In a previous article, we had highlighted some of the important elements of a unit trust fund’s prospectus. Now that you have familiarised yourself with the prospectus, it is time to move on to another important document every potential and existing unit trust fund investor needs to look at – the annual report. Most people have the misconception that when they invest in unit trust funds, having a group of paid professional fund managers to manage their money gives them the licence to pay less attention to the performance of their portfolio.
The practice is usually different when people invest directly in individual stocks, whereby investors tend to constantly and closely monitor their shares. Unit trust investors tend to hold their units for a longer time period and only look at the price when they want to sell their holdings. Some may even simply invest based on advice from friends or agents without fully understanding the nature and risks behind the trust funds that they have invested in. When they receive the unit trust annual reports or interim reports, more often than not, the reports will be treated like old and forgotten textbooks. Don’t let them gather dust on your bookshelves, read them!
The annual report -- how to read it
The Securities Commission, via its Guidelines on Unit Trust Funds, requires all unit trust companies to send their annual and interim reports to unitholders within two months after the end of the financial periods covered by the reports. Information in the annual reports is vital to both existing and potential investors. The nature of an annual report for a unit trust is the same as that of a company. It basically tells you how the fund has performed over the past year. As an existing investor, this is important because knowledge of the asset mix and fundamentals behind the trust fund can help you decide whether to continue holding the units or sell them.
If you are a potential investor, you can find detailed information on a unit trust fund’s financial performance compared to a higher level of information presented in its prospectus, which will be useful in making your investment decision.
What can you find in an annual report?
An annual report will typically contain information on how the fund has performed — it will detail out the financial information of the portfolio, investment changes and the report from the manager.
Manager’s Review and Report
An annual report will start with the manager’s review on the past year’s performance of the overall market. This will cover the performance of the individual sectors related to the fund’s portfolio. It then moves on to provide a high level summary of the fund’s performance measured against its investment objective and relative to its benchmark.
As an investor, your interest will lie in how the investments in the past years have been carried out and whether they are in line with the fund’s stated investment objective. For example, if a particular unit trust fund’s focus is supposed to be on income, then the portfolio’s assets allocated to various sectors should reflect similar characteristics. This is important to ensure that the risk and return characteristics of the actual investments are consistent with the portfolio’s objective.
Financial Highlight -- NAV/unit
Under the section of financial highlights, the fund’s performance in terms of net asset value (NAV) attributable to unitholders for the report’s financial period will be compared to previous year’s results. This is a direct measure of the fund’s unitholders’ value, which indicates the appreciation or depreciation in the fund holdings which are still in the “open” positions.
Here, what you are obviously looking out for is an improvement from the previous period. Do not get shocked if you discover that the fund you have or intend to invest in shows an inferior result in the 2008 financial year. When you start comparing the result for 2008 against 2007, you will have to account for the impact of the global financial crisis on last year’s performance. This will not be something that is exclusive to your fund alone, as most funds will very likely indicate the same.
Total Returns
A more meaningful way of measuring a fund’s performance is to compare it to its benchmark. One of the performance indicators used to compare to the benchmark is the fund’s total returns. The fund’s total return for the period, expressed as a percentage, includes the fund’s income received and capital appreciation from investments of the portfolio. The formula to calculated total return is:
Total Return % = [Income received + (End of period Fund value – Initial Fund value)]
Initial Fund value
The comparison of actual portfolio performance relative to the fund’s benchmark will serve as an indicator to investors on the relative performance, whether it is at par, above or below its benchmark. For example, if the total return for the fund is -5 per cent while the fund’s benchmark total return is 1 per cent, then the fund is said to have underperformed the benchmark by 6 percentage points. When the performance deviates from the benchmark, then the management should provide the reasons for the deviation. If it is mainly due to the implementation of management strategies and if the performance is significantly below, then the investors will have to be more cautious.
Here, investors will need to question whether the fund manager is well equipped and competent enough to implement the strategies they have in place. The fund may have deviated from its original investment objective, resulting in the exposure of the portfolio to unnecessary risks. Under such circumstances, investors should then evaluate whether the fund is still consistent with their own investment objectives and reconsider the suitability of holding the units. Other than looking at the financial performance for the period, you should also look for the fund’s performance over a longer time frame. For funds that have existed for more than a year, you will also find the financial performance shown for the past three or five years.
As we are all aware, the performance for a particular year, such as 2008, may be subject to certain one-time market events like the global financial crisis. One year’s less than stellar performance will not be an accurate reflection of the fund’s performance. Performance shown over a longer time period will be more representative of a fund manager’s skills and ability in adding value to the fund. However, always bear in mind that past performance is no guarantee of the future achievements of any particular fund. Hence, never base your investment decisions solely on past performance without learning other essential facts about the fund.
Now, picking up an annual report to study your future or existing unit trust fund seems easy, right? Be mindful though, this is just part one of this article. We will continue to explore more on the annual report next week.
The article was written by Securities Industry Development Corporation (SIDC) to educate investors on smart investing. The information provided is for educational purpose only and should not be used for legal or other professional advice.
SIDC, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
No comments:
Post a Comment