Most of my friends who bought Unit Trust didn’t really make money. I personally considered that a weird phenomenon as most of them held their holdings for more than 3 years and are still in the red. Compared to me, most of my holdings are held in single undiversified companies that gave me decent returns. Today I make a comparison with 2 random funds and my largest single stock holdings, SPH.
I will compare the risk and return during the past 4 years.
I am using 2 funds which most of my friends invested during the height of the crisis. They are First State (FS) Asian Growth and First State (FS) Regional China.
During the peak of their price in end Oct 2007, FS Asian Growth peaked at 1.93; FS Regional China peaked at 2.35.
Today I checked their prices; they are at 1.73 and 2.0021 respectively. This is to say an investor who invested at the peak of the fund prices would still be suffering a loss of 10.4% for FS Asian Growth and 14.8% for FS Regional China.
There were no dividends for the above 2 funds.
What was the price for SPH in 30 Oct 2007? It was 4.58. The latest closing price was 3.84. The same investor who bought SPH at the point when the above funds peaked will be suffering a loss of 16.2%, before dividends. What were SPH dividends during the last 4 years?
Assume the investor bought SPH in Oct 2007 and held it till today, his dividends would be as follows:
2007: 19 cents (not accounting for May 1H dividends)
2008: 27 cents
2009: 25 cents
2010: 27 cents
2011: 7 cents (1H only)
Total dividends: $1.05
Thus the same investor who bought SPH at the peak of the fund prices would have recouped his capital and made a modest gain of 6.8%. This is not considering he would have gained interest on his dividends.
Many readers would point to the fallacy of my argument. What if the investor bought SPH at the peak of 4.72 in 10th Dec 2007 (just before it goes dividend XD)?
His cost of purchase after accounting for the dividends would still be at $3.67, his profit would still be at 4.6%.
Again academia would argue it is not fair to compare a single stock to mutual funds. I could have taken much higher excessive risk to achieve better returns. Let’s calculate it on the basis of risk adjusted returns.
In order to simplify my calculation, risk free rate is assumed to be zero and volatility is calculated based on peak to trough deviation from mean, 3 years average.
FS Asian Growth: 3 year high 1.85, 3 year low 0.93. Average 1.39, 33% volatility
FS Regional China: 3 year high 2.17, 3 year low 1.02. Average 1.595, 36% volatility
SPH: 3 year high 4.72, 3 year low 2.35. Average 3.535, 33.5% volatility
Volatility is assumed to be deviation from the average price. Though not accepted by many academias, it is a rough way to get risk adjusted returns for comparison purposes.
Thus the Sharpe ratio, which gives us the excess return for every unit of risk taken are as follows:
FS Asian Growth: -0.32 (negative returns for every unit of risk taken)
FS Regional China: -0.45 (higher level of negative returns for every unit of risk taken)
SPH: 0.13 (positive Sharpe ratio that states that every unit of risk taken yields 0.13 unit of excess returns)
Some observations, disclaimers and fallacies in my little research report:
Unit trust sales charge and brokerage charges are assumed to be zero.
This is not to discourage the purchase of Unit Trust. I personally have FS regional China in my portfolio as well. This is just to compare (unfairly) SPH with two of my best performing Unit Trusts in my portfolio.
Volatility calculated though consistent is not correct. Sharpe ratio is a function of volatility and different fund house calculate volatility differently, perhaps to their advantage. Some may take minute/day/weekly/monthly/yearly volatility ratios to generate their financial ratios. I use my in house SBC volatility calculation, easy to understand and meaningful for comparison.
As long as returns are negative over the given period, Sharpe ratio will be negative. Most funds give negative Sharpe ratio over 3-5 years period anyway.
The fact is I am still holding every single share of SPH I bought in 2007 and some were added, off loaded along the way. Dividends reinvested in other counters gave pretty decent returns during the crisis where REITS were near the bottom.
If I have used some of my worst performing stock e.g. Hong Leong Finance or DBS (fortunately both less than 20k investment), the above funds will be doing much better.
If I have used Aberdeen Pacific equity for my comparison, SPH would have fared much poorer.
Fact is, SPH did give better risk adjusted returns over most funds available in Singapore.
Diversification does not provide you better returns or lesser risk than a single stock, at least in the above case study.
I still prefer my current way of investment style. Income concentrated with dividends reinvested in different counters for more income. It has buffered a lot of my losses and added a lot more thrill and returns in my investment journey.
I would still be investing in Unit Trust mainly using CPF funds. I will still actively look out for dividend blue chips to grow my income to a day that I do not need to work for a living.
And my apologies for keeping my faithful readers the long wait for a single post.
Busy with work lah!
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