Taking a closer look at the growth of unit trusts.

Sun, Oct 07, 2007 The Straits Times

FINANCIAL agents are now gunning for a slice of the CPF pie before rules kick in on April 1 to reduce the sum available for private investment. After that, a Central Provident Fund member will not be allowed to invest the first $20,000 of his Ordinary and Special accounts savings under the CPF Investment Scheme (CPFIS). Money already invested through the CPFIS will not be affected. Under the new rules, members will receive additional interest of 1 percentage point on the first $60,000 in their accounts. Thus, an interest rate of 3.5 per cent will apply to the first $20,000 in the Ordinary Account (OA); and about 5 per cent will apply to the next $40,000 in the Special, Medisave and Retirement accounts (SMRA). How CPFIS funds have done THE Sunday Times commissioned fund data house Morningstar Asia to assess the performance of CPFIS-approved unit trusts over a 10-year period up to the end of June this year. Note that the table provided does not reflect when a fund joined CPFIS. Its track record might range from three to 10 years, but it may have joined the scheme two years ago, for example. Of the 53 funds with a 10-year history, 43 grew over 5 per cent every year in the period studied. Of the 156 funds with a five-year history, 128 beat this growth. In the three years to June 30, 145 funds out of 185 have managed at least a 5 per cent annual return. While underperforming funds tend to be excluded from the CPFIS, it seems clear that, in absolute numbers, more funds have beaten the annual 5 per cent returns in recent years. Two main factors, timing and fund type, affect a fund's performance. Timing IT MATTERS when an investor enters and exits. The initial years of the decade under review contained significant events that sent markets south. IPP Financial Advisers investment director Albert Lam cited three:
# The Asian financial crisis in 1997-98 when the baht's devaluation triggered a currency crash.
# The bursting of the dot.com bubble in 2000, which hit markets worldwide.
# The Sars crisis in 2003, which hurt the economies of Singapore, Hong Kong and China.
Asian markets have generally performed better over the five and three years to June 30. Mr Giri Mudeliar, the executive director of the Investment Management Association of Singapore (Imas), said: 'Asian markets rode the upward wave and had better results. Most major markets bottomed in 2002/03 and have been on an upward trend since because of robust economic growth, rising risk appetite and liquidity.' In the five years to June 30, Hong Kong's Hang Seng Index rose 105 per cent, against 43 per cent over the 10-year period. Singapore's Straits Times Index (STI) rose 129 per cent over the five years, against 85 per cent over the 10 years, he noted. Risks Given the various crises in the past decade, a person who invested in 1998 and cashed out in 2002 would probably have gone into the red. But if he had held on until today, chances are, he would have been better off. Take technology manager Henry Lee, who in 2003 lost half of his $20,000 investment in a Singapore fund. The STI was at a high in January 2000 when he put in the money, but the tech bubble burst that March and Sars hit in 2003, driving the STI down. Fund type GOING by Morningstar data, most of the funds that have achieved more than 5 per cent in the past decade are all-equities funds. Mr Joseph Chong, the chief executive of financial advisory firm New Independent, said these funds have invested in regions or sectors where the stock markets have done well over a 10-year period, despite the deep trough of 2000-03. 'These markets have more than recovered from their losses. They include, for example, global, European and Asia ex-Japan equities, but not Japanese equities,' he said. Also, the returns of these funds have mirrored the average returns of, say, the Dow Jones Industrial Average in the past 10 years. The Dow has grown about 9 per cent a year, and the STI about 8 per cent, added Mr Lam. As most of the 43 funds are all-equities funds, it is not surprising their returns exceeded 5 per cent a year. Thus, someone who had invested in the more conservative balanced and fixed income funds would have ended up with far lower returns than someone investing in equity funds. This is why Fundsupermart research manager Mah Ching Cheng suggests that conservative investors take full advantage of the better rate of returns for the first $60,000 of CPF savings by leaving them with the Board. For instance, a very conservative portfolio - 20 per cent equities, 80 per cent fixed income - would be less likely to beat the new CPF benchmark rate than a more aggressive portfolio. Ms Mah said more aggressive investors with a longer time horizon, say, five to 10 years, have 'the option of investing the rest of their OA and SA monies, once the $20,000 compulsory requirements for OA and SA are met'. Risks Higher risks, higher returns. Investors need to understand their own risk appetites and decide if they can stomach the volatility that equities funds can experience. Morningstar head of research Jessy Yang advises investors to check out the standard deviation of a fund's returns over, say, a three-year period. This figure serves as a useful indicator of its potential volatility and risk. Take a fund with a standard deviation of six and average annual return of 10 per cent. The figures mean there is a greater probability that the fund's return will range between 4 per cent and 16 per cent. The higher the standard deviation, the greater the potential volatility and risk of the fund. The head of fund analytics at wealth manager Providend, Mr Ernest Low, said: 'If significant volatility affects a person's mental health and contributes to bad decisions like selling low and buying high, then it is better for that person to keep his assets in conservative or low-risk investments.' Investment tips MR MUDELIAR said Imas has always maintained that investing CPF monies in the open market is a risk and that investors should get advice from financial advisers and stick to the road map drawn up. 'Do not waver and change from one market blip to another. Keep to the same doctor and do not doctor-jump when you are too impatient for quick remedies,' he said. As at end-June, there were 220 unit trusts and 196 investment-linked insurance products. Mr Mudeliar advised investors to go for a good spread to lower the risks, to be sector-sensitive and to go for the long haul. Imas suggests that older people keep their money in the CPF and enjoy the risk-free returns. 'Life outside the CPF is too complicated to justify the marginal returns,' added Mr Mudeliar