Exchange Traded Funds (ETFs) are the nemesis of Unit Trusts – majority of ETFs are cheaper and able to deliver higher returns than Unit Trusts after net of fees. Many investors may wonder – why should you buy Unit Trusts?
But we do not need to be so extreme and write off Unit Trusts totally as most things in life are not clearly black or white. The fact is that not all ETFs are good and not all Unit Trusts are bad.
The biggest bugbear that investors have about Unit Trusts isn’t their performance. It is the cost. Unit Trusts can be beating their benchmarks but underperform after accounting for fees. Returns are not guaranteed but costs are.
Hence, investors should benefit from such investments as long as the costs are brought down. The good news is that the sales charges for Unit Trusts have come down significantly over the years, probably due to the competition from ETFs.
Unit Trust sales charge is at 0% now
In the past, the sale charges for Unit Trust could go up to as high as 5%, but now, retail investors can buy them at 0% on their own! moomoo is one such platform that allows you to buy them with no charges.
So how can a retail investor take advantage of this and expand their investment universe to include Unit Trusts instead of just ETFs?
I scoured through the Unit Trusts offered on the moomoo platform to give you some answers and I will share my thought process when it comes to selecting Unit Trusts.
One key thing I look out for is the ability to outperform the benchmark after fees. This is to ensure that the manager is worth the fees and is able to generate extra returns to the investors.
To help us narrow down which funds can outperform the benchmarks, we can use the SPIVA report which will tell us how many actively managed funds actually beat the indices.
Bond Funds
Below is the table about bond funds and we can see that the majority of the actively managed funds underperform the benchmarks. But out of which, actively managed funds did better in investment-grade intermediate funds and global income funds. These are the areas where we can look at for better performing bond funds.
I found one such bond Unit Trust on moomoo that could beat the benchmark – Legg Mason Brandywine Global Income Optimiser. It invested in investment grade bonds with an effective duration of 4.21 years (intermediate).
Below is a screenshot of the Fund’s factsheet with my annotations. The Unit Trust has been around since 2013 and has generated 4.63% returns per year for its investors after management fees, comfortably beating the benchmark of 0.70% return for the same period. If a 5% sales charge has been levied, the annual return will drop to 4%. This is why having 0% sales charge is significantly beneficial to the investors.
Maybe you may disagree with the benchmark used – 3-month US Treasury Bill Index. We can take a look at Morningstar’s comparison to Bloomberg Global Aggregate Bond Index and the Unit Trust continues to outperform.
Stocks
Now let’s look at stocks. The table below is taken from the SPIVA report on US stocks. What stood out to me were the mid-cap and small-cap growth funds which had enjoyed good performances over a 10-year period. But when you stretch this comparison to a 20-year period, the actively managed funds start to lose out.
It was a similar sight among the international funds. The small cap active funds did better till the 10-year mark but nothing outstanding when stretched to the 20-year mark.
What we can infer from the data is that active managed funds have better chances to beat the benchmarks in the non-large cap arena. I believe it is because the small caps are less traded and produce more mispricing opportunities for the active managers to take advantage of.
One such Unit Trust that is available on moomoo would be BGF Systematic Global SmallCap Fund. It invests in small cap stocks all over the world. Here is the list of the top ten holdings in the fund and I am not familiar with most of them. This shows us that small caps are indeed under the radar stocks and you pay the fund managers to uncover such gems for you.
The Unit Trust has been performing well, delivering a 10.15% yearly return over the last 10 years after factoring in management fees, and it beats the MSCI ACWI small cap index return of 7.30%.
Some Unit Trusts do perform and are worth the fees!
Yes, it is true that the majority of Unit Trusts underperform their benchmarks, and most investors are better off buying a passively managed ETF. But I hope I have done some justice to the Unit Trusts that have outperformed and are worth the fees they charge.
Of course, it will take some digging to find the worthy Unit Trusts amongst the 60+ funds available on moomoo. But moomoo has made it easy for you to do so as all the information you need is within the app. It should be a lot less work than analysing stocks so buying good Unit Trusts can help you beat the indices with less effort.
There’s a Unit Trust campaign running now till 31 May 2022. All moomoo users get rewards for completing certain tasks:
- Learn about moomoo’s Money Plus and watch the explore page to get a 3-day 15% fund coupon and 800 moomoo rewards points.
- Set up an automatic investment plan to get a 3-day 15% fund coupon and a SGD 8.80 cashback coupon.
- Subscribe to a non-MMF fund above SGD 100 to get a 3-day 15% fund coupon and a SGD 5.80 stock cash coupon.
- After completing all the tasks, users can unlock an exclusive gift package and this is inclusive of a 3-day 15% fund coupons, 1,500 moomoo rewards points, and a SGD 18 fund cashback coupon.
If you do not have a securities account via the moomoo trading app yet, you can sign up here and get 1 free Sea Limited share and SGD 30 stock cash voucher upon deposit and completing the necessary tasks. Promotion valid till 13 April 2022, 09:59 SGT.
Begin your investment journey today with moomoo (T&Cs Apply).
This article is brought to you by Futu Singapore Pte. Ltd. (moomoo trading app) but the opinions expressed belong to the author. This article has not been reviewed by the Monetary Authority of Singapore.
