then diversify our investment portfolio by identifying the core and tactical funds.
Core funds are the essential funds that focus on producing long-term results while attempting to manage risk. For example, funds with income, dynamic, balanced, and dividend strategies are usually selected as core funds. Whereas bond and money market strategy funds act as a buffer during a market downturn.
Tactical funds are selected to take advantage of the market conditions. The selection is usually based on market opportunities in terms of valuation, policy changes or macroeconomic factors, etc. It is usually suitable for investors that have a higher risk appetite. For example, growth, small-cap and high conviction strategies usually will be selected as tactical funds.
Portfolio In Action
Up to this point, I believe you will have a clearer picture of the secret for a successful unit trust portfolio. Then, the following step is to decide each fund’s allocation. There is no standard or rules to it. Most importantly you understand the funds and are aware of the strategies for your portfolio. I’ll show you a few examples of the past 5 years of performance simulation to compare between a fund and a portfolio.
Example 1: Comparing a dynamic strategy fund with a dynamic strategy portfolio that has some allocation for offshore funds. Portfolio 1 consists of 50% Greater China Equity Fund (Tactical Fund), 20% Local Bond (Core Fund) & 30% Local Equity Income Fund (Core Fund); Portfolio 2 consists of 100% Local Dynamic Strategy Fund.
Example 2: Comparing a local equity income fund with an income-focused portfolio that has some allocation to offshore funds. Portfolio 1 consists of 20% Greater China Equity Fund (Tactical Fund), 20% Local Bond (Core Fund) & 60% Local Equity Income Fund (Core Fund); Portfolio 2 consists of 100% Local Equity Income Fund (Core Fund).
Example 3: Comparing a balanced strategy fund with a balanced portfolio that has a combination of equity funds. Portfolio 1 consists of 30% Local Small Cap Equity Fund (Tactical Fund), 40% Local Bond (Core Fund) & 30% Local Equity Income Fund (Core Fund); Portfolio 2 consists of 100% Local Balanced Fund;
Summary
So the above was some of the good examples of how a diverse unit trust portfolio can outperform a single fund. That is mainly because you are gaining control in customizing a portfolio that suits your goal and risk appetite. Besides, with a combination of funds, it will help to average down the risks and make sure we do not lose out from any market opportunities. However, do note that there are chances that a portfolio may underperform. That is why a constant review and discussion with your consultant is important! If you need help with your existing portfolio or to start one, feel free to reach out to our consultants.
