How Unit Trusts Can Add Value To Savvy Investors' Portfolios

Unit Trusts (UTs) or mutual funds seem like investment vehicles for the layperson with little or no investing experience. So how do they fit into a savvy investor's portfolio?

Firstly, let's examine the unique characteristics of UT investing:

- UTs pool together investors' money to buy assets such as shares and bonds. This allows investors with small capital (even $100) to start investing.

- There are thousands of UTs in the market, covering a variety of asset classes, geographical regions, sectors, and industries.

- UTs are professionally managed by a Fund Manager, and relieve the investors of the active monitoring and trading of their investments.

- UTs charge annual management fees, usually about 1 to 2 percent of the asset under management (AUM). This fee is taken out from the AUM, which cause the Net Asset Value (NAV) of the fund to go down. Most funds are priced based on their NAV, and therefore annual management fees indirectly causes the value of an investor's share of the unit trust to go down.

- UTs are usually priced based on a forward pricing basis. Which means that if you bought or sold off your UT today, the price that it will be valued at is tomorrow's price. This prevents an investor from knowing exactly what price his investment is bought/sold at, and hence reducing the chance of market timing.

- UTs are usually designed for medium to long term returns.

From the above pointers, it may seem like UTs are targeted at people who are not well versed with investing. While that is true to some extent, UTs also very important to financially savvy investors as well.


The common saying of 'higher returns, higher risk" actually only applies to single-asset investing, such as a stock or a bond. When it comes to portfolio investing (multiple asset class), when more asset classes are added to a portfolio, research shows that returns go up while risk actually goes down.

Hence experienced investors can tap on the wide reach of UTs to add more asset classes to their portfolio and diversify their risk exposure.

Access to Markets with Barriers to Entry

Many overseas markets, especially emerging economies, are difficult to access for a foreigner. For example, China 'A-shares' listed on the Shanghai and Shenzhen stock exchanges are generally only available for purchase by mainland Chinese citizens. Overseas investors have to go through a tightly-regulated "Qualified Foreign Institutional Investor (QFII)" scheme.

The bond market is another tricky asset class to get into. Several years ago I called up a bank to ask about the public offering of Singapore Government Bonds, and was told that the minimum investment amount required is $1 million. Small matter for an institutional investor such as a UT, but almost impossible for an individual investor.

Hence UTs offer variety and choice of various asset classes to complement an investor's portfolio. Good at share investing? Buy some bond funds to complement your shares. Mainly focused on the local markets? Buy some funds with overseas exposure to international markets.

Hedging and Taxes

Overseas assets are subject to exchange rates fluctuations, which UTs can easily hedge against by purchasing some derivatives or making private arrangements with their bankers. In contrast, an Singaporean individual investor putting his/her own money (SGD) into the US stock market would have to face the full brunt of the USD-SGD movement. And as the recent 3 years show, USD has been sliding by more than 20% against the SGD. When the investor liquidates, he/she would be surprised to see so much returns being eroded by currency risk.

Overseas investments may also be subject to capital gain tax, income tax (for dividends) as well as estate duties. Investing in a UT takes the headache out of these areas.

Usage of CPF Funds

UTs can be invested using CPF Ordinary Account (CPF-OA) and CPF Special Account (CPF-SA) funds. An experienced investor may have such funds laying around and not working very hard for them in the 'safety' of the CPF account. He/she is unable to fully invest these funds into shares, ETFs or gold. (A cap of 35% of the investible CPF-OA can be used to buy shares; CPF-SA cannot be used for shares purchase.) In contrast, 100% of the investible CPF-OA and CPF-SA can be used to purchase CPF-approved UTs.

Professional Expertise

Speaking of overseas markets, while it is relatively easy to access local market news and data, international investing poses a few challenges that can affect an investor's returns.

For example, for one who wish to invest in American stocks, you would have to stay up till the wee hours of the morning (Singapore time) to keep abreast of market developments and to act on news such as corporate earnings data and economic indicators announcements.

Even so, getting first hand information from overseas markets proves to be tricky. News that are available via the mass media are usually outdated by the time we receive them, and the Efficient Market Hypothesis says that the news have already been priced in by the time we receive the news.

UTs benefit from highly sophisticated and specialised infrastructure that gives them the edge over individual investors. They are what we call "the Big Boys", as their financial power has the ability to influence the markets and wipe out the small-timers. They have teams of analysts and traders (many of them MBAs or PhDs) working round the clock, across different time zones all over the world to take advantage of market opportunities. They have access to almost instantaneous news through dedicated provides that gives them the unfair advantage over individual investors, who rely on mainstream media. They are also equipped with powerful computers and softwares that can generate market simulations (such as Monte Carlo simulations, Efficient Frontier, etc) to guide them in their investment decisions.

Unless you're "Remisier King" Peter Lim, I would suppose that your investing infrastructure only comprise a computer, a smart phone and today's edition of the Business Times.

Furthermore fund houses like BlackRock, PIMCO or AllianceBernstein have long history of managing investors money well. Their methodology and intellectual property is probably something that we as individual investors will never ever have access to.


Of course this does not mean that UTs make money all the time. If, for example, BRIC equity markets are suffering from a bear run, the Fund Manager of an Emerging Market fund will still lose money, no matter what he do or doesn't do. It then becomes a matter of how little he lose, and how well he outperforms the broad market (without management) and his peers.

With proper diversification, a well-rounded investor should still be able to make some profit (or minimise losses) from a bear market, so long the growing asset class make more money than the shrinking asset class loses.

So for the savvy investors out there, don't write off UTs yet!


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