Unit Trust Investing Tips

1. Getting the right mix
How do you tell the risk/return dimensions of a fund? "Look at the beta (historical measure of the fund's volatility in relation to the overall market) and Sharpe ratio (historical measure of the risk-adjusted return of the fund) of the underlying funds," says Wadia. This information can be found in the fund fact sheets as well as Bloomberg and websites like fundsupermart.com. "One of the ways to determine the correlation of the funds - how much in synch they move with each other - is simply to compare 10-year price charts," he explains. Backtesting (evaluating historic data) will show you how those funds performed, say, over a five or 10 year period, as a part of your portfolio, he adds.

For most people, though, the advice is to keep it simple. Although it is possible for you to simulate a portfolio of unit trust funds based on inouts like standard deviation and projected returns, says Pretta, it involves backtesting and thus, it is best to leave it in hands of the wealth management team. Avoid analysing data in an attempt to find the 'perfect' asset allocation, adds Wong. Besides that, past performance is insufficient to predict future risk-returns.

'It is sufficient to use model portfolios as guidelines to point you in the right direction," says Gan. He adds that, usually, a typical risk-profiler result can lead you toward a suggested unit trust portfolio allocation. Note though, that asset allocation models are generalised based on basic principles that are non-exhaustive. "As you arrive at an asset allocation, you have a second chance to think if you are really comfortable with, let's says, 60% in equities and 40% in bonds. Ask yourself whether you accept the allocation," says Pretta.

2. Look Beyond Asset Class
Diversification is not juts about different asset classes. Look at the fund manager of the fund as well, especially if you are choosing actively managed funds. You are, after all, paying the managers a feeto beat the market. "The skill of the manager would determine how well the chosen fund would perform. Different investing styles contribute the additional alpha (return in excess of the compensation for the risk borne)," says Dinesh Virik, executive director of Perkasa Normandy Advisers Sdn Bhd. Eric Wong, Hong Kong head of research for Lipper, a Thompson Reuters company concurs, saying that by looking at the alpha, one would determine whether the fund manager adds value to the fund. "A higher alpha shows that the fund manager has strong investment skills to manage his fund. This skill includes selecting securities and predicting the direction of the financial markets."

For a fund house that has a system in place and a few equity funds with the same benchmarks, the funds are likely to have the same investment universe, says Pretta. "It is a better option to diversify across fund houses for the same categories of fund."

3. Managing Your Portfolio
If you think investing in unit trust funds means that you don't have to do any work, that you can buy the units and forget them, think again. That's not a strategy, says the experts, even if the fund managers are actively managing the funds' asset allocation. "It is imperative that the individual (or a qualified adviser) manages his investment portfolio," says Wadia. "The reason for this is that a portfolio of unit trusts should be viewed as a collection of unrelated funds. Each fund, though professionally managed, has no correlation with the other funds in an investor's portfolio. This is why each fund should be considered as a separate investment, and as such, the investor must be aware of how much of his portfolio is allocated to each particular investment, and why."

Over time, inestments such as unit trust may become less attractive (due to valuation reasons - overpriced perhaps, or due to quality reasons - low growth prospects), adds Sam. "At the same time, other funds may become favourable and worth including in your porfolio. Besides, the investor's own needs and risk profile can change with circumstances. That is why the management of a portfolio is critical to ensure sufficient growth over the years."

It isn't enough to just hold one fund and let the fund manager handle the asset allocation, says Pretta. "An investment portfolio which, by definition, should comprise all assets owned by an investor, should include different asset classes such as bonds, equities, property and other alternative investments. In selecting a single mutual fund, albeit a mixed or balanced one, the investor is reliant on a single fund manager's capabilities, which limits the benefits of diversification."

There are two main approaches to the asset allocation of your own portfolio. Strategic asset allocation is about fixing you asset allocation; for example 60% equities, 40% bonds / irrespective of the market conditions, and requires a disciplined approach. "You would take a long-term view in this systematic strategy," says Wong. Tactical asset allocation allows you to take a view of the future - and is premised on the notion that valuations of asset classes are an important consideration when deciding weightings in your portfolio. "You make calculated moves by deviating from the original mix in order to capitalise on unusual or exceptional investment opportunities," says Wong. "For example, if you think the market is bearish, though your original asset allocation is 60% in equities (aggressive) category, by using the tactical approach, you cut your equities category to 30%. However, over time, you return to your strategic mix of 60%."

Lee gives an example, "Let say you had an allocation of 70% in equity funds, 20% in balanced funds and 10% in income funds in 2007 (when it was a bull year). In a declining market in 2009, you should have an allocation of 20% in equity funds, 30% in balanced funds, and 50% in income funds. However, in a recovery market in 2009, it should be 50% equity, 30% balanced funds and 20% income funds." Tactical allocation, however, has its critics, who say that it has an element of market timing, something notoriously difficult for investors. John Bogle, founder of giant Vanguard, said in his book, Common Sense on Mutual Funds, that if you choose to adopt tactical allocation, limit the deviation from your strategic allocation to 15%. So, if your strategic allocation were 60% in stocks, making tactical moves would bring you to 45% at minimum or 75% at maximum.

Yet a third allocation model is referred to some as dynamic asset allocation, in which the allocation changes on a move frequent basis. Even if you are adopting a strategic approach, experts favour reviewing your portfolio at least once a year. One practice recommended is rebalancing. When you have an imbalanced portfolio (your investment has deviated from original allocation), says Sam, you are favouring the winner over 'less optimal' performing funds. "The new portfolio may no longer reflect you tolerance for risk. The sharpness of any subsequent losses that occur can leave one surprised. You may regret not taking steps to fix the problem when you once had the chance." On the flip side, with the fall of the equity markets, you equity portion may have dipped to much lower levels. If you can stomach the risk, rebalancing combined with the strategic allocation approach would make you buy in at lower prices.

Benjamin Graham (author of The Intelligent Investor and Guru of Warren Buffet), suggested that rebalancing should be carried out every six months. This is when you fixed a time interval, says Wong. "It is also possible to look at variants, such as if your actual portfolio allocation moves 10% away from the set target or by looking at the market. For example, the (KL) Composite Index moves by 20%." A disciplined rebalancing process prompts you to act when changes in your portfolio require action. However, don't be obsessed with rebalancing. "Only rebalance when there's a need to do so. Don't be preoccupied with rebalancing and end up 'trading'," says Pretta. Hence, only move you investments when you believe market dundamentals have changed. Otherwise, don't get caught up with investor sentiment," says Gan.

Source: Personal Money magazine, February 2009