AN EMPIRICAL ANALYSIS OF UNIT TRUST PERFORMANCES IN SINGAPORE

Abstract

In the past few years, we have seen phenomenal growth rates in the fund management industry, largely due to the fall in interest rates and the government's efforts to promote Singapore as an asset management hub. The industry saw a 35.6% growth for the year 1999, with growth in the subsequent years expected to reach 40% per annum. However, past studies have shown that fund managers generally have poor performance track records. The management fees charged by local funds are also found to be relatively high. The growth in the number of asset management firms and unit trusts in the industry did not lead to lower management fees and a more performance-based reward system. In addition, the required information disclosure of unit trusts is found to be inadequate for the public to assess the actual performance of fund managers. As such, this study sought to obtain evidence of unit trust performances in order to examine the justification of their existence and the fees they charge. In addition, I evaluated fund managers' performance before, during and after the Asian Crisis. With the specified objectives, three different time periods in the 90s and 36 equity-based unit trusts were selected for the evaluation, based on weekly observations of unit-trust prices. The unit trusts considered are restricted only to existing local funds with trading activities in Singapore and/or the Asian region. The results showed that fund managers in general performed poorly in security analysis and market timing. However, they performed fairly well in risk-adjusted returns and generally maintained well-diversified portfolios. Analysis also showed little consistency in the performance ranking of the 36 unit trusts. However, there is evidence of repeat performances of some funds, which made it possible to formulate long-term strategies based on their past performances to make abnormal profits. Our results also showed that fund managers could indeed make excess returns above the risk free rate in the medium to long term, despite their poor trading abilities in the 90s. These unit trusts could be an ideal investment for smaller investors seeking sufficient diversification. However, the performance-reward imbalances in the industry suggest that the annual management fees should be replaced in part by performance fees in order to hold fund managers more accountable for their investment decisions. In addition, the government should consider implementing mandatory reporting standards and performance measurements in the industry to keep investors adequately informed. The poor performance of fund managers can be in part explained by the lack of talent in the industry. But due to the unique properties unit trusts can offer, investment advisors and insurance agents alike, are actively recommending them to be included as part of their clients' investment mix. For their part, banks can also consider offering part of their existing credit facilities to their unit trust investors to ease their liquidity concerns. This will go a long way in promoting unit trusts as the ideal long term investment for the common Singaporean.