Why I don't like Mutual Fund/Unit Trust

I am not a big fan of investing in mutual fund in Malaysia, the reasons are as follow:

1. Their return is misrepresenting based on the current benchmark method. Most of the funds benchmarked themselves against KLCI, with dividends excluded. I don't why they never consider the effect of the dividend in calculating the actual return of KLCI, perhaps it's due to the fact that it will complicate the calculation. But as KLCI has a dividend yield of around 3% (see here). This will greatly impact the return of KLCI presented in the long run. 

For example, the KLCI index value is around 1751 in 29th December 2014, on 27th December 2019, the index value is around 1610.61. If you calculate the KLCI return based on the index movement around, you get a value of -8.02% or annualized to be -1.66%. However, the index value is just representing the price movement of all 30 constituents stocks, and stocks pay dividends that don't show up in the index. so if we assume KLCI pay an average dividend of 3% over the past 5 years, the actual return of KLCI would be 1.34% per annum or annualized to be 6.89%. 

2. You cannot compare yourselves to the looser only, you need to benchmark against the risk-free option. KLCI was performing badly for the past five years due to a variety of reasons: Impact of Crude Oil price crash and fall in CPO price, a badly managed economy hampered by GST & SST, slow-growing banking industry profit due to increasing capital requirement, and declining profit in the telecom industry, and the exit of foreign capitals following strengthening of US Dollar. Looking from hindside, while a wise move for the investors will be not investing in KLCI at all, they always have a risk-free option at their disposal, which is investing in Fixed Deposit or Government Bond. For the record, the last 5 years the Malaysia 10Y Government Bond Yield average is around 3.8% (see here). That means an investor can invest risk-free and earn an estimated return of 20.5% over the last five years. I don't think many of the mutual funds in the market can beat that. 

3. When computing short term and middle term investment, they always omit the entry charge. 

Take Public mutual growth fund, for example, the publicized 5 years return is 13.17%. But they have a sales charge as high as 5.5%. So if you invest 1 million 5 years ago, your actual return is only 6.84%. 

4. Past performance does not guarantee the level of future returns. This is the excuse clause for lackluster fund managers. But the irony is that it is the long term past performance that the fund is advertising to the public, lure investors into investing in the fund, and justify the management expenses. In other words, a fund manager who made some good/lucky bets in the past (especially during and after the 2009 global financial crisis), can continually advertise his historical performance and justify the high management expense charged. 

Take Icapital Biz (5108), a close-end fund with inception since 2005 for example, they have a really good ride from 2005 to 2010 with annualize return close to 20%. But from 2010 onward, the fund manager decided to start hoarding more cash, perhaps in anticipation of a major crash that never happens. As a result, their performance dip. If you start investing in the fund from 2010, your 9 years annualized return estimate to be around 2.9%, which is definitely less than risk-free options (Fixed Deposit or government bond) and KLCI (with dividend included). 

5. The management expense ratio is unjustifiable for funds that cannot beat the risk-free return. 

The average management fee for the mutual fund/unit trust is 1.5%, higher than its peers in the US. And most importantly, the fund managers earn their fees and salaries almost risk-free as the management fee is based on NAV (Net Asset Value), while continuing to make an educated bet using the investors' money. 

In other words, there is more incentive for the funds to earn the management fee through recruiting activities to lure more investors in, such as using a lower benchmark, emphasize on the need to hold longer-term when short term performance is bad or advertise on short term performance when they are good. There is less incentive for the funds to focus on growing the existing capital of current investors at a rate that is above the benchmark.