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Facts About The Fund
To explain the differences, we first need to look at the characteristics of the most common types of unit trusts:
Types of Unit Trusts
Unit Trusts (or funds) are typically categorised by the assets they invest into, for example:
a) Equity funds invest in companies listed on stock exchanges.
b) Fixed Income funds typically invest in bonds and give a fixed payout to
investors.
c) Balanced funds invest in both equities and fixed income in a fixed or
varying percentage e.g. 50% in equities and 50% in fixed income.
Specialised Unit Trusts like commodities, property, etc, are essentially equity funds as they invests in companies related to that particular sector.
Seldom Known Fact
An important but seldom known fact is that typical funds cannot hold more than a fixed percentage of cash at any one time (to meet normal redemptions). Under normal market conditions, this is unimportant as investors expect their monies to be fully invested to try and maximise market opportunities.
Why is this important?
This fact becomes critical in extreme market situations like what we witnessed recently in the 2008 financial crisis when equity markets fell (meaning investors are selling). At such times, the fund manager is only able to sell up to his maximum cash level (typically 5-10%) and can do nothing else. Of course you can sell out of the fund, but would you know when and would you be selling at the worst possible time?
Of course fund managers always try to add value by seeking out good stocks that they think will outperform the index. Unfortunately when markets drop in extreme situations like in 2008, it takes a lot more effort and time to get back to where they were prior to the market collapse. E.g. If the fund were to drop 50% (as did quite a number of equity funds in 2008), they would need to rack up gains of at least 100% just to break even. So, that is why an important investment principle is not to lose money. However, the fund manager's hands may be tied in that he is unable to liquidate his equity holdings due to the stated mandate of the fund.
So, why is this Fund different?
In recognising this problem that fund managers face, we have removed the restriction on how much cash the fund manager can hold and given them a free hand to protect the asset values as best as they can when faced with such extreme market conditions. In other words, this fund can sell all of its equity and bond holdings (if the market situation calls for it) and hold up to 100% of its assets in cash should the manager deem that this is the best strategy to protect the fund's assets.
On the other hand, if the manager sees an upward trend forming in equities (or other asset class), he is able to invest up to 100% of the assets to take advantage of the market cycle.
It is also a known fact that different asset classes outperform at different times of the economic cycle. As it is generally difficult for an average investor to be able to keep abreast of the markets and know which is the best asset class to invest in, he may want to leave that decision to the fund managers (provided of course that the fund mandate allows it).
In summary, this Fund's dynamic strategy seeks to maximise potential returns during stronger growth and recovery periods, while minimising risks during difficult stages in an economic cycle.
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