There’s a misconception in the investment circle that unit trust investment is safer than stock investment. Seldom do we realize that unit trust investment is as much risky as stock. Unit trust investment rises and falls according to stock market indexes just like the general stocks do. The only difference is that the degree of value changes between the two varies greatly.
Fund House Stock Selection
Unit trust fund house chooses a basket of stock usually around 40 -50 selections according to their own criteria and analysis. When market falls, not all the 40 -50 stocks fall together in the same magnitude. Some of them do even rise and therefore, the overall fund price or net asset value (NAV) of the unit trust fund does not fall as bad as in a single stock. On the flip side, when market rises, fund price does not rise as fast as a single stock as well.
The advantage of investing through unit trust is the mitigation effect of gains and losses on daily market development. Unit trust fund normally diversifies widely and profusely among numerous stocks. That’s why it is much easy to invest through unit trust than single stock or a small group of stock on our own selection. There are a lot of factors ~ most of them are unknown to investors affecting stock prices on the market. Sometimes, fundamental analysis does not guarantee our investment will be saved, nor will chartist can make our profit certain.
However, investment through unit trust will only need to consider the macroeconomic fundamental and development. In the way, most unit trust fund prices will rise and fall according to major market sentiment. Nevertheless, among different classes of unit trust the magnitude of rise and fall is also different.
For example, unit trust that focuses on growth stock will rise and fall with moderation, because they have included some big cap stocks among their stock selection. While those unit trust funds focus on small cap will rise exponentially and fall devastatingly, because there’s the common nature of stock behavior being small in their capital. They are most susceptible to market manipulations and speculations. That’s why we as investors have to know our own risk appetite. We select the type of fund that suits our own taste.
As for my own practice, fund selection does not necessary based on fund class but rather on each individual merit in their performances both short term (within 3 to 6 months) and long term (within 1 year to 3 years). Those that were performing very well in the past many years say 3-5 years, may not necessary be the best performing fund anymore if you evaluate them in shorter term. This is possibly caused by some fund house internal management changes that we are not aware of or undisclosed.
For example, recent performance of Eastspring Investment Small Cap Fund has lost its leading ground to CIMB Principal Small Cap Fund recently in both 1 year and 6 months chart analysis (see Chart A). In that case, if I were to invest into Malaysia market now, I will select CIMB Principal Small Cap Fund instead of Eastspring Investment Small Cap Fund even though it was my long time favorite fund choice and currently one of the recommended funds by Fundsupermart as well.
Fund Selection Criteria
I will use fund selection screening tool either from Fundsupermart or Morningstar. I will mostly focus on those top performing funds and understand their reason (make your best guess based on their prospectus information or Fund Fact sheet) for their respective results.
And of course the best entry time will be the time when market is down and everyone is thinking pessimistic about investing like January 2019 recently. When you enter CIMB Principal Small Cap Fund, you will enjoy at least 24% profit gain right now after 6 months.
Market pessimism right now about investment is not very much different as compare to January 2019 back then. Most people are still reluctant to enter market investment now because of the never ending trade war threat that can possibly bring in global economic recession. In that case, you may consider my proposal in previous blog for reasons why global economic isn’t slowing down in 2019 and Malaysia market poses best opportunity for investment. Further escalation of trade war between US and China would even possibly benefit Malaysia economy as both US and China businesses have increased their factory establishment ventures into Malaysia just to avoid traffic hike recently. Then you can gauge market sentiment right now.
If you believe “reverse psychology” in investing which will bring profit, then Malaysia market can still be considered the right moment to invest, until or unless economic data shows otherwise. Or else you have to wait for next round when global trade relationship reshuffled or when market bottoms up after decadal global recession. This will possibly come after 3 to 4 years the earliest possible then.
Happy reading and investing, but invest cautiously!
(I shall write more on risk management in future blog if God permits, please stay tune and subscribe for immediate email notification for any future releases)
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.