Friday, 8 March 2013

Top 10 Unit Trust based on Volatility and Sharpe Ratio

Whenever I talk to my friends and colleagues about unit trust investing, the most common question asked is "What is the best performing fund with the highest returns?" It can't be helped that I too asked that very same question when it comes to investing. However, when it comes to investing in unit trust, it is not necessary the highest returns that should be the only consideration. Investors should consider the risk taken for that kiind of returns.

In my previous post, I wrote about the concept of Annualised Volatility and Sharpe Ratio. Both the jargons represent the risk you will face and the worthiness of the risk you are going to take to invest in a particular fund. You can read the post HERE

Today, I decided to look up the Annualised Volatility and Sharpe Ratio of the top 10 Best Performing Unit Trust funds under Category of Equity Malaysia. 

Are all the top ranked funds in Equity Malaysia really worth investing in?

In the table below, I have summarized the top 10 unit trust funds for Equity Malaysia based on:
  • 3 Year Annualised Returns (%)
  • 3 Year Annualised Volatility (%)
  • Sharpe Ratio
Top 10 Unit Trust Funds
(Category : Malaysia Equity)
3 Year Annualized Returns  (%)
(as of 7 March 2013)
3 yr Annualized Volatility (%)
(as of 28 Feb 13)
Sharpe Ratio
(as of 28 Feb 13)
Kenanga Growth Fund
Kenanga Syariah Fund
MAAKL Dividend Fund
AMB Dividend Trust Fund
Public Focus Select Fund
CIMB-Principal Equity Fund 2
CIMB-Principal Equity Fund
MAAKL Al-Fauzan
Hwang AIIMAN Growth
Let's take a look at the table. The highest returning fund over a 3 year period is Kenanga Growth fund at 21.15%. Its Sharpe Ratio is also the highest among the 10 funds. What does all that mean? 

When looking at Sharpe Ratio, we are actually looking at the ratio between the profit you make against the risk you are taking. The derivation is based on the the simple concept of Annualized Returns divided by Volatility. In the case of Kenanga Growth fund, a Sharpe Ratio of 1.91 means for every 1 unit of risk you are taking, you will make 1.91 unit in returns.

However, the Sharpe Ratio is not a direct translation of the profit that you can make. It does not mean that if you invest RM1 in Kenanga Growth fund, you will get RM1.91 in returns!

Let's take a look at CIMB-Principal Equity Fund 2 (CPEF2). The fund's annualised return over a period of 3 years is 14.05%. The Sharpe Ratio for the fund is 1.01 and the annualised volatility is 10.69%. CPEF2's volatility s the highest among the 10 funds and its Sharpe Ratio is the 2nd lowest. What does all that mean?

CPEF2 is an example of a fund that is able to produce high returns yet at the same time exposing investors to high volatility. In a nutshell, the higher the volatility the more thrilling your investment roller coaster ride would be. Price of CPEF2 over the 3 years will fluctuate more frequently (up and down) as compared to the other funds. The main problem faced by investor when buying CPEF2 is the timing of entry. 

If you have RM50,000 to invest, the volatility of CPEF2 makes it difficult for you to time the entry of your purchase and you might end up making less profit if you invest your money when the price is high (due to volatility). 

Still confused?
First ask yourself this, what kind of unit trust investor are you? Try looking at the 3 categories below:

Category A investor: Long term investment (investing consistently by buying on a periodic basis)

Category B investor: Short term investment (has a huge sum of money to buy at low and selling at high)

Category C investor: Long term investment (has a huge sum of money and intend to buy consistently on a periodic basis)

Category A investor:
If you are in this category (normally most of us are), your unit trust investment is on a periodic basis for long term. Your investment mostly comes from monthly contribution of quarterly contribution via EPF. The strategy is to leverage on the concept of 'Dollar Cost Averaging', where regardless of the fund price, you continue to purchase units consistently. When the price is low, you get more units and when the price is high you get lesser. For Category A investor, Annualised Volatility and Sharpe Ratio does not play a much of a role in determining what kind of fund you buy. The highest Annual Returns would be the key decision maker here when it comes to selecting a fund. 

Recommended Equity Malaysia Funds to buy for Category A investor: 
  • The Top Three funds with highest annual returns
Category B investor:
Investors in this category are similar to speculators intending to invest for a short term. By identifying funds has good annual returns, category B investor would look at the volatility of each fund. The more volatile the fund, the better it is as the price fluctuation allows them to buy unit trust at low prices and selling/redeeming the units when it is high. A volatile fund is much more sensitive to market movement. Therefore during a bearish market, the unit trust price falls faster then its counterpart and vice versa. Hence the opportunity to profit is available for Category B investors.

Recommended Funds to "speculate" for Equity Malaysia : 
  • CIMB Principal Equity Fund 2
  • Public Focus Select Fund
  • Hwang AIIMAN Growth
Category C investor:
Investors in this category have a huge sum of money to start investment, after which they would like to consistently contribute on a periodic basis. The investment nature is long term and leverages on the concept of "Dollar Cost Averaging". Category C investor have to be cautious especially when finding a fund to invest their initial large sum of money. 

Making your first purchase in a unit trust fund with a large sum of money when fund price is high could result in dire consequences. The large quantity of units bought at a high price will impact your overall "Dollar Cost Averaging" value at the end of the day. 

Considering that you intend to start your initial investment with a huge amount, you should place effort into finding the right time to make your purchase. If you do not have that kind of time, then it would be wise to go for funds with high Sharpe Ratio and low Volatility. 

Recommended Funds to do your research:
  • The Top Three funds with highest annual returns
Recommended Funds if you have no time to do research:
  • Kenanga Syariah Fund
  • AMB Dividend Trust Fund
By understand the concept of annualised volatility and Sharpe ratio, it has helped me to look at unit trust investing differently. I hope this post has helped you to realized that investing in unit trust is not just about finding the fund with the highest returns.

Just like any other post I have made, all recommendations are based on my knowledge and personal view. The recommendations are not a call to buy or invest. 

Cheers and Happy Investing!

If you like this post, reward me with a tip by:
1. Sharing this article with your friends on your Facebook!
2. Like my Facebook Page
3. Subscribing to me! See the "FOLLOW MY ARTICLES VIA EMAIL" section located at the top left? Just key in your email and click Submit.
4. Searching my blog for other related articles at

1 comment:

  1. Good article. Well done and researched. Recommend read to fellow fund investors.