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Tea with Invest Apprentice: 7 Reasons Why We Need Unit Trusts.

Tuesday, April 1, 2014

Another guest blog by Invest Apprentice and this should be read as a companion blog to the earlier guest blog. Please see related post number 1 at the end of this blog:

7 Reasons Why We Need Unit Trusts.

1) When we only have a small capital and it's too expensive to buy individual stocks or bonds in a certain market we want exposure to.
Eg. A global equity fund is a quick way to gain exposure and diversification to most of the mega cap companies in the global stock market.

2) When we want to diversify our risks and ETF is not a ready option. Our SGX exchange currently does not offer the range of ETFs compared to foreign exchanges such as the US, where you could literally buy an ETF for any sector, style, country, asset class etc. you can think of. They even have leveraged ETFs for you to “short” the market should you wish to (no thanks for me)! But until the day our SGX offers even half the range of ETFs, to some extent I’ll still have to rely on some unit trusts to diversify into certain sectors or markets.

3) When our research on macroeconomic drivers lead is to identify an undervalued sector or a country's market that is extremely promising, but we lack the confidence or funds to invest directly in specific stocks in that sector or country.
A simple example is the Phillip S-REIT Fund which I bought in late 2011 for my mum. She was new to investing and thus averse to picking REITs directly. That fund reinvested its quarterly dividend and has returned about 40% when I sold it in Feb this year.

4) When we favour the fund manager’s style and endorse the fund’s investing philosophy. For example, I still hold on to Aberdeen funds even though they underperformed their benchmarks last year, because I like the defensiveness of their portfolio selection and hold the view that going forward, defensive sectors like consumer staples tend to fare better in an increasingly difficult market.

5) When we don’t have a better alternative. Usually, this means that the sector/country/asset class we want to invest in does not have an ETF representing it, or the ETF is seriously illiquid in our exchange and therefore difficult to trade.
For example, there are unit trusts that invest in exotic frontier markets like Ukraine (!) and Vietnam which we may like to “try-try”, such as FTIF-Templeton Frontier Markets Fund managed by Mark Mobius.

6) When we want clean-cut portfolio allocation and easier time doing rebalancing. It’s easier to create a diversified portfolio like, “I want 40% into US equities, 30% into Asian equities, and 30% into global bonds, and I want to do that with $5,000”.

7) When we are not looking for spectacular returns, but a better than average market return at lower risk compared to investing in individual stocks.

Wilfred Ling did a breakdown of the various myths surrounding unit trusts. Some of my points are similar to his, although I added my personal interpretations:


Hopefully the above gives you a broader perspective on the role of unit trusts in one's portfolio. Personally, I am NOT a unit trust fan myself and I do my own active stock picking. I also use ETFs for investing in broad funds. I am just writing this as a response to the negative hype against unit trusts in recent years, at least among the fellow investors I spoke with or read about.

Every investing instrument has its place in the arena.

This is NOT investment advice and I am not a licensed FA. Invest on your own risk or seek a professional FA.

Related posts:
1. Can we trust unit trusts?
2. SRS: A brief analysis.


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