Unit Trusts: Differences Between The Various Share Classes

Investors may invest in unit trusts through the various share classes offered by them. For instance, the different share classes of a China equity fund may look something like:

• ABC China Fund Dis SGD-H
• ABC China Fund Dis USD
• ABC China Fund Acc EUR

Notice that the two main differences between the various share classes of the same fund are typically their currency dominations or ‘dealing currency’, and whether they are accumulation (‘acc’ in the above example) or distribution (‘dis’ in the above example) share classes.

Currency:

Various share classes of the universe of unit trusts out there have different currency denominations. Some of them are denominated in the Singapore Dollar (SGD) for example, while others may be denominated in the US Dollar (USD), the Euro (EUR) or the British Pound (GBP). The currency denomination is known as the ‘dealing currency’ for purchasing the unit trust.
There are two major things to note about currency share classes. Firstly, the dealing currency may not be the currency that you are exposed to; and secondly, certain share classes feature a hedge feature.

1. Dealing currency may not be the currency that you are exposed to

For example, a unit trust investing in the US equity market would need US Dollars to purchase equity securities listed on the US exchanges as they are priced in the USD. However, that same unit trust may have a share class that is denominated in the SGD. If you are buying the SGD share class of the fund, you buy units of the fund with the SGD, but your real exposure is to the US equity market as the fund manager will need to convert your SGD to the USD in order to invest in US-listed securities.

2. Certain share classes feature a hedge feature

It could look something like: SGD-H. This means that the fund’s underlying exposure is hedged to the SGD. When you buy a unit trust with a SGD-hedged share class, you are in effect hedging your exposure (from the fund’s underlying exposure) to the SGD. The fund you purchase may be invested in the European credit markets, whereby securities there are denominated in the EUR. Thus, your currency risk as a Singapore-based investor would be to the EUR, and the value of your investment would be exposed to the fluctuations of the EURSGD exchange rate. By adopting a SGD-hedged class of the fund, you can lower your risk of a weakening of the EUR against the SGD eroding your investment returns from the European credit market.

Accumulation or Distribution:

Other than currency, fund managers also offer the feature of accumulation or distribution.
An accumulation share class means that any investment gains (like bond coupons, or dividends from stocks) from the fund’s underlying assets would be automatically reinvested on behalf of the investor, allowing you to compound your returns as long as you stay invested.
A distribution, or ‘pay-out’ feature means that the fund would be distributing investment gains to investors of the fund. These gains could originate from capital gains, income from the fund’s underlying assets or a combination of both, at the discretion of the fund managers. A pay-out feature is useful for investors who seek a regular stream of income, and various distribution classes may offer different frequency of pay-outs. Some share classes may offer monthly distribution, while others may be quarterly or annually. If you are investing for regular income, you may want to align your income needs alongside the corresponding frequency of a fund’s distribution if it is offered.
Some fund managers’ guide for a fixed amount of distribution, while others may provide a pay-out at the discretion and ability of the manager. Before your purchase, be sure to find out about this!