17 August 2015

Building the Kids Education Funds with Unit Trust

For my children's Education Funds for tertiary education, I have been injecting monthly contributions and their annual Ang Pows (Chinese New Year red packets) into their respective portfolios using Unit Trusts. Both portfolios are similar. So I shall use one of them for illustration.

Broadly, the portfolio is evenly diversified across (a) Asian small-caps, (b) Global Emerging Markets (GEM), (c) Asia Pacific, (d) Europe, (e) US, (f) Singapore, (g) Short-term bond, and (h) Cash.

This has been going on for about 10 years. Guess how have the various Unit Trusts performed over the years? The specific funds are as shown below, with annualised returns over 1, 2, 3, 5 and 10-year horizon.

Fund Name 1 YR 2 YR 3 YR 5 YR 10 YR
Aberdeen Asian Smaller Cos -5.74% -0.23% 6.34% 6.26% -
Aberdeen Global Emerging Markets -5.73% 0.37% 1.34% 2.36% 6.50%
Aberdeen Pacific Equity -3.45% 1.05% 4.41% 4.61% 6.55%
Cash Fund 0.37% 0.24% 0.19% 0.18% -
Deutsche Singapore Eqty Fd -6.60% -1.57% 2.58% 3.46% 5.79%
Infinity European Stock Index 9.74% 9.15% 14.46% 7.85% 1.98%
Infinity US 500 Stock Index 20.63% 17.14% 19.19% 15.26% 4.26%
Nikko AM Shenton ShortTerm Bond(S$) 1.78% 2.11% 2.27% 2.50% 2.39%

Taking a 1-year view, US and Europe are the top performers at 20.63% and 9.74%. Singapore, Asian small-caps and GEM are the worst performing and are in fact in the red.

Stretching out to a 10-year horizon, Asia Pacific and GEM are actually the top performing at above 6% each. Whereas, Europe and Bonds were the weakest. Even then, they still turned in returns of 1.98% to 2.39%. As the Asian Small-Cap and Cash Fund have less than 10 years of history, their 10-year annualised returns are not available.

What can we observe from the above? While by no means definitive, it does illustrate some points that are often talked about:

1. Markets will have their ups and downs. Diversification across markets make sense as they tend to perform differently from each other, except where there is a massive global crisis. No single fund is going to be the best performer forever. There is no magic bullet.

2. Equities will usually outperform Bonds in the long run but will be more volatile. From above, we see that Bonds and Cash Funds (money market funds) remained positive throughout, but do not vary much over time. Higher risk, higher returns (you can go into the red). Lower risk, lower returns.

3. Over a 10-year horizon, it is unlikely to make losses. Despite the events of the Global Financial Crisis (2008), European crisis (2011) and the recent China meltdown (2014), equities still turned in respectable 1.98% to 6.55% over the 10-year horizon. Unlikely does not mean never though! Time in the market matters.

4. Investing (but know what you are doing!), even with the expenses involved for Unit Trusts, will do better than leaving money in the bank. The banks have been offering less than 2% interest for the last decade (risk free of course, especially the first $50,000).

It is now only a few years away from needing the money for the kids' tertiary education. Time to apply the brakes and exercise caution. There is no longer room for "time in the market". In the years ahead, I will be shifting more of the equities into cash funds, towards a 20:80 ratio. There is no need to adopt a high-risk, high-return profile anymore. To be precise, can't afford to.

Kids education revisited - back to the future
Endowment plans for child education
Misadventure of the education savings funds

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