Factors influencing unit trust performance

Bank-managed equity funds are not inferior to their non-bank counterparts. Previous research reporting relative underperformance of bank-managed funds ignored their differing fiduciary standards. To evaluate bank and non-bank funds facing similar fiduciary responsibilities, domestic retail funds approved for Singapore’s Central Provident Fund Investment Scheme were examined, as they meet the same standard for managing social security savings. Returns from these funds correlate highly with market performance. Even though these fund returns exceeded guaranteed interest rates, they did not outperform their market index. With financial market deregulation in Southeast Asia, local banks in small economies withstand erosion of business by foreign competitors. Banks, in order to increase profits, compete with local as well as foreign insurance and investment companies by offering mutual fund products. To remain competitive, banks need to shed their reputation for not being able to generate impressive fund returns, as their funds are not inferior to those from insurance and investment companies in terms of assets under management, expenditures, returns and risk. To gain competitive advantage, banks can differentiate their fund characteristics and reduce portfolio management costs. Mutual fund characteristics can affect expected returns or transaction costs. Factors affecting expected returns include asset allocation and systematic risk, while transaction costs include explicit and implicit ones, which can be measured by expense ratios and size of funds respectively. Insignificance of transaction cost determinants in affecting actual returns can be attributable to dominance of factors affecting expected returns