Why Investors Lost Money from China Equity based Unit Trust Fund?

In some of my previous posts and reviews about unit trust investing, I've stated that many investors got burnt investing into China Equity Unit Trust Funds. Despite the launch of these funds somewhere between 5 to 6 years ago, many investors whom invested into them during launching have yet to regain their principal investment amount.

In today's post, I intend to look into the history of China Equity based Unit Trust Funds, what caused the losses and finally how the losses could have been prevented.

Background

Being the largest unit trust company in Malaysia, Public Mutual Berhad (PMB) was the first to launch Public China Select Fund (PCSF) on the 5th of June 2007. This fund offer investors an opportunity to invest into greater China market such as Hong Kong, China and Taiwan.

Between 2003 to 2007, China's GDP growth grew from 10% to above 14% as shown below:

Leveraging on China's double digit growth, PMB was able to market PCSF with relative ease to investors. PMB's Unit Trust Consultants had it easy for the facts and figures were available to back their sales pitch. 

By 13th of August 2007 (2 months after launching), PCSF fund size grew to a whopping RM1billion in size! 

The popularity of PCSF lead to growing demands for an Islamic Syariah based China Equity fund as well. Hence on the 20th of November 2007, Public China Ittikal Fund (PCIF) was launched by PMB to cater to the Islam community. 

Rivals unit trust companies such as CIMB and OSK-UOB both launched their own China Equity Funds in December 2007 as shown below:

Fund Name	Launch Date
Public China Select Fund (PCSF)	5-Jun-07
Public China Ittikal Fund (PCIF)	20-Nov-07
OSK-UOB Big Cap China Enterprise Fund	3-Dec-07
CIMB-Principal Greater China Equity Fund	6-Dec-07

All four funds grew aggressively in terms of fund size between 2007 to 2008, indicating the confidence everyone had towards China's economy and growth. Investors were dumping in lump sum cash to invest into these funds, hoping to make fast money while foregoing the basic principal of unit trust investment, which is long terms investment. 

The Downside

An excerpt from an article by the China Digital Times dated 8th December 2008 outlined what happened to the China after 2008:

After starting 2008 with a double-digit growth rate, substantial trade surpluses, and over a trillion dollars in foreign reserves, it took almost half the year before China fell victim to the global financial crisis. At first some believed China might be immune; however, as banks began to collapse in the United States and Europe, China quickly found itself drawn into the financial mess.

When the U.S and Europe fell into the credit crisis earlier this year, they were forced to cut back on consumption, which fueled a massive decrease in demand for Chinese imports. China was already experiencing a economic downturn, and the lack in demand from abroad meant factory closures, resulting inhigh job losses all over China. Guangzhou, a major manufacturing town, lost tens of thousands of workersin 2008, forcing citizens to return to their home in the countryside. Dongguan, and the southern Pearl River Delta, also lost thousands of workers. Suddenly the great engine of China was slowing.

However the direness of the situation were already showing between 14th January 2008 to 23rd January 2008 when the Shanghai Stock Exchange lost almost 1000 points. But then again, how many consultants would have taken the initiative to warn investors to exit their holdings? In fact how many consultants would have predicted that by June 2008 the world was facing a global financial crisis?

Gains that investors enjoyed since the launching of PCSF were wiped out by March 2008. The same can be said for the 3 other funds launched later. 

To better illustrate the situation, let's take a look at the Shanghai Stock Exchange Index between 4th January 2007 to 24th June 2010 and the launching dates of all four China funds.

Click to Enlarge

Performance of all four China Equity Funds as of 31st May 2013

If you've invested lump sum into any of the fund on launching date, none have yet to return your principal investment amount as shown below:

Fund Name	Fund Size (RM - million)	Returns Since Launched
Public China Select Fund	808.74	-31.23%
Public China Ittikal Fund	397.20	-29.92%
OSK-UOB Big Cap China Enterprise Fund	231.54	-5.84%
CIMB-Principal Greater China Equity Fund	202.66	-9.64%

I don't know whether it is due to poor decision making or lack of experience in the China equity but both Public Mutual funds, PCSF and PCIF are still in the double digit loss zone as of 31st May 2013. 

The oldest China equity fund, PCSF, despite gaining handsomely between launching date to Oct 2007 is the biggest loser among four funds! On the other hand, OSK-UOB Big Cap Fund and CIMB's Greater China Fund have managed to reduce their losses to single digit.

What caused Investors to lose their investment?

The causes can be divided into a 2 main categories consisting of:

1. Human Emotion

• Desire and greed to make fast money by investing lump sum into a newly launched fund.
• Failure to take profit when opportunities were presented especially for PCSF investors.
• Over optimism that China would have continuous double digit growths. 
• Thinking that investing with the biggest unit trust company in Malaysia is equivalent to investing in the best performing fund. The performance figures proved otherwise.

2. Strategy

• Investing Lump Sum is a strategy that only works when the market is bearish. As you can see from the Shanghai Stock Exchange Index, the market was bullish and approaching its peak when China funds were launched. 
• Deciding to invest into China funds with no/historical performance or track record.
• Thinking that unit trust is an investment avenue for making fast money.

Could the losses be prevented or reduced?

Yes, the losses could have been prevented or at least reduced if:

1. Use Dollar Cost Averaging strategy instead of Lump Sum Investing
2. If you insist using Lump Sum strategy, make sure you have additional cash reserves to purchase more units if the market turns bearish. This would help bring down your average unit price.
3. Only invest a small portion of your investment portfolio (if you must) for newly launched funds with no track record.
4. Changing your perception about unit trust. It is not a get rich quick scheme and neither does it cheat your savings. Knowing about unit trust, how it works as well as its risk helps you to make wiser investment decisions.

Cheers and Happy Investing!

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