Thursday, September 06, 2012

Selecting Unit Trusts

As mentioned in the last post, there are 400 unit trusts in Singapore. How to choose the good ones from this mega-menu? I guess that’s why most people rely on 23 years old sweet young looking financial advisers, who usually does as great a job as a monkey promised bananas. But never fear, there is always help for those who are keen to explore.

Again, we take a look at PhillipCapital since they have one of the best online brokerage systems in town. I tried out their Fund Finder to see what I could get.

The first place to start is at the Advanced Search Criteria. But what if we are not advanced yet? Not to worry, it’s just terminology. It’s easy enough for monkeys so we should be ok. First, select the different asset class, geography and strategy so as to reduce the 400 unit trusts to a fraction so that you can eye-ball them better.

I have alluded to before that unit trusts would make better sense for bonds since ETFs haven’t really come up with a lot of bond ETFs yet. (Well it’s much harder to construct bond indices, and without bond indices you cannot have bond ETFs. So we need to rely on bond unit trusts.) So in the screen shot below, I simply selected “Bond”. Then the 007 logo appeared and I was treated to a 5 min sneak preview of Skyfall, starring Daniel Craig and Cecilia Sue as the bond girl.

Ok, just joking. After selecting Bond and clicking filter, I get to see just the bond unit trusts. Though that’s just the beginning. At the Search Results, you would then have to click on each unit trust to see the details. For me, I drilled into this PIMCO High Yield Bond. (see screen shot below)



The webpage goes down all the way, with general info, dividend info etc. I shall focus on a few key points to think about when selecting a unit trust.

Who is the Fund Manager?

There are 20-30 bond fund managers listed here and for those of us in finance, we see familiar names like Fidelity, PIMCO, Schroder, Templeton and also local ones like UOB, Lion, Fullerton etc. PIMCO is really the stand out brand here, which is why I chose it. As you might know, PIMCO stands for Pacific Investment Management Company and is the world’s largest bond house. Its top management such as Bill Gross and Mohamed El-Erian are also world renowned investors. Real investing gurus! Don’t pray pray.

So the key point here is to really stick with the good names, such as PIMCO, Templeton, Legg Mason. There are others like Fidelity, Aberdeen which are good at equities, traditionally. PIMCO is the only one good at bonds, seriously. Of course, no rules ever work without caveat in the world of investing. So you start by picking the brands, but you still need to drill the performance and other no.s.

But to my dismay, PIMCO is not on promotion, which means you pay full fees. Bo pian lor (We have no choice), go for others like Aberdeen, Legg Mason.

I would say avoid Lion for now, this is a local house that has gone through a lot of issues and still has a lot of issues. Maybe things will change in time.

Sector/Strategy

The other way to cut through the grass is to look at the sector/strategy filter. I would say filter via something like Global, Asia Pacific, Emerging Markets. I tried High Yield but the results were a bit strange (the performance of different funds differed too much). High Yield is a really appealing term in yield hungry Singapore but in the bond world, maybe it means something else. So really, these are just filters. It takes a lot more work to get to the real selection.

Fees

The other criteria that a lot of people will look at would obviously be the fees. As mentioned, PhillipCapital is having a promotion for bond funds and sales charge is zero during the promotion period. So this helps to cut down the fees.

Investment is a product that has no intangible benefits. If you pay 1% to your broker, or financial adviser, you get 1% less return. Over time, this 1% will significantly reduce your total return. This is unlike an LV bag, or Rolex watch, whereby you can pay a lot, benefit a lot of middlemen in the whole food chain and yet still feel good. Bcos there are intangible benefits: mostly just feeling shiok (awesome) that you hold a $8,000 bag or wear a $10,000 watch and can brag about it. Hence make use of the promotion and get a good deal! As mentioned, PIMCO, the best bond house, is not in the promotion, so can only go for others like Aberdeen and Legg Mason.

It also pays to look at the annual fees being charge. Although the sales charge is gone. You still need to pay the asset manager an annual management fee. Usually it adds up to 1% for most bond unit trusts. This cannot be helped. Over time, hopefully management fees will decline as well. So just make sure it is not exorbitantly high.

Performance

The other key factor would be performance. Most people, when shown the chart below, would be happy to buy. Their rationale: if this thing has gone up, then it’s time to join the bandwagon. I would advise against that. Unit trusts invest in assets that move in cycles. It is always better to buy cheap, not at the top of the market.

The important performance no. to look at is the one in the last column: Return/Volatility. Over time this number falls below 1. It is said that even the best investors would only have a ratio of 0.5. Obviously the history is not long enough for this PIMCO fund. Try to look at the 5 year or 10 year track record. If it’s still more than 1, then it means that the fund manager really has skill. Put your money with them!



Price

At the end of the day, we come back to Price. Looking at the chart with the benefit of hindsight, the best time to buy would be Oct last year (2011) when the Europe crisis was full blown. Greece was going bankrupt and everything. But usually, no guts to buy then lah. Phillip advocates this savings plan, ie you just keep buying say every 6 months. $1,000 at a time. But the problem is that the commission on this plan is 2% or more (if I read correctly). Hopefully they come up with a promotion for this too!

It also pays to really just spend time to find out more. (Not too different vs researching on stocks). You talk to other investors who have bought unit trusts before. You read up old reports, old prospectors about the unit trust etc. Just like stocks, sometimes it takes a while to understand to full picture. Esp when we all have full time jobs and can really handle these things parttime.

Nevertheless, personal finance and investing is something really crucial in today’s modern world but yet most people have limited understanding of the workings and how to really make the intermediaries work for us and not vice versa. Phillip/Poems is a good place to start. So go down Raffles City and open an account!

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