Evaluating the performance of unit trusts against the benchmark

Although I wrote that we should not compare in rule #5 of my 5 rules for happy living, there are some things that we must compare.

I was evaluating the performance of a number of unit trusts/mutual funds. Insurance salespeople, financial advisors and fund distribution companies are always recommending funds for people to buy. They'll tell you which the top performing funds are, which ones are on promotion, how much returns you could have gotten if you had invested in those funds 1 year ago, etc. Even if you don't talk to anyone, on the homepage of fund distribution companies, you can easily see the increase/decrease in value of the top gainers and top losers and recommended funds. There are also frequent promotions when salespeople get extra commission to push the "flavour of the month".

Some funds have returns of up to 40% over the past 3 years or 12% annualised returns. At first glance, it sounds really good compared to the paltry 0.5% or less interest rate that the banks give you. However, the returns is not the only thing that you should focus on. The really important information requires you to click a few more links and read a few more pages: performance of the fund compared to the benchmark.

Suppose there's a fund that invests in Singapore equity/stock market in general. The benchmark selected is the Straits Times Index (STI). The purpose of buying a fund is to reap returns that outperform the market.

(Otherwise, why would you pay commission (from 1-5% upfront and about 1.5% annually) to the broker and a management fee to the fund manager? If you have no intention of getting greater returns than what the market can give you, you are better off buying into the STI directly and paying much less in fees and commissions.)

Since you are paying so much money in fees and commission, your expectation should be that the increase in fund price should be more than the increase in the STI. If the fund had consistently performed better than the benchmark, then you can consider buying the fund (after you consider other factors).

Although it's true that past good performance is not indicative of future performance, past poor performance means that you probably shouldn't buy the fund at all!

I noticed a funds promotion that offers a 1% commission on the best performing funds over the past 3 years. I checked the performance compared to the benchmark. Shockingly, only half of the listed funds have outperformed their respective benchmarks! (To be fair, the online distributor did not state that those funds were highly recommended.)

Here are 2 charts of Singapore equity unit trusts, which are not from the above list. Would you buy into/more any of these funds or cash out immediately if you are holding on to them?

Fund 1:

Fund 2:


Anonymous said...

Hi Yu Kym

Did not know that you are rather well informed about these financial products. You can buy "STI directly" though exchange traded funds, ETF; but be warned that some of these ETFs do not track the underlying indices 1 for 1 due to slghtly difference indexing methodology used.

For a start, when one is investing in unit trusts, mutual funds, one need to be realsistic about the potential returns as tons of academic studies have shown that most, if not almost all, mutual funds do not outperform the markets over a long horizon net of fees.

It is advisible when investing in mutual funds to do a through read though/research on the investment strategies, past performance, fund managers, ... etc before signing up. One should understand that statistics can be easily "constructed" to serve one purposes and be very wary of those suave talking financial advisors/planners who quote and show you seductive charts and extraordinary tables. Just ask them what are these funds sharpe ratios, and it will usually knock them off for a while and give you a some time to digest what them had just shown you.

If you have any funds in mind or questions, I will be happy to look into them for you.


David said...


A most impressive post! Your knowledge of investing is far above the average persons.

Do you work or support the financial industry?

We use a financial advisor, and over the year he, with the support of his companies research and support group has guided our retirement and savings investments well. During the lasy years downturn, our losses were much smaller than average. This year gains have recovered more than expected.

Keep up your diverse opinion pieces, you simply are amazing!


Anonymous said...

Hi All
When those smooth-talkers make their pitch, I'll ask for evidence they bought the same unit. The cunning ones will flatter you-saying they dont have as much money to invest as you!
Walk away, nothing of value comes from that mouth.
Their basis for bragging how much their unit trust appreciated from 2007 to 2009? They pick the Lowest price for that YEAR and compare it with the Highest price achieved in any of the subsequent years!
Furthermore, these 2 closing prices may have been set by their fund managers by selling or buying into the dominant stocks the day before. You believe their comparison????
If I ever know a sure way to make money, do I need to sell it? The entire world will beat a path to my door!
Tip : only certain way to make money from stocks is to buy solid blue chips, eg banking shares, during a market crash.
YOU MUST HAVE GUTS. Your shares may nose-dive to half in the next few days but over the following year, it will reach a higher price - when sanity prevails.
Forget unit trusts. Folks hawking such products are looking for suckers who do not know where to put their money. Do your homework & know intricacies of Company P/E ratios, SAVs, ... otherwise stay out. You'll never know when to sell even if you had bought low!
If you are young, start a Company, attend pyramid plans seminars & OBSERVE how sharks behave, pay yourself a salary & contribute CPF. Move CPF funds to Special a/c. Earns 4% interest tax free. $500K gets 20K per year. 5 years on, interest= $108,320. 4 years + $103,284. In 9 years, total amount in Special a/c = $711,504 to continue earning interest.
Forget BMW. Invites envy & scratches! Squirrel away every cent on a solid stock - every year they pay dividends. When you reach your 60s, you have enough money to drive beautiful blondes in open top convertibles to your yatch club. Then you can have the satisfaction of seeing those rude, young unit-trust sellers eat their hearts out.(Ha! Ha! just trying to be funny - no offence to any readers out there selling such)

Regards - Leo

Yu-Kym said...

Leo, ya, fund managers and salesmen have lots of tricks. But one thing bad about being an individual investor is: if I'm fully invested, there's a limit to how much more more I can buy when the market goes down. Whereas the fund managers are able to buy more.