Auld Mac sees unit trusts as one way to conquer life's financial handicaps
THIS is the first in an occasional series of conversations in which an old hand provides basic answers to frequently asked questions about fund investing.
Auld Mac is in his usual seat at the golf-club bar, savouring a Bell's whisky. No one knows how long he has been in Hong Kong, but it has been long enough to have raised a family. A Scottish accountant, he's known as a shrewd fellow who nurses his money as carefully as his whisky.
Young Bill, an American-born Chinese recently returned to his parents' homeland, is anxious to improve his golf handicap and build up some capital.
'Good round, Bill?' Mac asks.
'OK, thanks, Mac. Did well on the first nine, but coming back, it fell apart again. Say, is that your Jaguar out there? Nice car,' Bill says.
'Aye, it's a good model.' 'You must be doing well to afford a car like that?' 'Och, I cashed in some of my investments.' (Mac is married to a Hong Kong lady and long ago gave up the Western aversion to talking about personal finances.) Bill looked surprised.
'You made a profit? I thought the past 18 months had been a disaster for investing.' 'Depends where you invest, laddie. I never put all my eggs in one basket. Global investment in unit trusts, that's been my game.' 'What are these unit-trust things? Are they the same as mutual funds?' 'Well, they are and they aren't. There are some legal differences. Mutual funds are based on the American legal system; some people call them open-ended funds. Unit trusts are more British. They both do the same thing.' 'And what's that?' 'They spread your risk. A unit trust is just what it says. It's a trust which holds units. You put your money into a pool and get units according to how much you put in. The company which manages the trust invests in individual shares - they do the stock-picking for you. Believe me, picking stocks in Hong Kong is one thing, but picking stocks half way 'round the world is something else again.' 'So what do they invest in?' 'Almost anything you like. It's your choice. You can buy units in a trust which invests in Hong Kong equities or one which invests in bonds around the world. There are regional funds, sector funds. But each manager has to stay within the stated objectives of the fund. You have to read the prospectus, y'know.' 'How much does a unit cost?' 'It varies according to the trust. Each unit price is based on net asset value, which varies according to the value of the shares in the trust. Divide the assets by the number of units, and that's the price. There's often a minimum investment, too.' 'How do I know what they are worth once I have bought?' 'Prices are published every day. Look in the South China Morning Post. It's got a comprehensive list.' 'Hmm. Do I have to pay a commission?' 'Nothing's for free in this world, laddie. There are funds which charge you when you buy - that's called a front-end load and can be up to 8 per cent. Others don't charge you at the beginning. Everybody takes an annual management fee. Working out the expense ratio, your total cost, can be tricky.' 'Are they safe?' 'If you mean that you definitely won't lose any money - no. No investment is cast-iron. All funds are required to point out that past performance is no guide to future returns and the fund can go down as well as up. Ask anybody who bought Asian funds two years ago.
'But if you mean will they scarper with your cash - unlikely, very unlikely. Funds sold in Hong Kong are authorised by the Securities and Futures Commission. Tough cookies, that bunch. They keep an eye on the management groups. Pick an authorised fund, and you won't have any problems with your money disappearing in suitcases.' 'So what should I buy? Which one will make me the fastest profit?' 'Probably the same one which will give you the biggest loss. This is a risk-reward game, Bill. The trick is to work out what it is you want from your investment - rapid capital growth, steady appreciation or income. Depends on your circumstances.' 'So what's your advice? You're the canny one, the one who can afford a Jaguar.' 'Stop lifting your head when you drive off. You're slicing too much.' Ray Heath is pleased to receive general queries about investing in funds, but he cannot offer investment advice or recommendations.