UNIT TRUST IN MALAYSIA kcchongnz

I have just read the article above.  KC must have spent some time to extract those information, very informative as well.  However, I like to discusse it from another angle.

I have blog this on 13 Sep 2014.

UNIT TRUST vs KLSE return

KLSE since inception (1972?) provided a CAR (Compounded Annual Return) of about 6.8%p.a.

Unit Trust - is an open ended fund, they come in difference sizes.  But, no rating agencies (for UT) had done any statistics about the industry for 10yr, 15yr, 20yr or 25yr.  Mainly because only a few fall above 20yr.  UT is a big biz in Malaysia, for discussion sake, lets say its NAV is about RM400 billion (the last I read about a year ago is about RM350billion)

Most UT charges 5% one off service fee + say 2% annual management fee for ACTIVELY manage the fund for its holders.  So, commission paid is for service fee 5% x 400b = RM20 billion AND management fee (assume on RM400b) 2% x RM400b = RM8 billion.  So, each year, the 700 over unit trust funds income on management fee = RM8 billion.

I myself have done some research (using only a small sample, although non conclusive), over 10yr or 20yr perfomance,  majority (>50%) underperform the KLSE's CAR.

COMPARISON

First we have to acknowledge that the satistics is not CONCLUSIVE and very difficult to compare with the KLSE Index, because there is always INFLOW and OUTFLOW (unlike Close End Fund).  

Like I have said earlier, a funds shows that the 5yr return is 150%.  Actually this fund started 10 years ago, doing badly the first 5 years and doing very well the recent years, hence giving a CAR (10 years) of about 6%.

This is a very HUGE biz, period.  Who would want to burst the bubble?

WHAT WE NEED TO ESTABLISH

I am neither saying UTs can outperform the KLSE Index in the long run (i.e. 15 yr, 20 yr or 25 yr) or underperformed the KLSE index.  It is more important for all investors to UNDERSTAND and to establish the following Type A and Type B mistakes in investments.

Hence, all statistics can only be used as REFERENCE, period and not for determinant of whether you should or should not participate in UTs.

TYPE A & TYPE B MISTAKES

Type A mistake - the stock market is not the right place to invest

Type B mistake - the stock market does provide higher return but it was not invested correctly (nobody is exlcuded).

SO WHAT DOES IT MEAN?

If Type A mistake, i.e. stock market is not the right place to invest because over the long term it does not provide a reasonable return (below bonds return).

Many of us falls into Type B mistake, we do not invest correctly, it is not the market that does not provide higher return.

You may ask, how to invest correctly? 

Just use a simple say blue chip funds UT.  Let just say, its return follows closely the KLSE Index.  What is the probability that it can outperform the KLSE Index?

Say the fund size started with RM100million (no inflow or outflow over next 10 years).  Fees paid, service fee 5% one off, so you will deduct about RM5 million.  Assumed the NAV over last 10 years average is RM100million, so the management fee for each year is RM2m x 10 years = RM20million.

So, in order for this fund to doubled to RM200m (equal to CAR of 7.2%), actually, this fund has to make RM125 million in the last 10 years, because, RM25 million is PAID to the FUND MANAGERS and UT AGENTS.

If the KLSE Index over the last 10 years, without charging any fee, can only provide 6.8% p.a., how can this particular fund outperform the market?  In fact the fund must make a CAR of 8% p.a. and only achieve net of fee at 7.2%.  Hence, of course, it is not impossible to do this, but, don't you think it is harder?

CONCLUSION

In my opinion, the challenge is actually reduce in Type B mistakes.  One of the few approachs is to do FORCE SAVINGS MONTHLY vs Lump Sum investment.  So, overtime, we will be making less mistakes, and correct our methology.  UTs is here to stay (as a big biz until someone decided to burst the bubble).

Investment is about picking up the RIGHT COMPANY.  One little example, who have invested in DIALOG since IPO, market cap is RM55million in 1996 and today is RM8.4 billion.  If you invested RM1,000, today you will have RM152,700.  What about Gamuda, Genting Plantation, etc.

Moral is, PICK THE right company.  Even you manage to pick one out of your portfolio of 10, your investment of RM10,000 (for 10 stocks of equal size) you are doing exceptionally well.  

So, lets find another Dialog.  No one say is going to be easy.  Of course, no one has the crystal ball.  

MY VIEW

Sharpen your axe.  Don't blame the trees.  

No training provided, just visit www.sosfinancialplanning.blogspot.com