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People often say: “Low risk, low return; high risk, high return.” Is it a truth? Let’s us examine it through an example of the investments made shown below.
Fund CAT is the best performer in Malaysian Unit Trust (Mutual Fund) industry for the period of more than 5 years as per 23rd June 2006. In the stable of around 400 funds to choose from, whether it is equity fund, bond fund, mixed fund, money market fund and so forth, it is the fund that gives the best return to its unit holders.
Fund CAT performance from 25th June 2001 to 23rd June 2006 is 113.04% which translated into 16.33% Compounded Annual Growth Rate (CAGR). One should notice that 2001/02 was the most bargain market since 1999. When count from an inception date of Fund CAT, which is in 1999, the fund performance is 90.5%, which translated into 9.67% CAGR.
How about placing all investment in a single stock? Is it really a high risk investment? Take an example of RLQ. RLQ is a resource-based company and its core activities are in 3 categories, namely Marine Products Manufacturing (MPM), Crude Palm Oil Milling (CPOM) and Integrated Livestock Farming. 
In the same period, RLQ generates a return of 119.27%, which is 17% CAGR. Bear in mind that RLQ is not the best performer of the market. Furthermore, since RLQ main businesses are in resource-based industry, any negative happenings would have impact to its performance. In the period mentioned, RLQ experienced few incidences such as high price of raw materials such as soy bean meal and corn meal, 2 bird flu threats and tsunami which have a huge negative impact to its underlying businesses. Nevertheless, it gives a better performance compared to Fund CAT which adapts a diversification policy.
While at a glance, Fund CAT is a more low risk investment made since its investments are well diversified into various sectors, money market and cash. At the same time, investment made on RLQ seems pose a high risk to its investors since RLQ businesses are in resource based industry, meaning that any negative happenings in the industry would cause negative impact to RLQ bottom line and ultimately to its investors. Nevertheless, anyone who chooses either Fund CAT or RLQ as his investment would reap similar return to his nest egg. One should always remember that investment made through rear mirror would not guarantee his investment success. When an investment result is most of the time relied on capability of the investment manager, it is worthwhile to aware any changes in fund’s investment team members. They are the one who decide the investment result of yours.
Note: As we are investors with long term perspective, any investment with less than 5 years is meaningless. Thus, we only use investments with minimum 5 years period for comparison. Remember, investment is a marathon, not a 100 meter race.
Excerpts from: http://www.theedgedaily.com/
“The Malaysian equity funds have posted "respectable returns" over the mid- to long-term periods, the Federation of Malaysian Unit Trust Managers (FMUTM). It said based on Standard & Poor's report on the fund performance as at July 28, 2006, the average returns for Malaysian equity funds for the seven-year period was 24%, five-year period 56% and three-year period 26%.”
Period (year) 3 5 7
UT Return (%) 26 56 24
UT CAGR (%) 8.01 9.30 3.12
FD Return with 4% CAGR (%) 12.49 21.67 31.59
As we can notice from the table above, by placing your money in unit trust (mutual fund) investment for 3 years, the return for the period would be 26% and when it translates to Compounded Annual Growth Rate (CAGR) which is 8.01. Similarly, for the period of 5 and 7 years, the return is 56% and 24% respectively and for CAGR for both, the former is 9.30% and the later is 3.12%. What will you get if you place your investment in “risk-free” Certificate of Deposit (CD) or known as Fixed Deposit (FD) in English Commonwealth countries? With 4% return annually, the figure will shock us!! For the period of 7 years, this “risk-free” investment performs better than unit trust (mutual fund) investment with more than 7%. When handling your hard-earned monies on hoping for better value creation by those fund managers, it seems that they do not fulfill your hope and as they promise – create value to its investors.
While the promoters of the unit trust investment always brainwash us “look for long term”, “let professionals handle your investment” and so forth, the reality is so cruel – it creates no value at all to the investors for longer term. When the promoters once again claim for the “outstanding” performance for 5 years period, bear in mind that the period is started from the 2001/02 market where it was the lowest. The best fund manager is not who gets the highest return when it is bull market, it is who gets the best result when it is bear market. It reminds me once again a famous quote by Warren Buffett: “It’s when the tide down, only you know who is swimming naked.”
When mutual fund (unit trust) shows its performance, it is in Bid-to-Bid performance. For example, when it shows 10% return per annum, it indicates 10% return per annum of its Bid Price, ie: Bid Price on 2nd January 2007 is $ 1.10 as compared to Bid Price on 2nd January 2006 of $1. Bear in mind that return on Bid-to-Bid is NOT Return On Investment (ROI) of the unit holders. Let’s consider 10% Compounded Annual Growth Rate (CAGR) where Fund KSA managed to achieve for 5 years, what will the investors get if he decide to cash out at the end of 5years:
Year OP ($) BP ($) BP-BP (%) ROI (%) Diff (%)
0 1.0000 0.935 0 0 0
1 1.0835 1.0131 8.35 -5.28 NA
2 1.1740 1.0977 17.38 2.63 561.09
3 1.2720 1.1893 27.20 11.20 142.83
4 1.3782 1.2886 37.82 20.49 84.61
5 1.4933 1.3962 49.33 30.55 61.48
John invested $ 10,000 at the beginning of 5 years period. He does not cash out until the end of the period and at the same time, he reinvested all dividends. After 5 years period, Fund KSA announces that it achieves 49.33% return (that is in term of Bid-to-Bid). When John sold all his units, he found out that he only manage to get $ 13,055 (1.3962 * 9,350 units) instead of $ 14,933. His real Return On Investment (ROI) in term of investor’s perspective is 30.55% instead of 49.33%, which is 61.48% difference. You might ask where is the money gone? Remember, there is always costs involved to feed the interested parties, ie: 6.5% Sales Load and 1.5% Annual Management Fee.
People often say: “Low risk, low return; high risk, high return.” Is it a truth? Let’s us examine it through an example of the investments made shown below.
In the same period, RLQ generates a return of 119.27%, which is 17% CAGR. Bear in mind that RLQ is not the best performer of the market. Furthermore, since RLQ main businesses are in resource-based industry, any negative happenings would have impact to its performance. In the period mentioned, RLQ experienced few incidences such as high price of raw materials such as soy bean meal and corn meal, 2 bird flu threats and tsunami which have a huge negative impact to its underlying businesses. Nevertheless, it gives a better performance compared to Fund CAT which adapts a diversification policy.
