Many people prefer to “Buy and Hold” their unit trust. But do your realized that a unit trusts consists of many securities of which the fund manager can sell and buy frequently? It is common to see unit trust having more than 100% of turnover. This means that all the stocks/bonds at the beginning of the year have been completely replaced by end of the year. If that’s the case, what kind of Buy and Hold is? Investors who Buy and Hold this kind of unit trust is merely having an illusion that they are Buying and Hold. In reality, investors are actually selling and buying non-stop because the underlying securities have very high turnover.

How can a fund has a turnover of more than 100%? There are only a few reasons:

1. The fund manager bought these securities when they undervalued and sell it off when it is overvalued. Due to market efficiency, the time for these securities to increase from undervalue to overvalue is less than 1 year.
2. The fund manager cannot make up its mind.
3. The fund manager is more of a day trader than a fundamental analyse– opening and closing positions quickly whenever there is a change in charts.
4. The fund house might be getting some kind of rebate from the excessive brokerage fees. In the industry this is called soft-dollar commission. Apparently it is legal! Unbelievable!

However, as I have pointed out – majority of the active managed fund underperformed their index. So all the talk about finding mispriced securities and selling overvalued securities are just nonsense. After trading cost, their performance cannot even beat the index.

Perhaps MAS should check funds that have more than 20% in turnover and investigate why this is so. But as usual, nobody will bother or investigate until something terrible happen.

For investors – just buy the index and you can sleep well. Active managers funds are like some bats – can suck your blood!