Llama Investment Styles II - Ultimate Guide to Unit Trusts in Singapore
Hi Readers! It's Mr Llama again :) Mr Llama wishes to deep-dive into Unit Trust, and aims to let everyone understand Unit Trust. Even if you do not have any finance background like Mrs Llama :) Mr Llama understands there are no complete Guide to Unit Trust for Singapore, hence, decided to embark on preparing this.
Above is a simple flow of how Unit Trust is formed.
What are Unit Trusts?
As illustrated above, you will putting money into a particular Fund (Unit Trust). In the US, Unit Trusts are termed as Mutual Funds.
Thereafter, Fund Manager will take your money, and allocate you Units in return.
What are Units?
Net Asset Value (NAV) is a crucial term for Unit Trusts.
Let's take a look at below illustration to understand how NAV is calculated:
|Source: Mr Llama - Workings of a Unit Trust|
Looking at the very left of above illustration, you can see that the Fund's portfolio is made up on 4 different stocks.
Every day, the stock prices change due to market fluctuations. This would directly affect the NAV of the Unit Trust.
Hence, by buying Unit Trusts (min. $1,000), you are technically taking part in the market price changes of the Unit Trust's investment portfolio. And, the Fund Manager is free to allocate the money according to his investment objective.
|Source: FSM - Unit Trust NAV quote|
For instance, if your purchase order for a Unit Trust is sent to the Fund company on 24th Jan 2019, a $1,000 investment will give you ($1,000 / 24.02) 41.63 units.
Types of investments you can make using Unit Trusts
Mr Llama does make trades within Llama Portfolio. A few prominent trades include Turkey, Vietnam or Energy price related ones.
Mr Llama uses FSM Fund Selector platform to find out the kinds of Unit Trusts available in the market.
|Source: Mr Llama - Types of Unit Trusts|
Mr Llama generally only involve himself with Equity or Fixed Income Unit Trusts. As Mr Llama is not an expert in Foreign Exchange, he will try his best to avoid Unit Trusts valued at other currencies.
You can see that within Llama Portfolio, he only holds substantially Equity & Fixed Income unit trusts only.
He will prefer Unit Trusts involved in a certain Class of instruments, and is possible, hedged against other currencies.
Generally, Fixed income Unit Trusts pay out consistent dividends. Fixed income funds generate returns from Coupon payments of the Bonds it holds.
Equity Unit Trusts are generally classified into 2 kinds:
1. Growth Equity
2. Dividend Equity
|Source: Mr Llama|
Growth Equity vs Dividend Equity
Mr Llama has picked 2 specific Unit Trusts from Allianz to showcase the differences.
|Source: FSM > Fund Selector|
You gain 3.34% more if you invest in the Growth Unit Trust 1 month ago.
|6 Months Price Chart Comparison|
In 6-months, it fell 8.73% more than the stable Dividend Fund.
|2 Years Price Chart Comparison|
If you have a long-term investment horizon, Growth Funds are definitely beneficial. A long-term outlook means that you are able to ride out any potential recessions.
If you are looking for a stable investment with consistent Pay-out, this particular Dividend Unit Trust is not a bad choice. Its monthly payout is 0.0583 SGD with a NAV of 9.45 SGD priced on 29 Jan 2019.
Annual projected yield: 7.4%, Expense Ratio: ~1.8%
Fixed Income Unit trusts
There are 381 Fixed Income Unit Trust on FSM Fund Selector. What exactly are they?
Mr Llama is sharing on 5 broad kinds of Bonds below, and how you can access them through Unit Trust in Singapore.
|Source: Mr Llama / Investopedia|
Types of Fixed Income Unit Trusts
Government Unit Trust
Holds 43% Singapore Government Bonds
Holds 40.52% US government Bonds
Municipal Unit Trust
Holds a significant portion in HDB bonds
Corporate / Investment Grade Unit Trust
Holds US & Europe Corporate bonds
Asset-Backed Unit Trust
US Mortgage backed Unit Trust
Emerging Market Unit Trust
Top 3 holdings include government bonds from Brazil, Mexico & Indonesia
*Above is largely a gauge. Risks should still be assessed according to Portfolio's bond investment grades. I have obtained below table from Wikipedia:
|Source: Wikipedia - Default Rate of Bonds|
Ways to invest with Unit Trusts in Singapore
Do subscribe to LlamaFinance, or Follow @LlamaFinance on Instagram so you can witness how Mr Llama invests in Unit Trusts.
Unit Trusts are a good way to access various regions or instruments that you will naturally not be able to. Generally, brokers in Singapore allows you to trade in various Main Exchanges, but not certain Stock Exchanges in say Vietnam, or Malaysia. This brings me to my first point.
You can see from Mr Llama's previous posts that Mr Llama accesses Turkey through HSBC GIF Turkey Equity Fund.
Mr Llama generally invest in Regional Equity Funds if the Country has promising plans ahead. Or, has certain stimulus to economy in place.
You can access regional equities in:
If you have been following LlamaFinance, you will also know about Mr Llama's investment in Energy.
Sector depends on trends. For instance, Oil Price is currently in an uptrend due to Venezuela Sanctions on Oil by US.
US Chip-makers are threatened by China's Huawei better and cheaper chips. This will likely dampen the price of US Chip-makers like NVIDIA.
You can invest in Sectors like:
Commodities and Resources (ie Gold)
Consumers (ie FMCG companies)
*Please note, for instance you invest in a Unit Trust made up of Gold Miners. NAV fluctuations will be highly related to Gold Price movements. However, the Unit Trust holds equities of Gold Mining companies. You will profit given a rise in Gold Prices through the Unit Trust.
Fees & Charges involved
Please see comparison of fees between different platforms - here.
*% refers to % of Overall Net-Asset Value of Unit Trust portfolio
Sales Charge - 0 to 5%
Mr Llama uses DollarDex, so he is paying 0%. If you use local banks, fees are around 1%. If you were to purchase Unit Trust through an Insurance agent, it can be 5%.
Redemption Charge 0-5%
Fees involved when you sell off your Unit Trust holdings. Generally, most platforms do not carry this charge. Local Banks do not. Neither do FSM & DollarDex.
Platform Fees 0.05% - 0.0875%
Local banks & DollarDex does not charge this fee. FSM do charge this.
Net Asset Value of a Unit Trust refers to its value of a single unit of investment. It is the cost of a basic Unit of a Fund.
It is derived from the value of the whole of the Fund, minus its liabilities.
This is the value where you can buy, and sell your Unit Trust at. Updated on every other dealing day.
Monies paid to Fund Manager, who manages your Unit Trust. Charged on every other dealing day.
Expense Ratio (0-5%)
This is an important figure. It is Management Fee + Any other fees involved in operations of the Unit Trust.
Any other fees can be marketing costs, audit fees, etc.
This is the % that will be eaten off you Unit Trust value every other dealing day. For instance, if there are 200 dealing days every year, and expense ratio is 2%.
Unit Trust investment = $1,000
Daily fees = $1,000 x 2% / 200 = $0.10 eaten off your holdings every dealing day
Trailer Fees (8-20% of Management Fee)
Amount paid out of Management Fees to Investment Advisors (Unit Trust platform)
This is not additional fee to Investors, but paid from the Management fees already incurred as part of Expense Ratio.
Why Mr Llama still get involved with Unit Trusts?
There are reasons why Mr Llama is investing with Unit Trusts.
Yes, there are sayings that Unit Trusts underperform Index Funds or ETFs. There are also sayings that Annual fees eat into your gains in the long-run.
Is that really so?
In buying an ETF, you have to buy through a Broker.
If you were to buy $10,000 worth of SG ETF, you will have to pay 0.275% commission once during purchase, and once more during sale of the shares.
This is not forgetting that GST is charged for commissions.
There are other fees involved too:
- Clearing Fee (CDP imposed): 0.0325%
- SGX Trading Fee: 0.0075%
So, $10,000 investment in ETFs will cost:
Commission - $27.5 x 2 x 1.07 = $58.85
CDP Fees - $4
Total cost: $62.85
If you were to spot an uptrend, and decides to invest $10,000 in an Equity Unit Trust.
With expense ratio at 2%, any investments not ranging more than 114 days will be cheaper than buying an equivalent ETF.
This being said, ETFs are cheaper if you have a large sum of money, and holds investments for a period of time.
If you prefer to invest in Trends, or has a small sum of capital, Unit Trusts is not that bad, with minimum investment sums of $1,000, and no brokerage fees.
|Source: FSM >Fund Selector|
Ever wondered why similar Unit Trusts, in different currencies, can pay out different dividend amounts?
From the Table above, you can see that the Fund stipulated in Euros gave lowest yield of 4.96%, while the one in RMB gave a yield of 9.8%. RMB's yield almost doubles that of Euro's!
|Source: FSM - NAV quote|
To start off, let us understand that when you purchase the above Unit Trust - European Fund stipulated in RMB, you will be paying in RMB. To obtain RMB, your Unit Trust platform will exchange your SGD (local currency) into RMB, and send your Order to the Fund company.
Thereafter, the Fund Company will receive your RMB, and purchase underlying European securities. The Fund Company will use Euros to buy the securities, and hedge against any EUR/CNY currency movements.
Looking at below Price Chart of EUR/CNY for past 1 year, we can see that EUR has generally strengthened against CNY. Simply, you can change more CNY with EUR.
This will mean that the holdings in Euro will have a higher valuation in CNY. This bumps up the Capital returns & Dividends.
This is not forgetting the costs of Hedging. Derivatives are required for hedging. There will be fees involved in forming a Derivative contract too.
|Source: XE currency - 1 year EUR / CNY Chart|
|General Rule of Thumb|
Source: Mr Llama - Currency effects to Unit Trust Singapore
Unit Trust Naming Conventions
Unit Trusts comes in all forms and sizes, literally. This is to appeal to the masses, and cater to each and everyone's needs. Let us use a few examples to understand how their naming works.
[Fund House] [Sector / Region] [Asset Class] [Share Class of Units] [Hedged/Not Hedged] [Base Currency] [Distribution]Example 1
ALLIANZ EUROPEAN EQUITY DIVIDEND CL AM DIS H2-RMB
HGIF - RMB Fixed Income AM3O SGD
*Example 2 is not hedged, but valued in SGD base currency. You have to check this Fund's information on your Unit Trust platform in order to know if it has any distribution.
To fully understand Finance...
If there are some terms used above that you do not understand. Fret not! Mr Llama has prepared a Glossary Page under Resources tab above. Please take a read, and rest assured your efforts will pay off:)
Here are other Guides:
Part 5 - Resources for your Investing journey