FINANCIAL PLANNING

LECTURE 6
INVESTMENT IN UNIT TRUSTS
LEARNING OUTCOMES
At the end of this lecture, you should be able to:
• Discuss the characteristics of investments in unit trusts
• Analyse the different types of unit trust funds and common methods
investments are made in Malaysia.
• Discuss the benefits and disadvantages of investing in unit trusts
• Analyse the fees and charges involved in making unit trust investments
• Discuss the common performance metrics and risks associated with
investment in unit trusts in Malaysia
• Analyze the contents of the prospectus and the role of the unit trust
consultant in making the investment decision.
 Introduction to Unit Trust
• Involve the pooling of money from institutional and retail investors to invest in
asset portfolios comprising of equity/shares, bonds, money market and other
financial securities

• These unit trust schemes are managed by professional fund managers hired
by unit trust management companies (UTMC)

• The fund managers need to act in accordance with the trust deed which is
safeguarded by a trustee.

• Each investor in unit trust schemes (UTS) own a holding of units.

 How Unit Trusts Work

Source : FIMM (2013) Start the journey to financial freedom with unit trusts https://www.fimm.com.my/wp-content/uploads/2014/10/FIMM_Booklet_Web.pdf
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Source : SC https://www.sc.com.my/api/documentms/download.ashx?id=4ee325c4-41b0-4085-bc94-8a068c648a8a
Source : SC : List of UTF in Malaysia https://www.sc.com.my/api/documentms/download.ashx?id=6f6277b6-a139-419d-b4bc-
52b01b12b09d
Source : SC https://www.sc.com.my/api/documentms/download.ashx?id=4ee325c4-41b0-4085-bc94-8a068c648a8a
https://www.sc.com.my/analytics/fund-management-products
 Major Characteristics of Investment Funds
• Open end funds
• Unlisted funds are what we commonly known as unit trust schemes/funds
• UTMC is required to sell and buy back the units upon demand at the Net Asset Value.
• Generally only one NAV quote per day.

• Closed end funds

• Listed on the stock market. Also known as mutual funds.
• More than one price quote per day.
• E.g. Real Estate Investment Trusts (REITs)

• Exchange Traded Funds (ETF)

• A special type of closed end fund that pool funds from shareholders/investors to buy shares
that replicate the composition of a specific equity index e.g. KLCI
https://www.bursamalaysia.com/market_information/equities_prices?keyword=&top_stock=top_active&board=ETF&alphabetical=&sect
or=&sub_sector=
https://www.thestar.com.my/business/unit-trust/A/
 Classifications of Unit Trust Funds in Malaysia
• Equity funds
• Objective is to provide capital appreciation over the medium and/or long term.
• Higher volatility in returns and risk

• Bond fund
• Objective is to provide the investor with regular and steady income.
• Risk that the bond issuer may default.

• Balanced fund
• Between 40% to 60% of the NAV in equity investments.
• Provide investors with both growth and regular income opportunities.
 Classifications of Unit Trust Funds in Malaysia
(continued…)
• Money market funds
• Investment in short term securities e.g. repurchase agreements, bankers’ acceptances,
short term debentures, short term government securities/treasury bills etc.
• Sometimes known as Cash Management Trust Fund.

• Capital guaranteed funds

• Emphasize the preservation of capital not guaranteed returns.

• Government sponsored schemes

• Comprises funds managed by the government linked company, Permodalan Nasional
Berhad (PNB)
• Fixed unit price e.g. Amanah Saham Bumiputra
https://www.asnb.com.my/asnbv2_0index_EN.php
 Classifications of Unit Trust Funds in Malaysia
(continued…)
• Sectorial funds
• Focus on companies in specific types of industry in specific countries or regions
which exhibit growth potential.
• Risk concentrated on the selected sectors→ Typically higher risk.

• Global and foreign funds

• Invest in financial securities (equities, bonds or funds) of overseas companies.
• Exposed to additional risks, including foreign currency risk and political risk.

• Shariah Compliant Funds

• Investments avoids securities that involve charging of interest (usury), activities that
considered haram (sinful), speculation (maisir) and/or excessive risk and uncertainty
(gharar)
• Investment mandate monitored by a Shariah Advisory Board.
Types of Unit Trust Funds in Malaysia

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Types of Unit Trust Funds in Malaysia

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 Benefits of investing in unit trusts
• Diversification
• Asset portfolios comprising different types of equity, fixed income, money market and others
enables negatively or lowly correlated assets to lower the volatility of the returns or risk of the
funds.
• Asset liquidity
• Easy to buy and sell funds back to UTC (open end) or via Bursa Malaysia (closed end)
• Professional Management
• Managers are equipped with the relevant qualifications, competencies, skills and experience.
• Suitable for investors who may lack the sophistication but would still like to gain access to the
capital markets.
• Smaller initial outlay compared to direct investments in equity/bonds
• Tax exemption on dividends and capital gains in Malaysia.
 Disadvantages of investing in unit trusts
• Partial loss of control over investment decision
• Appointed fund managers make the buying and selling of asset decisions within the fund.
• The investor also does not have a say in the types of equities and/or bonds being invested
in.

• Fees and charges

• There are initial service charges, annual management fees, trustee fees, sometimes exit fees
and other charges associated with unit trust investments.
• These fees and charges could erode and affect the overall returns on unit trust investments

• Investment risk
• Exposed to market risk, liquidity risk, interest rate risk and inflation risk.
• In addition, management risk
 Pros and Cons of Exchange Traded Funds
Pros Cons
Diversification ▪ Allows for asset diversification ▪ Not all ETFs are equally diversified.
across regions and ▪ Performance can still be volatile
internationally
Fees Lower fees compared to unit Could still incur brokerage charges and other
trusts fees especially if you trade regularly.
Trading Willing buyer, willing seller Difficulties could arise for non-heavily traded
funds.
Dividends Generally tax free for Malaysian Overseas ETFs may still be subject to foreign
ETFs tax e.g. US ETF have a 30% withholding tax.

• MyPF Website : What are Exchange Traded Funds?. Retrieved from

https://mypf.my/investing/etf/
 FINANCIAL PLANNING
LECTURE 6 – PART 2
INVESTMENT IN UNIT TRUSTS
 Methods of investing in unit trusts
• Lump sum
• This method involves a large outlay of money at any one time.
• The cost of investment is tied to a particular NAV at a point in time.

• Dollar cost averaging (DCA)

• Long-term strategy that involves making fixed amounts of investment at regular intervals
(e.g. monthly, quarterly, semi-annually or yearly)
• The cost of the investment is averaged.

• Employees Provident Fund (EPF) withdrawals

• EPF allows for members to withdraw 30% of any amount in excess of the basic saving for
their age from Account 1.
• Can make withdrawals once every three months subject to Terms and Conditions

• By taking a loan
• Leveraged investments in unit trust is the most dangerous form of investment method
• Loan interest is fixed and investment returns are uncertain.
https://www.kwsp.gov.my/documents/20126/131635/A19_EN_Members+Investment+Scheme+%28MIS%29+005.pdf
The amount of investment eligibility will be updated every 3 months.
 Costs of unit trust investments
• Initial Service Charge
• Commonly known as the upfront sales charge

• Exit Fee
• Commonly known as the repurchase charge or back load fee.

• Annual Management Fee

• To cover expenses incurred by the UTMC for portfolio management, for instance the fund
manager’s fees, staff salaries, rental, computer systems, depreciation, compliance, staff
training, annual marketing and distribution expenses, cost of holding the annual general
meeting and other operational and general overheads.

• Trustee Fee
• To ensure that the requirements of the trust deed is adhered to by the UTMC and that the
assets of the scheme are safeguarded
 Costs of unit trust investments (continued…)
• Switching fee
• This fee is charged if the investor decides to change his investments between two UTS within
the same family/series of funds of a UTMC.

• Other fund expenses

These expenses will affect the total returns to unit holders including:
• Transaction costs which includes commissions and fees paid brokers on the buying and
selling of securities
• Taxation and other duties levied on the UTS by the government or other authorities.
• Auditors fees and related expenses
• Valuation fees paid for valuation of fund assets
• Costs incurred for the amendment of the trust deed other than those for the benefit of the
UTMC and/or trustee
• Cost incurred for the Annual General Meeting other than those called for by the management
of the company or trustee.
 Common unit trust measurement metrics
Pricing Metrics
• Net Asset Value (NAV)
• NAV per unit
= (Value of Assets of the Fund - Value of Liabilities of the Fund)
Number of units outstanding
• Unit splits
• A split occurs when every single unit of a unit trust scheme/fund is divided into
two or more units.
• Does not change the total NAV but it increases the number of outstanding units,
thus resulting in a lower quoted NAV per unit.

• Impact on income distribution

• Dividend pay-outs will generally reduce the ex-dividend NAV, ceteris paribus
 Common unit trust measurement metrics
Turnover Ratios
• Portfolio Turnover Ratio (PTR)
• PTR = ½ ( Total fund sales + Total fund purchases)
Average fund size on a daily basis
• The higher the PTR, the higher would be the need of the fund to be
managed and the higher the transaction costs.

• Management Expense Ratio (MER)

• Measures the percentage of operating expenses over the average total
fund size or NAV
• A high MER means that the UTS would incur more management
expenses to operate and is likely to be less efficient and profitable, vice
versa.
 Common unit trust measurement metrics
Past Performance of the UTS
• Total return over a period =
Total period income distribution+ NAV
Begin
End
NAV
Begin −NAV

• Total return figure does not tell us how the UTS performed in a particular
year.
• Comparison with benchmark
• Requirement by the Securities Commission that the benchmark be clearly
stated in the prospectus.
• External Ratings
• Lipper Leaders (under Thomson Reuters)
• Morningstar ratings

Past performance do not guarantee future performance

 Risks of investing in unit trusts
• Market risk
• Uncertainty due to global, regional or national economic conditions, governmental policies
or political developments.
• Systematic, undiversifiable risk
• Liquidity risk
• Risk that a security that becomes temporarily/permanently difficult to sell, the fund
manager may be forced to dispose the security at a discount to its fair value.
• Management risk
• Risk of lack of professional judgement and/or conflict of interest that will lead to losses and
negative effect on the capital invested
• Inflation risk
• Risk that the returns generated by the fund will not be able to compensate for the decrease
in the purchasing power of money i.e. inflation.
 Risks of investing in unit trusts …cont/..
• Interest rate risk
• Prices of fixed income securities (e.g. bonds) are sensitive to interest rate changes.
• Interest rate changes also affect the demand and supply for money and vis a vis
investments

• Loan financing risk

• The use of leverage has a fixed commitment whereas investment returns are
uncertain.

• Country and currency risk

• Risk upon conversion of foreign denominated investments at maturity date.
• Risks of any changes in the country’s political regime, regulatory or economic
situation in the foreign country that may adversely affect the value of the investment.
Spectrum of risks of funds
 Importance of the unit trust scheme prospectus
Information contained in a UTS prospectus in Malaysia include:
▪ Identification features - Name, type of fund and financial year end
▪ Investment objectives of the fund – Allow matching to investor’s own risk profile
▪ Investment policy, strategies and approach
▪ Comparison of past performance with the benchmark index
▪ Risks of the UTS
▪ Distribution policy of the UTS
▪ Fees and Charges that are applicable
▪ Information about the management company
▪ Information on the Trustee
▪ Calculations used in the determination of prices of the UTS
▪ Procedures on how to subscribe/purchase, redeem/sell and switch units.
▪ Cooling off period – generally 6 business days from the date of purchase of units.
▪ Any specific features and constraints of specific funds which may conflict with your
needs
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 Sources of Fund Information

Professional Advisory Services

• Lipper Analytical Services
• Morningstar, Inc.
• Value Line
• Mutual fund newsletters
• Available in libraries and from brokerage
firms and online
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 Role of the unit trust consultant
• UTCs may be attached to unit trust management companies (UTMC), an institution other than
UTMC (also known as Institutional Unit Trust Advisers (IUTA)) which are licenced to offer UTS
and/or a licenced financial planner (also known as Corporate Unit Trust Advisers (CUTA)). All
UTMC, IUTA, CUTA and UTCs must be licenced with Securities Commission and registered
with FIMM. UTCs are usually attached with an UTMC, IUTA and/or CUTA.

• The responsibilities of the UTC would include strict adherence to the code of ethics of the
Securities Commission and FIMM regarding the marketing and distribution of unit trust
schemes.

• UTCs are required to identify him/herself as a unit trust consultant to the client with a valid and
active FIMM Authorization Card before conducting his/her activities.

• A unit trust consultant is there to explain and answer any questions that a potential investor may
have on unit trust schemes. However, the responsibility on the final decision on whether or not
to invest lies solely on the potential investor.