Beginner Investor Series: Unit Trust Part 5 (Fund Selection Example)

For investors who wish to diversify their portfolio by investing abroad in emerging markets but are deterred away by the high cost, unit trusts might be the solution for you. Unit trust as a financial instrument, grants investor access to foreign markets that will otherwise be difficult for investors to directly invest in. In this article, I will be writing about the selection process I follow when choosing unit trust and also which unit trusts, in my opinion, are worth looking at right now. The foreign markets which I will be focusing on, will be the South East Asia, India and China.

South East Asia

Source: www.fundsupermart.com
Source: www.fundsupermart.com

As shown in the screenshot above, we can use the fund selector tool from fundsupermart.com to sieve out funds that focuses on the South East Asia region. There is a total of 11 funds on fundsupermart.com that focuses on the South East Asia region, but not all of these funds are performing well. It is therefore imperative for us to have a selection process to guide us in selecting which fund to invest in. To start our fund selection process, we will first sort the funds by their 3-Year Historical Performance. Next, we will remove funds that perform worse than the average of all the funds out of our consideration.

Source: www.fundsupermart.com
Source: www.fundsupermart.com

We will then look at the remaining fund’s Fund Size and funds with fund size less than $100 million will be filtered out. We will also be looking at the fund’s Annual Expense Ratio, if a fund’s expense ratio is greater than 3%, we will also be taking them out of consideration. In this case, 2 of the funds do not meet the criteria of having fund size equal to or greater than $100 million. They will thus, be removed from our consideration.

Source: www.fundsupermart.com
Source: www.fundsupermart.com

With that, we are only left with 4 funds to choose from. The next indicator to look at will be the fund’s 3 Year Risk Return Ratio and 3 Year Sharpe Ratio. These ratios measure the amount of return per unit of risk and the amount of return per unit of excess risk respectively. Therefore, the higher the risk return ratio and Sharpe ratio of the fund, the better the fund is. In this case, JPM ASEAN Equity Fund is performing significantly better than the rest of the fund in terms of returns per unit of risk. It is therefore tempting to conclude that this is the fund we should invest in. However, it is too soon for us to arrive at this conclusion. We have yet to take a closer examination at the competency of the fund manager. The fund manager is ultimately, the one who you will entrust your money to, it is thus vital for you to choose a fund manager that you can trust. Things to look out for to determine if your fund manager is competent or not will be the fund manager’s Assets Under Management (AUM), Years of Experience and the Country where the fund manager is from. In this case, the fund manager of JPM ASEAN Equity Fund is J.P. Morgan Asset Management with an AUM of 1.7 trillion dollars. The country which the fund manager is based in is in Singapore and the individual fund managers managing this particular fund have up to 20 years of experience. I will therefore think that the fund manager for this fund is sufficiently competent, and it will not be too risky to invest in this fund.

India
Using the same steps above as we did for South East Asia on India, I am able to narrow down the number of funds to choose from down to 2 funds.

Souce: www.fundsupermart.com
Souce: www.fundsupermart.com

As shown below, both funds have comparable risk return ratio, Sharpe ratio, expense ratio and AUM.

india-2

In this case however, Pinebridge India Equity Fund is still a better option as compared to Blackrock India Fund due to the higher 3 year performance, fund size, risk return ratio and Sharpe ratio. Furthermore, Pinebridge India Equity Fund’s currency is in SGD while Blackrock India Fund is in USD. This means that when you invest in Pinebridge’s fund, you will not be subjected to exchange rate risk. If you invest in Blackrock’s fund however, you will be subjected to exchange rate risk.

China
We repeat the same steps again for China’s funds and we are able to narrow it down to 3 funds to choose from.

Source: www.fundsupermart.com
Source: www.fundsupermart.com

As shown in the table below, all 3 funds have comparable performance, with Neuberger Berman China Equity Fund performing the best in terms of 3-year historical performance, risk return ratio and Sharpe ratio. Between Neuberger Berman and Blackrock, it is easy to choose Neuberger Berman over Blackrock just by looking at these 3 indicators. It is however, much more difficult to choose between Neuberger Berman and Fidelity. Fidelity’s fund does not perform as well as Neuberger Berman’s, however, its currency is in SGD as compared to Neuberger Berman’s which is in USD. Investors who are more risk averse will therefore, be more likely to choose Fidelity China Focus Fund ,while investors who are more risk loving will be more likely to choose Neuberger Berman’s China Equity Fund.

china-2

Summary
There are many unit trusts to choose from and it can be incredibly overwhelming for those who invest unsystematically. It is therefore, imperative for you to be aware of your own investment objectives and to have a proper selection process for you to follow before deciding to invest in a particular unit trust. The takeaway here should not be that the funds discussed above are good and that you should invest in them, the above funds may not be suitable for your investment objectives and it would be foolish to blindly invest in them. Instead, the lesson here is to be clear on your own investment objectives and to have a proper selection process to guide you in achieving your investment objectives.

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