Ever had bullish outlook for a geographical region or industrial sector but held back from investing because you were clueless on the right stocks to pick? Or had you already identified the stocks but were shut out from investing due to the high initial outlay? For retail investors, such predicaments are not uncommon and one option would be to consider unit trust investing.

For the uninitiated, a unit trust allows investors with similar investment objective (e.g. capital growth or income distribution) to pool money together to participate in the debt, equity, money and derivative markets. This pooled sum is put under the care of professional fund managers who invest in a portfolio of assets in accordance to the fund’s stated investment approach.

One benefit of unit trust investing is the expertise of fund managers that is usually available only to high net worth individuals and large institutional investors. Specifically, the fund managers carry out thorough research on the economy as well as industries and companies to develop strategies to achieve the fund’s objective.

Furthermore, given the pooling of money from different investors, the fund managers have a sufficiently-large sum that can be allocated to form a diversified portfolio of assets. Risks, therefore, are spread across industries leading to meaningful diversification. In other words, unit trust investing allows retail investors who have only small initial outlay to enjoy diversification that was previously unattainable.

Such benefits, however, come at a cost in the form of initial sales charge and annual management fee. Also, as different fund managers apply different investment strategies, unit trusts in the same category could see disparate returns. For example, among 19 Singapore equity funds listed on the Morningstar website, Nikko AM Shenton Horizon Singapore Dividend Equity Fund has a high one-year return (in USD terms) of 33 percent as of end-February while HSBC Global Investment Funds Singapore Equity A Inc (SGD denominated) has a low 3.8 percent as of end-February. Hence, extra efforts that are put to identify the crème de la crème could be well-rewarding.

For the Morningstar Singapore Fund Awards 2013 that will be held on 19 March, global independent research provider Morningstar will give recognition to unit trusts and unit trust house that have added most value to investors. Notably, the award is a quantitatively-driven programme that accesses unit trusts within the context of a relevant peer group. While its methodology emphasises on one-year risk-adjusted returns, it also takes three- and five-year risk-adjusted returns into consideration. This will ensure awards are given to unit trusts that have outstanding one-year performance as well as the ability to post strong long-term results without undue risk. Also, Morningstar’s research analysts will conduct a qualitative check to remove any funds that they believe will not continue to outperform in the future.

As for which unit trusts will come under the limelight and deserve closer attention, stay tuned as we unveil the winners!

With a long-standing interest in economics and finance, Daxx is the Senior Research Editor of Shares Investment .

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