Sunday, 28 September 2014

Experience with Lifecycle Unit Trusts

When I started investing my Supplementary Retirement Scheme (SRS) funds 7 years ago, it was with several experiments in mind. Firstly, the SRS account adopts a monthly Dollar Cost Averaging investment methodology, as opposed to market-timing for my cash account. Secondly, the SRS funds were invested in an index fund and a balanced fund, as opposed to individual stock selection for the cash account. Thirdly, the monthly investments were split between an index fund and a lifecycle fund, to understand whether lifecycle funds could serve the needs of an investor throughout his lifetime.  

What are lifecycle funds? These are funds whose asset allocations change from aggressive to conservative as time progresses. Using the fund that I bought (UOB GrowthPath (GP) 2040) as an example, the allocation to equities will reduce from an initial 83% (in 2002) to an eventual 20% by 2040. This saves the need for an investor to regularly and consciously adjust his asset allocation as he ages and is less able to take risks. Besides UOB GP2040, there are several other lifecycle funds in this family, namely, GPToday, GP2020 and GP2030. The timeline indicates the year when investors plan to liquidate and withdraw money from the fund. When the timeline is reached, the particular GP fund will be terminated and converted to the GPToday fund, which has an asset allocation of 20% stocks and 80% bonds. The figure below shows the current asset allocation of the various GP funds.

Figure 1: Current Stock Allocation of UOB GP Funds

So, what has been my experience with the UOB GP2040 lifecycle fund? Besides UOB GP2040, I also have invested an equal amount of money in an index fund, the LionGlobal Infinity Global Stock Index Fund, which provides a comparison with UOB GP2040. As you can see from the figure below, UOB GP2040 (blue line) has underperformed the index fund (green line) by some margin, which prompted a review of my unit trust portfolio after 7 years. While some level of underperformance is to be expected as UOB GP2040 does not allocate 100% of its investments to stocks, the level of underperformance have been too much for my liking.

Figure 2: Relative Performance of Index Fund & Life-Cycle Fund

What caused the underperformance of UOB GP2040 compared to the index fund? While part of the reason is due to US stock prices reaching new highs currently, another part of the reason is due to changes to its initial asset allocation. The figure below shows the initial and current asset allocation of the various UOB GP funds.

Figure 3: Initial & Current Asset Allocation of UOB GP Funds

From an initial 83% stock allocation at the time of its inception in 2002, the current stock allocation for UOB GP2040 has fallen to 59% only. Part of it is due to the passage of time as explained earlier. However, another part of the reason is due to the fund manager changing the asset allocation model for whatever strategic or tactical reasons. By right, the asset allocation for GP2040 today should be similar to that of GP2030 10 years ago, since they have the same investment horizon. However, the current stock allocation for GP2040 is even lower than that for GP2030 in 2002, which was around 74%. Thus, the fund manager has moved approximately another 13% from equities into bonds when compared to the initial asset allocation model. Being an aggressive investor, I would have preferred the initial asset allocation model.

What are the lessons to be learnt from this experience? Firstly, the asset allocation of lifecycle funds do not fit all investors who invest in the same fund. Some like myself prefer a more aggressive allocation while others may prefer a more conservative allocation. Secondly, the actual asset allocation may change from the initial asset allocation model. Thus, while lifecycle funds save investors the trouble of having to adjust his asset allocation regularly, they should not be left to run on auto-pilot. There still needs to be some regular monitoring to ensure that the current asset allocation meets the investor's objectives. 

Considering that the current asset allocation of UOB GP2040 no longer meets my objectives, I will probably be selling this fund and switching to an index fund. Despite not being able to accompany me all the way till 2040, investing in this lifecycle fund has allowed me to understand more about lifecycle funds.

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