Disclaimer: I am not a licensed financial advisor. If you require professional financial advise, please consult your licensed financial advisor. Please treat my comments below as merely sharing personal thoughts and second opinions.
Dedication: This article is dedication to "EH", "pk" and others who have expressed interests in investing in Unit Trusts before in real life, as well as in my chatbox. For some of you, sorry if this opinion is "belated".
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Recently, I met up with a young friend of mine whom I haven't seen in months, and we chat about Unit Trusts over a meal at my house. We chatted about many things, learnt that he was recently promoted, been very busy naturally, and the promotion came with a higher salary which I am pleased for him. Naturally, after some time, he's wondering what to do / how to invest his surplus monthly funds.
His background is that he is an intelligent, full-time professional, working outside the financial sector with little financial knowledge, and so, have little knowledge on personal financial products. He also has very little time to monitor financial markets, and prefer to spend whatever little extra time he has left outside his job to enhance his small side business over the next few years.
His benchmark comparison is obviously Fixed Deposits. These are safe and secure, and doesn't require any involvement from him. But the returns are a measly 3.7% to 4% per annum, which doesn't even match inflation. These are of course very natural concerns, since even the official inflation rate is already 7.7%+, and the unofficial rates even higher.
The extra savings per month is also not large. We may be talking say hypothetically $5k per quarter (figure adjusted), but he's also considering his existing savings which I understand is currently in F.D., and when spread over a monthly basis, may double that (say) over the next 6 to 12 months.
My friend is of course aware that with shares and unit trusts, prices do fluctuate, and past returns do not guarantee future performance. In terms of trading knowledge, he has virtually zero, and is not yet interested nor ready to learn how to trade yet. In terms of time-frame, his time-frame is very long, since he doesn't expect to have any need for that surplus funds, and so, does not expect to touch the funds over the next 10 years.
The short of it is that he asked for my opinion on what I personally think of Public Mutual equity trusts. Basically, several people has recommended him Public Mutual trusts, and he's wondering how that compared with investing directly in Public Bank shares, which he has heard others including me mentioned before also.
His background is that he is an intelligent, full-time professional, working outside the financial sector with little financial knowledge, and so, have little knowledge on personal financial products. He also has very little time to monitor financial markets, and prefer to spend whatever little extra time he has left outside his job to enhance his small side business over the next few years.
His benchmark comparison is obviously Fixed Deposits. These are safe and secure, and doesn't require any involvement from him. But the returns are a measly 3.7% to 4% per annum, which doesn't even match inflation. These are of course very natural concerns, since even the official inflation rate is already 7.7%+, and the unofficial rates even higher.
The extra savings per month is also not large. We may be talking say hypothetically $5k per quarter (figure adjusted), but he's also considering his existing savings which I understand is currently in F.D., and when spread over a monthly basis, may double that (say) over the next 6 to 12 months.
My friend is of course aware that with shares and unit trusts, prices do fluctuate, and past returns do not guarantee future performance. In terms of trading knowledge, he has virtually zero, and is not yet interested nor ready to learn how to trade yet. In terms of time-frame, his time-frame is very long, since he doesn't expect to have any need for that surplus funds, and so, does not expect to touch the funds over the next 10 years.
The short of it is that he asked for my opinion on what I personally think of Public Mutual equity trusts. Basically, several people has recommended him Public Mutual trusts, and he's wondering how that compared with investing directly in Public Bank shares, which he has heard others including me mentioned before also.
My thoughts which I shared with him was as follows.
1. Unit Trusts are generally long term investments because of the higher upfront fee. Typically, equity unit trusts charge 5% or more as upfront fee, and so, it makes it hard to beat F.D. if the time-frame is short. Shares on the other hand have lower brokerage, typically, 1.5% or less for the full buy and sell trip. For him, it is important to adopt a long-term view for both Unit Trust and Shares which to him is already something he is willing to do before we met.
2. Equity unit trusts and Public Bank shares both share the same characteristics, in that they are both share investment and so, their prices can fluctuate over time. It is both a source of profit or an opportunity to lose money. But in general, if one adopts a prudent approach to buying and selling, then, the price fluctuations are a friend than an enemy - it gives one an opportunity to "buy low" and "sell high". The potential returns can be significantly higher than F.D. if it is done prudently.
1. Unit Trusts are generally long term investments because of the higher upfront fee. Typically, equity unit trusts charge 5% or more as upfront fee, and so, it makes it hard to beat F.D. if the time-frame is short. Shares on the other hand have lower brokerage, typically, 1.5% or less for the full buy and sell trip. For him, it is important to adopt a long-term view for both Unit Trust and Shares which to him is already something he is willing to do before we met.
2. Equity unit trusts and Public Bank shares both share the same characteristics, in that they are both share investment and so, their prices can fluctuate over time. It is both a source of profit or an opportunity to lose money. But in general, if one adopts a prudent approach to buying and selling, then, the price fluctuations are a friend than an enemy - it gives one an opportunity to "buy low" and "sell high". The potential returns can be significantly higher than F.D. if it is done prudently.
3. So, to maximize profits, contrary to public opinions, it is not a question of how long the money has been invested, but at what price was it bought and at what price was it sold (ignoring dividends). So, sometimes, two year old investment can be more profitable than a 10 year old investment, and sometimes not. The key is to be selective in when to buy (the Method), as well as how much to buy at any one time (Money Management). Adopting the attitude that a low price is a friend for long term buyers is also very important (the Mind), because often, we are our worst enemy when it comes to investing.
4. At the present moment, when he has a very long time horizon, I advised against entering the market now. I believe it is better to wait as a general comment. Why? Because we are still in a bear market where we can expect more lower "highs" and a lower "lows" to come.
I showed him various charts of various stock markets around the world over the past decade, where it was obvious that in many stockmarkets around the world (e.g. the US, London, Dax, Cac, Australia, Malaysia, Singapore, etc.), it was a wonderful bull run for many, many years (e.g. since 2002) - as witnessed from the higher "highs" and higher "lows".
However, this year, it was obvious that the bear has started to come in, as evidenced by the "lower highs" and "lower lows".
And given that the bear has only been around for less than a year, chances are good that it probably won't stop this month, and reverse its course, after 5 to 6 years of bull run. This is a longer-term bear that has come in, and I believe it will take longer than just a few months to run itsfull course.
What to Buy?
We went back to his original question of what to buy. Public Mutual trust or PBBANK shares?
I note that the problem with investing relatively small amounts of money is the lack of diversification risk. Public Mutual Equity trust has the advantage of diversification, in that the Manager invests in a number of shares which are supposed to be "carefully selected". So, if for whatever reason any one share kaputs, it shouldn't hurt the entire fund performance. Whereas, investing in just PBBANK alone is potentially risky. We chatted about PBBANK - the good and the bad - and about the reliance of valuation on the founder (THP), and the risks should something unexpected happen to him. Whilst PBBANK is clearly the best performing bank relative to other banks in Malaysia over the past long term, my advice was to only put a certain % of funds in there, and not 100% of funds.
As for Public Mutual Equity trusts, I compared this with ICAP. Notwithstanding my stance on ICAP's integrity, I do believe that ICAP as a fund manager has performed excellently - the past results speak for themselves. I suggested that he considers investing a part of his savings into ICAP also, since it automatically provides diversification, as well as fund management (including trading) services for a relatively small level of expenses, and for a significantly lower fee with better performance than Public Mutual equity trusts.
I showed him various charts of various stock markets around the world over the past decade, where it was obvious that in many stockmarkets around the world (e.g. the US, London, Dax, Cac, Australia, Malaysia, Singapore, etc.), it was a wonderful bull run for many, many years (e.g. since 2002) - as witnessed from the higher "highs" and higher "lows".
However, this year, it was obvious that the bear has started to come in, as evidenced by the "lower highs" and "lower lows".
And given that the bear has only been around for less than a year, chances are good that it probably won't stop this month, and reverse its course, after 5 to 6 years of bull run. This is a longer-term bear that has come in, and I believe it will take longer than just a few months to run itsfull course.
What to Buy?
We went back to his original question of what to buy. Public Mutual trust or PBBANK shares?
I note that the problem with investing relatively small amounts of money is the lack of diversification risk. Public Mutual Equity trust has the advantage of diversification, in that the Manager invests in a number of shares which are supposed to be "carefully selected". So, if for whatever reason any one share kaputs, it shouldn't hurt the entire fund performance. Whereas, investing in just PBBANK alone is potentially risky. We chatted about PBBANK - the good and the bad - and about the reliance of valuation on the founder (THP), and the risks should something unexpected happen to him. Whilst PBBANK is clearly the best performing bank relative to other banks in Malaysia over the past long term, my advice was to only put a certain % of funds in there, and not 100% of funds.
As for Public Mutual Equity trusts, I compared this with ICAP. Notwithstanding my stance on ICAP's integrity, I do believe that ICAP as a fund manager has performed excellently - the past results speak for themselves. I suggested that he considers investing a part of his savings into ICAP also, since it automatically provides diversification, as well as fund management (including trading) services for a relatively small level of expenses, and for a significantly lower fee with better performance than Public Mutual equity trusts.
ICAP vs PBBANK vs KLCI Performance
The green line is ICAP.
The red line is PBBANK.
The yellow line is KLCI.
All 3 are compared over the same time period, which is from Oct 19, 2005 (or 2.75 years), when ICAP was first introduced to Bursa.
We can see that ICAP has performed very, very well amongst the three vehicles. ICAP total returns over the 2.75 year period is nearly 80% or around 23% annual compounding rate of return. This is a superb result.
PBBANK is also very, very good - nearly 60% over 2.75 years, or around 19% annual compounding rate of return excluding dividends. And if include dividends, the returns should be comparable to ICAP.
The KLCI however is a relatively poor performer - it only managed 27% over 2.75 years, or around 9% annual compound rate of return. Whilst this is very good compared to Fixed Deposits, we must bear in mind that the last 2.75 years was an extremely good year for Bursa, and I don't expect this same level of performance to be repeated over the next 2.75 years. In fact, it will definitely struggle to even earn double the F.D. rate annually (7.4% to 8% p.a.), over the next 3 years.
And we observe that ICAP (and to a lesser extent PBBANK) has large volatility too. For example, if one has invested $10,000 at the start, then, this amount would have grown to nearly $28,000 at its peak, but then, fall to $18,000 approximately. This means one must be willing to give up $10,000 as a Buy and Hold investor. But for someone who is very busy with 2 careers, and does not have an interest in monitoring their investments, this is an unavoidable cost. We can't have everything in life.
Public Mutual Performance
Public Mutual Equity Fund also outperformed KLCI. However, it only managed 46% over the same 2.75 year period. This translates to less than 15% per annum return, over what is arguably one of the best 2.75 year period in Bursa.
My belief is that this is the maximum that one can reasonably expect. In fact, after taking out charges and expenses, it will be less. Depending on time-frame, it could be 14% or 13% or less. I ass-u-me these are based on net prices, and not gross unit prices, i.e. the maximum possible returns. I expect actual returns to be less than shown in the graph above.
So, if we compare Public Mutual Equity trust over the same period with PBBANK shares and ICAP, it's clear that the latter 2 are better performers with lower fees. Of course, the past does not guarantee the future, but both vehicles seems to be better long term investment.
My Allocation thoughts between the 2 - perhaps consider something like 33%-50% PBBANK, 50%-67% ICAP. Or something similar.
My friend was also interested in investing in China funds and enquired about Public Mutual China funds. We compared some graphs and found that since inception, Public Mutual China funds have under-performed their benchmarks. In fact, on absolute return basis over the same period 2.75 years, the China funds have underperformed KLCI. It's obvious to me that Public Mutual expertise is in the local sharemarket, and when they venture to China, they do not appear to demonstate the same level of relative competency. I leave it up to him to decide whether he still wants to invest in China, but if he does, then, I advise him to keep it small. E.g. 10% China, 40% PBBANK, 50% ICAP or something like this. Note that since I am not a licensed advisor, I do not want to give him specific number, but leave that to his discretion.
The Method - When / How to Buy?
All 3 are compared over the same time period, which is from Oct 19, 2005 (or 2.75 years), when ICAP was first introduced to Bursa.
We can see that ICAP has performed very, very well amongst the three vehicles. ICAP total returns over the 2.75 year period is nearly 80% or around 23% annual compounding rate of return. This is a superb result.
PBBANK is also very, very good - nearly 60% over 2.75 years, or around 19% annual compounding rate of return excluding dividends. And if include dividends, the returns should be comparable to ICAP.
The KLCI however is a relatively poor performer - it only managed 27% over 2.75 years, or around 9% annual compound rate of return. Whilst this is very good compared to Fixed Deposits, we must bear in mind that the last 2.75 years was an extremely good year for Bursa, and I don't expect this same level of performance to be repeated over the next 2.75 years. In fact, it will definitely struggle to even earn double the F.D. rate annually (7.4% to 8% p.a.), over the next 3 years.
And we observe that ICAP (and to a lesser extent PBBANK) has large volatility too. For example, if one has invested $10,000 at the start, then, this amount would have grown to nearly $28,000 at its peak, but then, fall to $18,000 approximately. This means one must be willing to give up $10,000 as a Buy and Hold investor. But for someone who is very busy with 2 careers, and does not have an interest in monitoring their investments, this is an unavoidable cost. We can't have everything in life.
Public Mutual Performance
Public Mutual Equity Fund also outperformed KLCI. However, it only managed 46% over the same 2.75 year period. This translates to less than 15% per annum return, over what is arguably one of the best 2.75 year period in Bursa.
My belief is that this is the maximum that one can reasonably expect. In fact, after taking out charges and expenses, it will be less. Depending on time-frame, it could be 14% or 13% or less. I ass-u-me these are based on net prices, and not gross unit prices, i.e. the maximum possible returns. I expect actual returns to be less than shown in the graph above.
So, if we compare Public Mutual Equity trust over the same period with PBBANK shares and ICAP, it's clear that the latter 2 are better performers with lower fees. Of course, the past does not guarantee the future, but both vehicles seems to be better long term investment.
My Allocation thoughts between the 2 - perhaps consider something like 33%-50% PBBANK, 50%-67% ICAP. Or something similar.
My friend was also interested in investing in China funds and enquired about Public Mutual China funds. We compared some graphs and found that since inception, Public Mutual China funds have under-performed their benchmarks. In fact, on absolute return basis over the same period 2.75 years, the China funds have underperformed KLCI. It's obvious to me that Public Mutual expertise is in the local sharemarket, and when they venture to China, they do not appear to demonstate the same level of relative competency. I leave it up to him to decide whether he still wants to invest in China, but if he does, then, I advise him to keep it small. E.g. 10% China, 40% PBBANK, 50% ICAP or something like this. Note that since I am not a licensed advisor, I do not want to give him specific number, but leave that to his discretion.
The Method - When / How to Buy?
Using Public Bank as an example (and similar examples can be applied to ICAP), I showed him another price chart in my study, where PBBANK recent low was seen at $9.95 after falling from a peak of $12 on 12 May 2008.
The goal then is simple. Just patiently wait until PBBANK share price falls below $9.95. When this happens, wait until the price falls to find bottom. E.g. wait until it falls to say lower third or lower quarter or even lower over the past 52 weeks. Only then, consider making the first out of many purchases.
In other words, do nothing until the price makes a new lower low. We can't catch bottoms, but I believe the odds are very good that one will be able to buy lower than $9.95 sometime this year. Patience is the key.
Money Management - How Much to buy & sell
In the near term, the question of selling does not arise, as he intends to be a very long term investor. It is only a question of how much to buy each time, since the savings is approximately monthly, aside from the initial investment.
I suggested that since he doesn't have experience in timing the market, and market timing is difficult even for experienced investor, he is better off spreading the buys from his initial lump sum too say over 6 to 12 months, in the same timing as his monthly savings.
So, for the immediate term, buy when the price first make a new low. Let's say this happen in October at say $9.50. Then, when November comes, take a look at the price and if it's below say $9, then, buy as planned, but if it's $10, then, just wait and carry that over to the next month or until a lower price than $9.50 is seen. However, PBBANK is a generally well supported stock, so, any knee-jerk fall is likely to only be short-lived for a few days in general ...
Of course, there is a risk that the price might never fall below $9.50, but in the current bear market, the odds are hugely stacked against it - buying opportunities at lower prices are more likely to occur than not occur. And in the process of waiting, if he finds himself with too much cash, then, just use a % of that to buy at a lowish price- e.g. use 20% or 25% to buy at the low of the week or something like that, and keep the rest in cash. And since he expects to be a monthly saver over the next 10 years (he has separate emergency funds and access to his parents as well), he can afford not to hold more than 3, 6 or even 12 months savings in cash. I advise him to review from time to time his financial circumstances, since he may one day get married, have a family, have a mortgage, etc., with additional financial commitments, even though at present this is not an issue under consideration.
The Mind - Dealing with Volatile Prices, Fear, Greed, etc.
We can't cover everything, but some advice are ... for PBBANK and ICAP only, treat lower prices as a friend, since he is a long term investor. Low prices are usually opportunities to buy on the cheap.
For example, let's say the founder of PBBANK passed away, and the share price drops by 30%. To me, that's knee jerk reaction, and is a great opportunity to buy. I would use 33% of my cash to buy for every 10% price drop, or something like that. It can be fine-tuned, but the general idea applies. Try to buy at low prices.
After you buy, there is no need to watch the price every day. Once a week is more than enough. Unless you have spare cash and looking to buy. Then you might want to monitor more regularly, say everyday for a week before purchasing. This will happen every month.
Watch brokerage. $5k per quarter is not a particularly large amount, although $3k per month is the bare minimum. After the first 6-12 months (including the initial investment), the future savings may / may not be large enough to warrant monthly purchases (assuming no further increase in savings). As a very general comment, one wants to purchase shares at around $3k minimum, to keep the brokerage small. This can be fine-tuned, as his future savings may be higher a year later.
Try not to pick tops to sell. I walked through with him some live examples, picking a random date in the past, and then walk through the day-by-day experience, and asked him to try to pick tops as we roll forward one day at a time. It is interesting that he couldn't pick tops at all from this exercise since he has no training. But it gave him a good "live" example of the volatility involved, the feeling of "euphoria" as price rise and the "fear" as price falls (after a while, when he is absorbed in the process, you can see his greed and fear). In his case, better to just ignore watching the stock market, except the few times when he wants to buy.
Discipline. Don't touch the monies once invested. Especially when prices are low. Don't invest more than agreed upon. Don't be greedy and over-invest. Stick to the plan even when times are good years down the road. (He might check up with me again after he decides to invest).
Take an interest in PBBANK and ICAP fundamentals. E.g. the Annual Reports, and the Quarterly Reports in Bursa. Over time, once he has bought, I expect him to automatically be interested in the 2 counters that he owns whether these are on the news, rumours, tips, etc.
Some Concluding Remarks
It is always difficult to give advice to beginning investors on how to invest to earn more than F.D. The risks are great that they could lose money. My advice remains which is to keep it in F.D., or give the money to a professional manager to invest.
The problem of course is that with high real inflation (not official figures), F.D. rates simply does not keep up with that. If we do nothing, it means our money erodes in purchasing power as a matter of default.
Public Mutual is one of the best unit trust managers in the country. They do decent job. The question in my friend's mind is can he do better?
In my own personal opinion, investing in PBBANK and ICAP in a "balanced" manner (say 33% to 50% PBBANK, 50% to 67% ICAP) in this specific example for my friend who has set monies aside for everything else that he can think of, and to only invest surplus funds that he doesn't expect to touch over the next 10 years or longer, seems like not a bad proposition. On paper, both beats Public Mutual trusts hands down (19%-23% vs 13%-15%) based on historical returns. Of course, the past does not guarantee the future.
The final decision is up to him. I do not receive any hard nor soft commissions from either PBBANK nor ICAP nor from my friend. He's a friend, it's just a chat between two friends, and I don't dream of receiving any money at all from him. If he didn't talk to me, his monies would be retained in either F.D., or cash or ... ?
Disclaimer 2: As usual, buy, hold, sell, at your own risks.
Good well reasoned article, Seng. Thanks.
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