Sunday, November 30, 2008

The Basics of Unit Trusts

Sharing a thought...

I feel it is timely to remind the general investors especially the Unit Trust investors how UT works.

Currently the equity market is very low (as a matter of fact is so...cheap as its PE is 9x compared to 7 years average of 16x! In layman term, it requires at least 9 years to recoup your profit compared to 16 years for the same amount of investment).

The low market sentiment has affected the prices of the stock market as prices of shares are determined by Supply and Demand. Should the demand of a particular share is lesser than the supply (as we are experiencing now) the price of the share drops irregardless of whether the company is fundamentally strong or otherwise as right now human emotions are running gamut instead of the practical approach of staying focused on personal objectives for the long term. Sigh....

Those who are able to analyse a particular company's account will look at the company's income PROJECTIONS, FUTURE development/marketing plan, the current management team, the POTENTIAL of the product/services or even industry,etc to determine the feasibility of investing in the company. You will note a smart investor will look for the company's potential as investment involves putting money into a company's potential/future not its histocal performance (no doubt it does have some impact). Because it requires a professional to undertake the analysis task which some viewed as tedious, most "investors" follow hearsay or whatever free advice readily available from friends, neighbours, colleagues, etc who may or may not be qualified to dispense such advice. This, somehow, further aggravates the current poor market performance or rather as the saying goes "follow the herd" mentality prevails.

As you will note, monitoring the market's performance requires much time which many working professionals do not have due to their work commitment. Furthermore, investment requires capital and good counters are quite expensive. A majority of investors are small time investors due to their capital limitation. Those with high risk appetite used to contra their purchases or even take loan to invest! No doubt in the short term they may benefit but in the long run with wrong timing, some investors may get hurt, badly as occured in 1997/8.

Those who are able to invest directly into the equity market must be able to withstand the low periods which may take a while to correct. In other words, the investor's holding power must be strong enough to weather the storm. Investing in the Bursa Saham limits an investor to the local market which poses greater risks as the market may be affected by political and economic policy which directly affects the local industry, people's sentiment,foreign investors, etc. Moreover, to diversify the investment portfolio into various local industries require huge capital outlay which many people are unable to do so.

Due to the limitations from direct investment, UT is an alternative investment tool to address its weaknesses.

A UT company pools money resource from the investing public. It consists a pool of fund managers who are qualified professionals responsible for analysing and recommending the purchase of shares of companies that they believe are under valued, has income or capital appreciation potential, growth potential or even economic sector/industry that has potential to grow. Based on their recommendation, they will pick or dispose shares of companies in order to meet their fund's objectives using their investors' money. Most fund managers' decisions are collective decisions which benefits the investors.

A particular UT fund is liken to a basketful of shares. In a fund, it may consist between 50 - 80 shares from various sectors or even countries. The advantage being that the risk exposure is much lower due to the diversified nature of the fund. I have been asked numerous times whether a fund's value or NAV could be equal to "0" . What do you think? For the NAV to be "0" it would require ALL the 50 - 80 shares to be "0". Is it possible? NAV which is the Net Asset Value of the fund represents the value of the shares in the basket/fund. Its value co-relates to the average value of the shares in a fund.

Furthermore, the accounting works, shares log, distribution computation, administrative matters relating to the shares purchased/held for a particular fund are placed with a trustee company which is not a member of the UT company eg Amanah Raya, etc. A trustee company also ensures that the UT Company complies with the objective of a particular fund which is clearly stated in the fund's prospectus. A copy of the prospectus is also filed with the Securities Commission to ensure compliance.

Unit trust involves sales of shares by unit to the public. One lot of share is equal to about 700 - 1000 units. Sales in unit enable the investing public to participate in the equity market as it is cheaper compared to direct investment in the share market.

Since it is affordable, UT investors are able to do a regular savings/investment in their chosen fund/s. The advantage of doing a regular investment/savings is that they are able to lower their average investment cost thus enable them to realise their profit / break-even point faster. This is useful especially during volatile market condition. You could read this in my previous blog on Dollar Cost Average.

As UT funds are managed by the fund managers, this allows their investors from having to monitor their investments and enable them to concentrate on their own profession/work. It is similar to outsourcing your investment to the fund manager.

UT allows individuals, especially those who does not have the time nor knowledge, to participate in the equity market thru a third party. To me, it is the stepping stone for young investors who does not want to miss out on the investment opportunity whilst they are equipping themselves with its knowledge or chasing their dream profession or etc, etc. The advantage of investing for a long period of time is the benefit of compounded return. It would be good to check with your UT Consultant who would be able to advise you on this powerful benefit.

Saving using UT is very flexible as a person is able to invest or save according to his affordability and objective. It is always advisable to invest using the extra money that you have no plan to use within 3 years. Please be reminded that UT investment requires you to look at a period no lesser than 3 years. The duration depends on your objective and the amount that you are currently saving to achieve your goal. Please discuss with your UT Consultant to come out with a proper saving/investment plan.

UT caters to the various risk profiles of its investors. There are basically 3 types of funds ie equity, balance and bond/money market. Besides, a particular equity or balance fund does not mean that 100% of the investors' money are into equity as a certain percentage of it will be kept in the money market, treasury bills, bonds which generates income and provides liquidity to the fund managers or its investors. This feature also addresses the investors' concern on the possibility of the NAV being "0". Furthermore, a UT investor is able to switch from one fund to another in order to diversify/balance his portfolio, to lock in his profit, to reduce his risks in a volatile market, to cater to investor's risk appetite, investment strategy, etc.

The distributions earned from UT are paid according to the number of units held by the investors and is devoid of any service charge. Therefore, each time a distribution is declared and is being reinvested, the average cost per unit is lowered thus creating greater possibility of hitting break even point at an earlier date. This also explains the reason why as a responsible UT Consultant we usually advise our customers to top up their investment despite the market going downhill as the low price enables them to acquire greater number of units which lowers their average cost. It is a norm for the market to correct itself eventually. When? No one knows but if we are to refer to history, the market always comes back.

"Never time the market" is another piece of advice that you will usually hear from us. Well...I am glad to let you know that Warren Buffet is a firm believer of this adage too. No one knows when will the market hit rock bottom or hit sky high rate but being a long term investor, we should not be swayed by what is happening around us.

Always looks towards the future and potential of a company / country. To be successful in the investment world, hold on to your objective and act smartly. Be rational and devoid of emotions. As Warrent Buffet said, "Be Fearful When Others Are Greedy and Be Greedy When Others Are Fearful".

In summary, UT investment
(1) is managed by a pool of professionals
(2) is held in trust by a trustee company
(3) is affordable
(4) is well diversified whether in industry/sector or country or asset allocation
(5) caters to the needs of its investors according to their risk profile
(6) is flexible
(7) enable investors to enjoy Dollar Cost Average
(8) is for mid to long term investment period
(9) is suitable for young investors who may or may not have the time or knowledge to invest.

2 comments:

Fat88Trader said...

Happen to chance upon your blog about the Basics of Unit Trusts. Interesting. I don't trust them because they make money while still losing your money.

It's unfortunate that choosing a "GOOD" Unit Trust is not that simple because only a few of them really make money for you. There are hundreds of them, which one can perform?

It would be better that time is spent researching some good blue chip stocks and hold them for the long term, especially those who are well managed with good track records and most important pay dividends to the shareholders.

To make money, there is no short cut to hardwork.

Annieson said...

Hi Fatt88Trader!

Tx for your comments. You may be right in your observation but if I may comment, which is my own thoughts only, right or wrong, each has his own opinion....

(1) UT co is in the biz of providing investment services. Being in a biz, they hv to make money for themselves too. Otherwise, how are they going to survive to ensure they are still operating to render their services to those who NEED it?
(2) Ah...so you do agree some UT funds do make money. :) Which one? Good question. It all depends on your objectives, duration, your risk profile, etc besides the UT company. Sometimes we have to dabble in several UT Co or funds to uncover the gems. Am sure you are doing the same when selecting the "good" shares to buy too. Sometimes you are right and sometimes it's a mistake...
(3) You must be the brainy one and has lots of time or interest. Lucky fella! Unfortunately, not many people are wearing the same shoes as yours. Blame it on our education system....sigh! Actually, if I may say so, no school/college/uni in the world includes investment/financial studies in their education syllabus. So what happened to those who don't have such priviledge or exposure like yours or even the means to take up further trainings or studies specialising in finances/investment?
(4) UT is an investment tool only. One of the many. It may help solve certain problems the general public has when it comes to investing. Putting a firm foot down to say No is a choice which you can make but as mentioned earlier, it is a tool which is worth exploring if anyone is interested to DIVERSIFY their investment portfolio or does not have any knowledge at all, etc, etc.

Am sure you are aware that "putting all your eggs in a basket is very risky". UT is a means for you to invest even to overseas market without actively being involved. As you have mentioned, there are hundreds of UT, which one can perform? Well, in UT, that is the fund managers' responsibility. As for direct investment, the responsibility rests solely on the investor's shoulders. Wouldn't it be good if someone eases SOME of the load for you?

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