FIMM - Chapter 1

FIMM
CHAPTER 1
I UNDERSTANDING UNIT TRUSTS
LEARNING OBJECTIVES
This Chapterfocuses on providing UTC with a basic knowledge of UTS, which will be developed in subsequent
Chapters.
At the end of this Chapter, you should:
' appreciate the structure of UTS, and be able to explain their basic features
' be able to describe the benefits of investing in UTS, and some of the disadvantages
' be familiar with the different types of UTS available to Malaysian investors, and how they may be used
to meet the needs of investors with different investment objectives
' be aware of the history current state of development and future of the Malaysian unit trust industry
' appreciate the importance of the unit trust industry within the investment management industry in
Malaysia
' be familiarwith the contents of a prospectus of UTS, and be able to explain each section to prospective
investors in UTS
' understand the fees and charges of UTS and their impact on investors in UTS
' be able to measure UTS investment performance and to understand the F|MM-endorsed UTS
performance tables
' be able to explain how UTS selling and repurchase unit prices are determined, and the impact of unit
splits and distributions.
FIMM
X sECTroN 1.1 ovERVrEw
This Chapter provides, in Part A, an explanation of UTS, how they work, their structure and the reasons
why investors use them.
We examine the various types of UTS - open-end and closed-end, listed and unlisted - and the differences
between them. We look at one method of classification of UTS, and see how UTS can be used to meet the
basic investment objectives of different investors.
We review the history of the unit trust industry in Malaysia and measure its significance within the investment
management industry. The future of the unit trust industry, and therefore of the role played by UTC, is
promising and is reflected in the Malaysian Capital Market Masterplan.
Part B of this Chapter looks at some areas particularly relevant to UTC, including the contents of UTS
prospectuses. The various fees and charges payable by investors are explained, and the impact on the
investment performance of UTS is described. Several measures to assess the performance of UTS are
introduced. The calculation of unit prices is key to the measurement of UTS performance, so UTC need to
know and understand how UTMC determine the selling and repurchase price of a unit in UTS. The impact
on unit prices of unit splits and distributions must also be understood by UTC so that investors can make
informed investment decisions.
PART A
K SECTIoN 1.2 BASIC FEATURES oF UTS
1.2.1 WHATARE UTS?
A UTS is a form of collective investment that allows investors with similar investment objectives to pool
their savings, which are then invested in a portfolio of securities or other assets managed by investment
professionals.
lnvestors in UTS do not purchase the securities in the portfolio directly. Ownership of the portfolio is divided
into units of entitlement and each investor is known as a 'unitholder'. A unit in a UTS represents a proportionate
'share'of the pool of investments. As the investments within the UTS portfolio increase or decrease in value,
the value or'unit price'of each unit increases or decreases accordingly. Where the portfolio is not subject to
changes in value, as in some Government-sponsored funds, the unit price is fixed at RM1.00.
Unitholders in UTS are not shareholders in a company but are rather beneficiaries under a trust set up by
the promoter of UTS (the UTMC). Under the UTS constitution or' deed' , there must be a trustee who looks
after the interests of the investors. The trustee is the legal owner of all the assets of UTS on behalf of the
unitholders, and must act for the benefit of the unitholders towards whom it has a fiduciary relationship, i.e.
the trustee must put his or her own interests behind those of the unitholders. Unitholders in UTS have a
beneficial interest in each and every asset of that UTS, but are not entitled to direct UTMC on how to invest
the portfolio of investments.
As evidence of their interest in UTS, each investor receives a confirmation of entitlement, either in the form of
a statement or unit certificate. The number of units in UTS held by each investor depends on the unit selling
price at the time the investment was made and the amount of application money contributed by the investor.
lnvestops in UTS apply for units after reading and understanding a prospectus, which explains everything
an investor needs to know before investing in that UTS, and by completing an application form.
FIMM
The return on investment for unitholders in UTS is usually a combination of a regular income payment (a
'distribution') and capital appreciation, derived from the pool of investments held within that UTS. Each unit
represents an entitlement to an equal amount of income (determined by the level of distribution declared by
UTMC) and capital appreciation or depreciation that is normally reflected in the unit price of that UTS.
ln some countries, the number and types of investment options available through UTS are almost endless.
An investor may find it difficult to choose the type of UTS he or she would like to invest in. ln Malaysia,
the number and variety of UTS are growing quickly. Examples include income and capital growth funds;
equity (share), real estate and fixed income (bond) funds; and funds managed in accordance with Syariah
principles.
lnvestors in UTS are typically those with relatively small amounts to invest, who neither have the time nor the
inclination to hold portfolios of direct investments in shares or other assets. Rather, they prefer to invest in a
regulated investment vehicle. UTS allow small investors to have easy access to a wide range of investments
to which they would not normally have ready access.
ln Malaysia and throughout the world, collective investments (such as UTS, mutual funds, and open-end
investment companies) have experienced phenomenal growth in the past few years. This growth reflects the
suitability of collective investments - in Malaysia, the UTS - as a means for the smaller investor to accumulate
capital over the longer term.
As investors want good returns on their savings, UTS provide an ideal way for them to gain exposure to
investments that, in the long run, can produce returns superior to those from traditional savings accounts
and fixed deposits.
The 'cost' of these potentially higher returns is, of course, the risk that accompanies the investment. ln the
short run, the certainty of investment returns of most UTS is far less than those offered by fixed deposits.
However, in the medium to long term (i.e. over five years), investment in many UTS can provide far better
returns at an acceptable level of risk.
1.2.2 BENEFITS OF UTS
For investor who is unable or unwilling to research and analyse investment markets on his or her own, UTS
are an ideal way of investing.
To maintain a portfolio of directly held investments, an individual needs to keep up-to-date with market
information and sentiment. ln today's fast-moving and increasingly sophisticated financial markets, this
means keeping track of a wide range of information from many sources. For many individual investors, this
is difficult, time-consuming and expensive.
lnvesting in UTS transfers most of the stress of investing to those best equipped to handle it - professional
fund managers.
There are a number of other significant benefits of investing in UTS that should be noted:
DIVERSIFICATION
A larger pool of funds allows the fund managers managing UTS to purchase a wide range of investments.
Ratherthan limiting an investment portfolio to one ortwo investments, a portfolio comprising many investments
can be held. UTS investors therefore may benefit from the 'portfolio effect', i.e. generally, the greater the
number of investments, the less volatile (variable) the investment returns will be. ln other words, for investors
unable to acquire a wide range of investments because of limited savings, investment in UTS implies less
risk.
;.li*t&:ai
FTIUM
READYACCESS TO FUNDS
Most investors require that their investments be liquid, i.e. the investment can easily be sold within a short
period of time. UTS provide this benefit, as units can be bought and sold readily through UTMC, IUTA,CUTA
and UTC. An investment that is expected to produce an excellent return but which cannot be sold does not
necessarily constitute a good investment, as poor liquidity forms an additional risk factor for the investor.
Under the Guidelines on Unit Trust Funds, the UTMC should pay the proceeds of the repurchase of units to
unitholders as soon as possible, at most within 10 days of receiving the repurchase request.
PROFESSIONAL MANAGEMENT
The fund managers making investment decisions on behalf of investors in UTS are professionals. Their
training and background should ensure that the investment process adopted by UTS is structured and follows
basic investment principles. UTS enjoy the depth of knowledge and experience that skilled personnel can
bring to investment decision-making. ln the long term, it is this expertise that could generate above-average
investment returns for investors in UTS.
There are other skilled and experienced personnel within UTMC who can also provide benefits to investors
in UTS - for example, client service staff, accounting and tax experts, etc.
INVESTMENT EXPOSURE
For the smaller investor, it is sometimes difficult to gain exposure to a particular asset class or to certain
securities. For instance, if an investor with RM1,000 wished to invest in real estate, international securities
markets or corporate bonds, it would be impossible for him or her to hold a direct investment in any or all of
these markets. With UTS, it is possible for the investor to invest his or her savings in one, or a combination
of all, of these investments. The investor can therefore tailor his or her investment exposure to meet his or
her objectives.
INVESTMENT COSTS
When making direct investments, the smaller investor faces transaction costs, e.g. stockbroker commissions,
that are much higher than those paid by large institutional investors such as UTMC fund managers. UTMC
fund managers invest large amounts on behalf of UTS, so economies of scale apply. Also, because fund
managers invest in much larger amounts, they are able to gain access to institutional rates of return and
to investments to which smaller investors may have no, or only limited, access. For instance, the smaller
investor cannot directly access the Malaysian Government Securities market, where the amount of each
transaction generally is in millions of ringgit. Fund managers have ready access to this market because of
the amount that they can invest at any one time. lnstitutional investors, including UTS fund managers, often
receive preferential allocations of initial public offerings of shares of companies seeking to be listed, to which
smaller investors are excluded or limited.
1.2.3
RISK
DISADVANTAGES OF UTS
Any investment involves risk. lnvestment in UTS also has its risks. Thus it is important that an investor is
aware of these risks before making a decision to invest in UTS.
UTC must ensure that an investor in UTS is given an explanation of these risks before he or she invests
by directing the investor to the relevant sections of UTS prospectuses. The UTS performance tables and
other UTMC-approved promotional material can also be useful in explaining to investors the differences in
investment risk between UTS.
Further details of the risks involved in UTS are given in Chapter 3.
FIIUIM
LOSS OF CONTROL
lnvestors in UTS lose the right to direct how their savings are invested. lf UTMC fund managers invest UTS
investment portfolios in accordance with the prospectus and deed, there is little that the unitholders can do
if they disagree with investment decisions made by the fund manager.
UTMC fund managers must invest in accordance with the prospectus and deed even if market conditions
or investment'fashion' change.
FEES AND CHARGES
The services provided by UTMC are not without cost. Hence there are fees and charges payable by investors
in UTS. These can have an impact on unitholders' returns although such fees should be measured against
the professional expertise available to investors through UTS.
OPPORTUNITY COST
As with any decision, an investor who invests in UTS may have produced better returns by investing direcly
in the markets. This excess represents the 'opportunity cost'of investing in UTS.
Especially when UTS performance is disappointing, investors can argue that they could have 'done better'by
investing their funds themselves. While this may be true, one aspect of investment that tends to be forgotten
by direct investors is the level of risk taken to achieve those returns. lnvestment through UTS provides a high
level of diversification for smaller investors with limited savings. A single direct investment may produce a
return in excess of that from investment through UTS, but clearly the risk level accepted by a direct investor
is significantly greater than that through investing in UTS.
1.2.4 METHODS OF INVESTING
There are several ways to invest in UTS.
LUMP SUM PURCHASE
A lump sum purchase is the most common means by which savings are invested in UTS. Provided that the
amount of investment meets the UTMC's minimum application amount, the investor can invest his savings in
UTS after he or she has completed an application form from a prospectus. With a lump sum purchase, there
is no further commitment to add to the initial investment in UTS. Over a period of time, it is expected that the
initial investment in most UTS willgrow as investment income and capital gains are earned by UTS. When
the investor ultimately disposes of his or her units, the repurchase price of a unit will reflect the accumulation
and compounding of investment returns over the period since purchase. lt is the compounding of investment
returns over time that makes investments, such as UTS, so attractive to investors.
For example, a recently inherited sum of money may be invested in UTS and held for an extended period
for some specific purposes, e.g. children's education, retirement planning, house purchase. At the end of
the period, the proceeds from disposal of the units will reflect the initial investment made plus any returns
on that amount compounded over the relevant period. Of course, if the investment returns are negative, the
investor will not receive (on disposal of the units in UTS) the amount of his or her initial investment.
FIMM
REINVESTMENT OF INCOME
By reinvesting distributions from UTS (i.e. by directing UTMC to use the distribution payable to a unitholder
to buy more units in UTS for the unitholder), an investor can acquire, on a regular basis, small numbers
of additional units that, over time, can add significantly to total returns from investing in UTS. Often, small
amounts of distributions from investing in UTS are dissipated rather than saved by investors. Reinvestment
of distributions is therefore a simple and easy way to increase an investment in UTS.
Where a unitholder instructs UTMC to reinvest distributions, the amount of the distribution is used to purchase
additional units (usually at the selling price quoted one month after the ex distribution date). Some UTMC
automatically reinvest distributions; others provide additional units through a unit-split (see Section 1.12).
The beneficial effect of compounding investment returns is the same.
REGULAR SAVING
Some investors invest in UTS by making regular (e.9. monthly) contributions to UTS - in effect, a series of
smaller lump sum investments. Contributions are not contractual and can be stopped at any time without
penalty. This is a disciplined, useful and flexible way for investors to accumulate capital for a future need. By
making regular contributions over a period of time, the sum (including investment returns) accumulated at the
end of the period may be expected to be significant compared to the amount of each regular contribution.
At the end of the period, the proceeds from disposal of the units will represent the accumulation of all
contributions, plus returns generated by each contribution. Clearly, the amount accumulated is likely to be
greater the longer contributions are made and the units held. This form of saving is the basis of retirement
savings through, for example, the EPF.
lnvesting in UTS through regular saving is very attractive to smaller investors because they can participate
with a capital outlay of typically as low as RM100.
BORROWING TO INVEST IN UTS
An investor can obtain a loan from a financial institution for the purpose of investing in UTS.
To maximise potential investment returns, some investors investing in UTS borrow the application money
to invest, expecting that the rate of return from investing in UTS will exceed the borrowing costs, thus giving
rise to additional profit. This is known as leveraging (or gearing) an investment in UTS.
Lenders usually require investors to have some of their own money to invest alongside the borrowed
application money. The technique allows a small amount of an investor's savings plus a borrowed amount
to be invested into UTS. The UTS investor is, in effect, using the lender's funds as well as his or her own
to gain exposure to the desired investment. Using someone else's funds comes at a cost - lenders charge
interest, and other charges and fees may apply.
The leveraging effect refers to the potentialfor investors to earn greater returns than they could have achieved
if they had restricted investment in UTS to their own savings.
However, there is a very significant potential downside. The value of the investment in UTS could fall,'for
example, in line with a falling share market. Whilst the value of the investment in UTS may decrease, the
amount of the loan taken out to finance the purchase of units remains constant (and may increase with the
accumulation of interest payable). lf the value of the investment in UTS declines and the amount of the loan is
increasing, an investor's savings can be eroded and the investor will need to sell his or her units at a loss, or
increase the security offered to the lender. lf the units are sold at a loss, the investor will be required to repay
the difference between the proceeds of disposal of UTS and the amount of the loan out of other savings.
t{i
FIMM
Most banks and finance companies in Malaysia offer borrowing facilities to investors who wish to leverage
their investment in UTS. Loans are generally for periods of up to 10 years at interest rates generally higher
than personal finance and housing loans (depending on the borrower). Amounts usually range between a
minimum of RM10,000 and a maximum of RM250,000. The rate of interest is usually variable based on the
lender's Base Lending Rate plus a margin.
The maximum loan-to-valuation ratio or margin (i.e. the amount of finance offered compared to the cost or
value of the investment in UTS) is 67%. This means that an investorwho wishes to invest RM100,000 in
UTS could be able to borrow up to RM67,000.
Borrowers must be over 1B years, and should be less than 55 years at the end of the term of the loan. This
is to ensure that the borrower is within the income-earning age group. Monthly loan repayments do not
normally exceed onethird of the borrower's gross monthly income to ensure that the borrower is able to
meet his or her other financial obligations.
The SC requires that UTMC ensure that UTC do not, directly or indirectly, encourage the sale of units through
loans. Loan financing for UTS is therefore normally provided by a panel of UTMC-approved lenders. The
SC has imposed a number of requirements relating to loans and UTS, including the need for an investor
to sign a Unit Trust Loan Financing Risk Disclosure Statement, reflecting the risks of investing in UTS with
borrowed funds (see Chapter 3).
1.2.5 RISKS OF BORROWING TO INVEST IN UTS
Should an investor borrow to invest in UTS? Each investor's position is unique, so generalisations are
difficult to make. Prospective investors must carefully consider the implications of investing with borrowed
funds before committing themselves to a loan. lf the investor doesn't understand UTS and the financing
arrangement, he or she should not be borrowing.
INTEREST RATE FLUCTUATIONS
lnterest rates for UTS loans are usually variable rates, i.e. the borrower is subject to changes in the lender's
Base Lending Rate. The total cost of financing an investment in UTS cannot therefore be predicted. This
increases the uncertainty of the expected profits to be derived through borrowing to invest in UTS.
DEFAULT IN REPAYMENT OF LOAN
Where there is a default in repayment of the loan (which may be on a regular monthly payment basis), the
lender is entitled to liquidate the investment in UTS. Action may be taken with or without the consent of the
borrower. Units may be sold by the lender at a time that is determined by the lender (which may be at the
lowest point in the market cycle), i.e. the borrower loses control over the decision to sell units. Any shortfall
between the proceeds from disposal of units and the amount of the loan has to be paid by the investor.
PREMATURE REPAYMENT OF LOAN
Borrowing for investment in UTS is a long-term commitment - the loan period may be up to 10 years. Due
to unforeseen circumstances, e.g. loss of employment, the borrower may wish to repay the loan before the
agreed repayment date.
FIM]UI
Premature repayment may adversely affect the expected returns from investment in UTS. Research shows
that most loans are repaid within the first five years of the agreed loan period, i.e. before the investment
in UTS has had chance to perform. Studies show that, on average, the probability of losing money in an
investment in the share market (i.e. Bursa Malaysia) can be up to 35% in any one year, 28o/o ovet two years,
and 21o/o over five years. lnvestors may therefore face a high risk of losing capital if they repay the loan
earlier than expected, and dispose of the units in UTS.
MARGIN CALL
The value of UTS may vary from time to time. As a result, lenders may find that the value of the units in UTS
that are held as security (collateral) for the loan provides them with insufficient margin over the amount of
the outstanding loan. The lender will then ask that the borrower 'top up'the level of security, i.e. a margin
call will be made on the borrower. A failure to pay the additional amounts on top of your normal installments
can cause the lender to sell units in UTS held as security, possibly at the worst time, to reduce the amount
owed.
It may be more prudent for UTC to suggest to clients that the regular saving method is a more appropriate
way of investing in UTS than borrowing money.
FIMM
I SECTIoN 1.3 THE STRUCTURE oF UTS
A UTS is a non-incorporated collective investment scheme formed for the purpose of pooling the savings
of investors with the intention that those savings be invested and managed for their mutual benefit. The
structure of UTS is shown in the diagram. Whilst there are many variations between UTS, the structure is
the same.
The operation of each UTS is governed by a deed, which names its UTMC and trustee and details the way
in which that UTS is to operate. UTMC are responsible for the operation of UTS and normally act as the
promoter. Under the deed, a trustee is appointed to supervise the operation of UTS. The duties of UTMC
and trustee are set out in the deed and in the law.
THE STRUCTURE OF UTS
(Mode of Operations Governed by the Deed)
Monev
HOSStDIe
oi"trinrti.". Pooled from
lnvestors
Safeguards
the Assets
of the UTS
Administers
the
Operations of
the UTS
Possible
CapitalGain &
lncome
lnvests
FIMM
Unitholders are bound by the deed and their obligations are set out in that document. They have rights and
therefore have access to various legal remedies described in the deed, should the terms of the deed are
not be adhered to.
The assets of each UTS are held in the name of its trustee. This is a legal safeguard, as it separates the assets
of UTMC from those of UTS. This segregation safeguards the investor, should UTMC go into liquidation. The
UTS assets are held 'on trust'for the unitholders of that UTS. This means that the UTS assets are held by
the trustee on behalf of unitholders and, should the trustee go into liquidation, the assets are not legally able
to be paid to the trustee's creditors. While UTS assets are registered in the name of its trustee, the beneficial
ownership of those assets lies in the hands of the unitholders (the beneficiaries under the trust).
1.3.1 PARTIES TO A DEED
The parties to a deed, and the role of each, are as follows:
UTMC
UTMC of UTS make reports to the trustee regarding the purchase, sale and management of the investments
of UTS. UTMC also promote and distribute or sell units in UTS either directly or through IUTA, CUTA and
UTC, service the unitholders, and buy back units from those unitholders who wish to dispose of units.
UTMC generally keep the accounting records of UTS since these are required to calculate unit selling and
repurchase prices, and to determine the amount of distributions payable to unitholders. UTMC also maintain
a register of unitholders in each UTS showing the units held by each unitholder.
TRUSTEE
The trustee is responsible to unitholders for safeguarding UTS assets and ensuring that they are invested
in accordance with the terms of the deed. The trustee supervises the operations of UTS to ensure that
its objectives are followed by UTMC and that the interests of the unitholders are protected. The trustee is
independent of UTMC and can remove one that fails to manage effectively and in accordance with the deed.
The deed sets out the various responsibilities of the trustee. Major responsibilities include approving and
monitoring all financial transactions, holding title documents of all UTS assets, and collecting all income
entitlements on investments held.
UNITHOLDERS
Of the three parties to a deed, the unitholders are the most significant since they supply the capital to be
invested by UTMC on their behalf. As such, they are responsible for the fees earned by UTMC (and hence
salaries and commission payments of UTC) and the trustee.
Unitholders hold units, each unit ranking equally with all other units of that UTS. The value of a unit is
determined by using a formula set out in the deed, which is based on dividing the market value of the net
assets of the UTS by the number of units currently in circulation. Unitholders purchase units in UTS by
completing an application form contained within a UTS prospectus.
1.3.2 DEED
A deed shows the rights and obligations of UTMC, the rights and duties of the trustee, and the rights of the
unitholders. lt will also include the maximum fees payable; describe the investments in which UTS can be
invested; prescribe how the value of a unit is to be determined; and determine how the price at which a unit
to be sold to investors, and bought from them, by UTMC is to be calculated.
The deed will also outline the way in which changes can be made to the deed. This will sometimes require
the consent of UTS unitholders who will be asked to vote on the proposed changes. The responsibilities of
the auditor of UTS, appOinted by the trustee under the deed, will also be set out in that document.
FIMM
1.3.3 PROSPECTUS
Where UTS are to be offered to the public, it is required by law that potential investors receive sufficient
information about UTS, its UTMC and the trustee to allow them to make an informed investment decision.
This information is contained in a prospectus for the issue of units in UTS.
The prospectus must be registered with the SC and contain certain information as required by law The
information provided must be accurate and not misleading. Those involved in the preparation of a prospectus
are held accountable for its contents. There are legal remedies available to investors against those who
have made misrepresentations or who have caused misleading information to be included in a prospectus.
By completing and signing an application form from UTS prospectuses, investors become unitholders and
a party to the deed.
1.3.4 AGENTS OF UTMC AND TRUSTEE
Several other parties are involved with UTS, although they are not parties to the deed.
A trustee may appoint a sub-custodian to hold UTS assets on its behalf (perhaps where UTS investments
are listed on overseas share markets). UTMC may appoint fund managers, asset consultants, managers of
real estate, and other specialists to assist it in its role.
The trustee and UTMC are responsible for the actions of any agent they appoint. The deed clearly sets out
the duties of the trustee and UTMC, and these cannot be avoided.
We will consider the roles of UTMC and trustee of UTS, and the legal requirements relating to UTS prospectus
and deed in greater detail in Chapter 2.
X SECTION 1.4 TYPES oF UTS
There are numerous ways in which collective investments, including UTS, can be classified. Each country,
as a result of different investor requirements and regulatory regimes, has its own collective investments and,
in turn, its own classification system and terminology.
ln Malaysia, we can distinguish between:
listed UTS, which are closed-end, and
unlisted UTS, which are usually open-end but which may also be closed-end.
Another way of categorising UTS is by the investment objective (for example, income or capital growth) or
by the class of investment in which UTS are invested (for example, equity or fixed income). Further subclassification
into, say, 'smaller company'equity groMh UTS also occurs. Such classifications are significant
to investors since these classifications are used to distinguish between UTS for the purpose of measuring
comparative performance.
1.4.1 LTSTED UTS (CLOSED-END FUNDS)
Listed UTS have units quoted and traded on a stock exchange. The prices of these units will fluctuate
daily based on the supply of, and demand for, units from investors, i.e. it is the investors in the market who
determine the buying and selling prices of the units rather than UTMC.
FIMM
Currently, all listed UTS in Malaysia are closed-end in that the number of units is limited at the time the UTS
were floated on Bursa Malaysia. An investor who wishes to purchase units after the initial public offering
must approach a stockbroker who, through the market, will acquire those units from a selling investor.
UTMC do not buy and sell units in UTS after the initial public offering. The sole responsibility of UTMC after
listing is management of that UTS in accordance with the deed and the terms of the prospectus. lf UTS wish
to expand after listing, new units can generally only be issued by way of a rights offer to existing unitholders.
A placement of units to institutional investors may also be made.
Listed UTS operate similarly to a limited liability company with shares listed on Bursa Malaysia. The Amanah
Small Cap Fund is an example of a listed closed-end investment company - i.e. not a UTS - although from
an investor's perspective, it operates in a similar way to listed UTS.
All listed UTS in Malaysia are currently Real Estate lnvestment Trusts (REIT). Property, as an asset class, is
most suitable for a listed and closed-end structure since the unitholders can only sell units to other investors
and, following the initial public offering, UTMC can be certain of having raised sufficient application money to
purchase the nominated real property. An open-end unlisted property UTS can be disastrous if every investor
wishes to dispose of his or her units at the same time, as UTMC are required by the SC to repurchase those
units. The property market is highly illiquid in comparison with securities markets, so realisation of real property
by the trustee to repay unitholders within a short time frame could be impossible and inefficient.
An example of a listed UTS isAmFirst PropertyTrust. The prices of listed UTS are quoted in the newspapers
alongside other companies listed on Bursa Malaysia.
A major disadvantage of listed UTS is that the market price of a unit in UTS usually varies from the NAV of
a unit. Generally, the NAV per unit of a listed UTS is greater than the market price, i.e. listed UTS usually
trade 'at a discount'. There are many reasons for this but, put simply, the price of any listed securities is
determined by buyers and sellers in the market. The price of a listed UTS reflects this rather than the NAV
of the UTS. ln an unlisted UTS, the unit price is based on the NAV, so no significant discount or premium
can apply.
A new type of listed UTS has been launched in overseas markets - the Exchange Traded Fund (ETF). An
ETF is a listed but open-end UTS. Overseas experience has shown that an ETF does not generally trade at
a discount to NAV. Yet an ETF offers UTMC the advantage of constructing a long-term investment portfolio,
without fearing that the trustee may have to realise investments to raise cash for UTMC to meet repurchase
of unitholders. The first ETF, i.e. ABF Malaysia Bond lndex Fund was launched in July 2005.
1.4.2 UNLTSTED UTS (OPEN-END FUNDS)
These are UTS whose units are not quoted on a stock exchange. The price of units is determined by UTMC
of the UTS. The selling and repurchase unit prices are arrived at by first valuing the investments of UTS and
determining its NAV and then dividing by the number of units in circulation.
Unlike a listed UTS, where orders to buy and sell units are placed through a stockbroker, investors'sales and
repurchases of units in unlisted UTS are transacted directly with UTMG, often with the assistance of UTC.
UTMC of unlisted UTS publish the NAV of units in national newspapers on a daily basis. This NAV of units
serves as the latest selling price at which units can be bought by investors as well as the repurchase price
at which investors may dispose off units to UTMC.
Unlisted UTS are usually open-end, i.e. there is no limit to the number of units that can be sold and unitholders
have the right to dispose off units to UTMC at any time. (Note that in practice, the SC retains control of the
total number of units in UTS through approving limits to the maximum number of units that each UTS may
issue, but this limit can usually be raised on application to the SC.)
FTMM
Some UTMC do, for marketing purposes, place a limit on the total number of units in UTS (called 'closed'
UTS) that can be issued. Once the total issue has been sold, only units repurchased from investors by UTMC
can be sold on to investors. An example of a closed UTS is wawasan 2020 Fund.
Unlisted UTS commonly have a current prospectus for the sale of units, as most UTMC are continuous
issuers of units in UTS.
1.4.3 CLASS|F|CAT|ON OF UTS
Currently, the range and type of UTS available in Malaysia are not as extensive as that available overseas.
The unit trust industry is still relatively young, but over time, the range and number of UTS will increase as
regulations are relaxed and UTMC develop new UTS to cater to investors'needs - and as investors become
better informed of investment choices.
The main categories of UTS in Malaysia currently include:
EQUITY UTS
Equity UTS are the most common UTS in Malaysia. The major portion of equity UTS portfolios are shares
of listed companies.
Equity UTS are popular as they provide investors with exposure to companies listed on Bursa Malaysia
(and some overseas share markets). The performance of most equity UTS is therefore closely linked to
the performance of Bursa Malaysia. A rising share market will normally result in an increase in the value of
units in equity UTS, and vice-versa.
There is a wide array of equity UTS available in the market, ranging from UTS with higher risk-higher return
characteristics to those with lower risk-lower returns. Equity UTS labelled 'aggressive growth'generally
invest in companies with higher capital growth potential, but with associated higher risk. The expectation of
both UTMC and investors is that these UTS could produce high returns based on increases in the price of
shares held in the portfolio, rather than from dividend income received by UTS. However, the prices have
higher volatility. Aggressive growth UTS may include the category of 'smaller company'equity UTS, which
invest in the shares of listed companies with a relatively smaller market capitalisation. Companies with a
large market capitalisation are usually considered to be more stable, and may therefore be included in 'blue
chip'equity UTS, sometimes referred to as'growth and income'equity UTS.
For example, the objective of the Public Aggressive GroMh Fund is "to seek high capital growth over the
medium to long-term period through investment in situation and high growth stocks." The public Savings
Fund's objective, on the other hand, is "to achieve long-term capital appreciation while at the same time
producing a reasonable level of income.'f
Another$pe of equity UTS is the'index'UTS. These UTS invest in a range of companies that closely match
(or'track') companies comprising a particular lndex, for example the Kuala Lumpur Composite lndex (KLCI).
lnvestors who participate in this type of UTS will expect to generate investment returns that closely resemble
the KLCI, both in terms of risk and return.
Equity UTS can also be invested with an income objective. This means that the equrty UTS will invest primariry
in companies that are expected to pay significant dividends, rather than companies that are expected to
pay little or no dividends.
lnternational equity UTS, investing primarily in overseas share markets, are now available to Malaysian
investors. Examples include the MAAKL Pacific Fund, PRUAsia Pacific Equity Fund, Hwang DBS lM
Guaranteed Fund and RHB Dividend Valued Equity.
FIMM
FIXED INCOME UTS
These trusts invest mainly in Malaysian Government Securities, corporate bonds, and money market
instruments such as bankers acceptances and fixed deposits. The objective of a fixed income (or bond)
UTS is usually to provide regular income, with less emphasis on producing capital groMh for investors. lt is
possible, however, for fixed income UTS to generate both capital gains and losses during periods of volatile
interest rates.
Generally speaking, the volatility or risk associated with fixed income UTS is lower than that of equity UTS.
Fixed income securities are usually more secure, especially if held to maturity. lt is therefore expected
that over the long-term, the returns offered by fixed income UTS will be lower than those offered by equity
UTS. However, this is not always the case and there have been instances where fixed income UTS have
outperformed equity UTS, and with significantly less risk.
Returns from fixed income securities can vary with the remaining life of the securities. Generally, fixed income
securities with a short period to maturity are less volatile than those with a longer period to maturity. Some
UTMC have promoted 'shortterm' fixed income UTS, where income represents most of the total return
achieved by investors and changes in unit prices are minimal.
Often, fixed income UTS are held by an investor as part of his or her investment portfolio as these UTS can
provide diversification to reduce the risk level of the portfolio. This is because investment returns from fixed
income securities can have a negative correlation with those of equities, i.e. when returns from investing
in share markets are falling, the returns from fixed income securities may be more positive. This negative
correlation can be a usefultool in the management of risk in an investor's portfolio.
MONEY MARKET UTS
One of the most populartypes of UTS overseas is the money market (or'cash management') UTS. ln the US,
the amount invested in money market mutualfunds now exceeds that saved through the banking system.
Money market UTS operate in a similar way to a bank account - the unit price is normally set at a fixed
amount, say RM1.00 , and there are no entry or exit charges levied by UTMC. Money market UTS invest in
low risk money market instruments that are, in effect, short-term deposits (loans) to banks and other - low
risk - financial institutions, and in short-term government securities. The weighted average maturity of money
market UTS (i.e. the average time before such loans are repaid to the trustee) is normally no more than,
say, 90 days and usually much less. The money market UTS is therefore highly liquid and idealfor use as a
short-term 'parking place'for investors' savings, or for longer periods. lncome distributions to investors are
paid regularly and frequently, and reflect the generally higher interest rates available to institutional investors
in the money markets.
ln Malaysia, money market UTS are currently not common. The AM Cash Management Trust is an example
of a money market UTS.
REAL ESTATE INVESTMENT TRUSTS
Real Estate lnvestment Trusts, or REIT, invest in real property, usually prominent commercial (office)
properties, and provide the investor with an opportunity to participate in the property market in a way which
is normally impossible for the smaller investor. An investor with, say, RM1,000 who wants to invest in
commercial property would find it impossible. By acquiring units in a listed REIT, however, it is possible to
invest small amounts to gain exposure to the property market.
FIMM
Returns from property comprise net rental income plus or minus any change in the value of the property over
the period. The prices at which units in REIT trade on Bursa Malaysia will reflect these returns. A unitholder
in listed REIT receives a distribution paid from the net rental income and can make a profit or loss on selling
units. The price of units in a listed REIT should approximately reflect the market's assessment of the value
of the real property held by the UTS.
Of course, real property valuations reflect a number of factors including rental and vacancy rates, management
expenses, location and physical attributes of the property. These factors, therefore, also need to be taken
into account when investing in REIT.
The maximum rate of initial service charges and exit fee to be imposed by each distribution channel are
required to be disclosed too.
Because of the illiquidity and indivisibility of property, most REIT are closed-end, and the units are listed on
a stock exchange. Units in listed REIT can be bought and sold through stockbrokers, and UTC would not
normally arrange to buy or sell units for an investor.
EXCHANGE TRADED FUNDS
An Exchange Traded Fund or ETF is like a listed index UTS whose investment objective is to achieve the same
return as a particular market index. lt will primarily invest in all of the securities or a representative sample
of the securities that are included in a selected market index. For example, ABF Malaysia Bond lndex Fund
invests in Government and quasi-Government bonds that tracked by iBoxx ABF Malaysia Bond lndex.
ETF often have low expense ratios and can be bought and sold throughout the trading day through a
stockbroker, on an exchange like listed shares. Unlike traditional UTS, through, unit prices of the ETF are
set throughout the day by the laws of supply and demand.
BALANCED UTS
Some investors may wish to have an investment in all the major asset classes to reduce the risk of investing
in a single asset class. There are two ways to achieve this - either invest directly in a range of single asset
class funds (e.9. an equity UTS and a fixed income UTS and REIT); or invest in a single UTS that invests in
several asset classes. A balanced (or'diversified') UTS generally has a portfolio comprising equities, fixed
income securities, cash and property - although property exposure may be obtained through holding units
of listed REIT and shares of real estate or construction companies. Direct property will not normally be held
as it is illiquid.
Balanced UTS exhibit lower volatility than most single asset class UTS (except money market UTS) but offer
some prospect of returns higher than those available from money market UTS, savings accounts and fixed
deposits. Some balanced UTS have a higher component of groMh assets (principally equities) to appeal
to investors comfortable with some risk, whereas lower risk investors may prefer to invest in balanced UTS
that invest a higher proportion of the portfolio in more defensive assets (i.e. fixed income securities and
cash). A more defensively invested balanced UTS may produce a higher level of distribution, but produce
lower capital growth. The Mayban Balanced Fund and MAAKL Balanced Fund are examples, with the latter
having a more defensive, income objective.
SYARIAH UTS
The main objective of Syariah (or lslamic UTS) is to provide an alternative avenue for investors sensitive to
Syariah requirements. The utmost task of Syariah UTS is to always invest in a portfolio of halal companies,
lslamic Debt Securities and bonds or other securities in accordance with Syariah principles. Halal companies
will exclude those companies involved in activities, products or services related to conventional banking,
insurance and financial services, gambling, alcoholic beverages and non-halal food products.
FIMIUI
The returns of Syariah UTS will also avoid the incidence of riba or usury interest through a unique systematic
process of cleansing or purification in removing the amounts representing all non-Syariah permissible
elements. Such amounts are normally donated to charities. Amanah Saham Bank lslam and Dana Al-Aiman
by ASM Mara Unit Trust Management Berhad are examples of Syariah UTS.
GOVERNMENT.SPONSORED UTS
The modern era of the unit trust industry in Malaysia started in 1981 with the launching of the Skim Amanah
Saham Nasional (ASN), a government-sponsored UTS managed by Permodalan Nasional Berhad (PNB).
The UTS was launched to mobilise the savings of the Bumiputra and to invest in Malaysian companies under
the then New Economic Policy. Such was the success of the ASN that PNB has since promoted several
other UTS and state governments, too, have launched UTS with similar objectives.
Government-sponsored UTS represent the bulk of UTS (by value) managed by the unit trust industry in
Malaysia. They generally invest on a balanced basis although equity-invested UTS are also available. Equity
invested government-sponsored UTS may have a fluctuating or variable unit price while those UTS investing
in more balanced portfolios normally have a fixed RM1.00 unit price and operate on an account basis, i.e.
an 'earnings' rate (representing the total returns of the investment portfolio UTS for the year) is credited
annually to each investor's account balance.
I srcrroN 1.5 srzE oF THE MALAvsTAN uNrr
E TRUST INDUSTRY
The current size of the unit trust industry in Malaysia is outlined in Appendix 1. lt is important to keep this
table up-to-date and UTC should refer to the FIMM and SC websites on a regular basis.
The range and number of UTS have increased dramatically over the past few years. This trend is likely to
continue as investors demand a wider range of services, and UTMC strive to produce new and innovative
UTS to complement the current range.
The updated list of all the FIMM members can be found on its website -www.fimm.com.my. You are
encouraged to review this website so as to be well acquainted with the participants of the industry and the
UTS offered.
FIMM
I sncrloN 1.6 coLLECTIVE INVESTMENTS rN
I uerAYSrA
A'collective investment scheme' is a generic term that includes a range of pooled investment opportunities
available to investors. ln a collective investment scheme, a number of investors hand over their savings to
a professional fund manager who manages the pool to produce a return that is shared by those investors.
UTS are a type of collective investment scheme.
Collective investment schemes in Malaysia also include pension and provident funds, insurance funds
and pilgrims' funds. UTS represent the bulk of funds under the management of Malaysia's investment
management industry.
A description of the investment management industry in Malaysia, and of the major role played by the unit
trust industry, is included as Additional Reading (Appendix 2).
INVESTMENT.LINKED FUNDS
While a detailed review of the various types of collective investment schemes lies outside the scope of this
book, it is important that UTC are familiar with type of schemes that is camparable to UTS - the investmentlinked
fund by life insurance companies.
An investment-linked fund promoted by life insurance companies operates in a broadly similar way to a UTS.
The investor acquires a life insurance policy, which represents a number of units in an investment pool,
managed by the life insurance company. The policy may be purchased with a single premium (lump sum
investment) or with regular premium payments, rather like a regular savings plan promoted by many UTMC.
Unlike most UTS, the policy provides life insurance cover although this may be smaller in amount than the
cover available through term life policies, and through whole life and endowment policies.
The premiums, less the cost of providing life insurance cover and entry fees, are added, at the investor's
direction, to one or more separate investment pools, each of which holds different investments and has
its own investment objective. The pools are unitised like UTS, and the entitlement of a policy is to the
investment return from a particular pool. The value of a policy is the number of units held multiplied by a
unit price. Units have both a buy and sell price. Net premiums are invested at the pool's unit selling price,
and on surrender of the policy, those units are cashed-in at the pool's buying price as calculated by the life
insurance company.
The value of a unit in a pool is based on the market value of the investments within the pool. lnvestment
management fees and other ongoing charges and expenses are taken out of the pool.
The investment returns relating to the pool are subject to tax at the rate applicable to a life insurance company.
The unit price therefore reflects tax payable by the life insurance company on the investment income and
realised profits on the disposal of investments. A provision for tax on unrealised capital profits is deducted
from the value of investments in the pool before the unit prices are determined.
UTC must note that investment-linked funds are not subject to scrutiny by the SC, nor are they subject to
monitoring by a trustee. They are not sold through a prospectus and are therefore not required to meet
the detailed and comprehensive disclosure provisions within the law that apply to UTS. lnvestors must be
informed of this significant difference between UTS and investment-linked funds.
FIMM
K SECTION 1.7 HISToRY oF UTS IN MALAYSIA
The world's first unit trust, The Foreign and Colonial Government Trust, was established in London in 't868
but UTS did not become particularly popular until much later. ln the United States, in the 1950s, a collective
investment scheme similar to UTS became popular - an open-end investment company, known as a mutual
fund. ln the 1960s and 1970s, UTS gained popularity in several countries including the United Kingdom
and Australia.
Malaysia introduced the concept of UTS relatively early compared to its Asian neighbours when, in 1959, a
unit trust was established by a company called Malayan Unit Trust Limited.
The development of the unit trust industry in Malaysia can be presented as follows.
1.7.1 THE FORMATIVE YEARS: 1959 - 1979
The first two decades in the history of the unit trust industry were characterised by slow growth in the sales
of units and a lack of public awareness of the new investment product. The industry was also regulated by
several parties including BNM, the Registrar of Companies and the Public Trustee.
r ':::: ' -:::
:l1.1!:
FTMM
1.7.2 THE PERIOD FROM 1980 TO 1990
During this period, the lnformal Committee for Unit Trust Funds was set up to regulate the unit trust industry.
The Committee was made up of representatives from BNM, the ClC, the Public Trustee of Malaysia and
the Registrar of Companies.
1.7.3 THE PERIOD FROM 1991 TO 1999
This period witnessed the fastest growth of the unit trust industry in terms of the number of new UTMC
established and growth in funds under management. The introduction by the SC of its Guidelines on Unit Trust
Funds and the enactment of the Securities Commission Act, 1993 brought about even greater awareness of
the unit trust industry and contributed towards its tremendous growth prior to the 1997 Asian financial crisis.
Following the crisis, the steady growth in funds under management continued.
Total funds under management grew more than threefold from RM15.72 billion at the end of 1992 to RM59.95
billion at the end of 1996. The period also saw greater product innovation and deregulation of the industry.
.'XK
FIIUIM
The first UTS to be offered with free term life insurance protection for unitholders on a blanket policy basis
was introduced. Previously, life insurance cover was offered with the UTS on a partially subsidised basis,
or the insurance cover was to provide unitholders who invested under loan plans with insurance to protect
the interests of the lenders.
The revised Guidelines on Unit Trust Funds allowed UTMC to invest up to 10% of the NAV of UTS in foreign
securities (subject to other approvals).
The first fixed income or bond fund in Malaysia was launched.
The SC issued Guidelines on the operations of property UTS, Guidelines allowing UTMC to delegate functions
and appoint external fund managers, and Guidelines on loan financing of sales of units in UTS.
The FIMM Secretariat was set up, headed by a fulltime Executive Director.
FIMM
The Malaysian Unit Trust Administration Course began. This course provides an introduction to the way a
UTMC operates and was jointly developed by the FIMM and the Securities lndustry Education, Australia.
The latter conducted the training.
The unit trust industry moved towards a new era when PNB launched the RM3 billion Wawasan 2020 Fund,
which was opened to all Malaysians (including non-Bumiputras) between the ages of 12 and 40. Like the
ASB and the ASN earlier, the Wawasan 2020 Fund would remain at RM1.00 until further notice from PNB.
The Malaysian Unit Trust Funds Performance Table prepared by MicropalAsia Ltd (now known as Standard
& Poor's) was introduced. The purpose of this table was to provide investors with a means to monitor and
evaluate the performance of the various UTS.
FIIUIM
1.7.4 THE NEW MILLENNIUM
o FlMltl
FIM]UI
PART B
tr I SECTION 1.8 UTS PROSPECTUS
UTS prospectuses are very important documents. No sale of units in UTS can be made without a prospectus,
which must comply with the law and SC requirements. Further, the prospectus must be updated at least
once every 12 months. lt is an offence to issue a prospectus to prospective investors that is misleading, and
UTMC are required to constantly review the prospectus during its life.
We will examine the legal requirements relating to the issue of prospectuses in Chapter 2. ln this section,
we will provide UTC with a review of the contents of a prospectus, and describe the requirements in the
Prospectus Guidelines for Unit Trust Funds.
1.8.1 KNOWING THE PROSPECTUS
UTC must ensure that an investor is given a current prospectus and should provide him or herwith an in-depth
explanation of the prospectus before an application is made. The prospectus is a legal document containing
legal, accounting and investment terms that many investors find difficult to understand. lt is mandatory for
UTC to be thoroughly familiar with the prospectus of each UTS they distr:ibute. UTC are required to draw an
investor's attention to the various sections of a prospectus.
ln response to public comments, UTMC now take great care to make UTS prospectuses more investorfriendly.
UTC should be aware, though, that the purpose of a UTS prospectus is to provide investors with
all the necessary information to make an informed decision to invest in that UTS.
While there are variations in layouts and design, UTS prospectuses must be legible, be in type size of not
less than eight point, and must contain the information prescribed by the SC as set out below.
COVER PAGE
The cover page will provide the name of the UTS, and the name and registration number of its UTMC and
trustee. All prospectuses must carry the date of issue and an expiry date. A general warning statement is
also required to advise investors to read and understand the prospectus and, if in doubt, to refer to their
adviser.
TNSIDE COVER (OR FTRST PAGE)
The prospectus of UTS is issued by the directors of its UTMC, who take full responsibility for the contents
and any omissions. A statement to this effect is required in the prospectus.
Although a prospectus is lodged and registered with the SC, the SC takes no responsibility for the contents,
and a statement to this effect is also required to be given in the prospectus. Also required is a statement
that registration of a prospectus is not to be taken as a recommendation to invest in that UTS and a warning
statement that investors should themselves assess the merits and risks of an investment.
Finally, there must be a statement that units will not be sold later than one year after the date of the prospectus.
It is important that only the current prospectus is provided to prospective investors and referred to by UTC.
Units in UTS cannot be sold on the basis of a prospectus that has expired.
FIMM
TABLE OF CONTENTS, DEFINITIONS, CORPORATE DIRECTORY
UTMC may issue a prospectus that offers units in a single UTS or a prospectus (called a 'master' prospectus)
that offers units in several UTS. Consequently, the size of a prospectus has increased in recent years. A
clear contents page is therefore considered by the SC to be essential.
The SC requires a glossary of abbreviations and technical terms to assist prospective investors in their
understanding of a prospectus prior to investment.
A corporate directory listing the directors, company secretaries, and members of the lnvestment, Syariah,
Audit and Compliance Committees must be provided. Names and contact details of UTMC and trustee are
also required. The names and addresses of auditors, reporting accountants, tax consultants, solicitors,
principal bankers, agency office and Syariah adviser (where applicable) must also be given.
lf an expert's report is included within a prospectus, the expert's name, address and qualifications must be
provided.
KEY DATA SECTION
This section provides an executive summary of the prospectus showing its key features. lt is designed to
be concise and is often presented in a tabular format with cross references to the relevant section of the
prospectus. lt allows investors and UTC to make a quick comparison of different UTS issued by UTMC. Being
a summary, the information will be incomplete, and for full details the whole prospectus should be read.
The section will include details of the parties involved in that UTS, its investment objectives, the type of
investor to whom the UTS is directed, approved fund size and units currently in circulation, the various fees
and charges payable (see below), minimum investment and repurchase transaction size, any repurchase
restrictions, the cooling-off right, switching and transfer facilities, exit and re-entry options, and whether
distribution reinvestment is available.
The maximum rate of initial service charges and exit fee to be imposed by each distribution channel are
required to be disclosed too.
Distribution data relating to the last financial year is also required to be disclosed - amount, form (e.9. payment
or additional units), and the various components (e.9. interest, dividend income, realised capital gains).
A series of warning statements is required to be disclosed to the effect that
. there are fees and charges that should be considered before investing . past earnings and distributions are not a guarantee or reflection of future earnings and distributions . prospective unitholders should read and understand the contents of the prospectus, and consult their
advisers, if necessary (possible sources of advice should be given by UTMC) . unit prices and distributions (if any) may go down as well as up.
INTRODUCTION TO UTS
ln this section of UTS prospectuses, investors will be provided with a general introduction to UTS without
specific reference to the UTS offered in the prospectus. This will incorporate details of how UTS work, the
parties involved and the regulatory framework. The general benefits and risks of investing in UTS and the
specific UTS offered will also be disclosed - especially in relation to alternative investments such as bank
deposits and direct investment. The benefits and risks disclosed should relate to the profile of the typical
investor, e.g. the investor's investment outlook, risk level and other investment criteria.
FIMM
UTMC DETAILS
The SC requires disclosure in UTS prospectuses of how the UTS will be managed and administered.
Details will be given of a UTMC's experience in managing investment portfolios; its financial strength; its
directors'and lnvestment Committee members'experience in funds management; securities markets and
risk management; the experience of senior management and other key personnel - especially of those
responsible for investment management (including details of external fund managers).
Any conflicts of interest will be disclosed in this section together with UTMC policy in dealing with such
situations, e.g. how personal securities dealing by directors, employees and lnvestment Committee members
are handled.
Powers of UTMC to remove and replace the trustee will also be described.
TRUSTEE DETAILS
The SC requires details of the trustee of UTS to be disclosed to investors, including its experience and
capacity as a trustee and its financial strength, its duties and responsibilities, and the circumstances in
which it may retire, be removed or be replaced. The UTMC is also to confirm in the prospectus the trustee's
willingness to assume its position and accept its responsibility to unitholders.
The trustee's powers to remove, retire or replace the UTMC of the UTS will also be described.
FUND INFORMATION
The prospectus will include in this section details of the UTS, such as its type and investment objectives, the
investment management strategy (including asset allocation, risk management strategy, gpe of investments
to be held, hedging policy) to be adopted by UTMC, its permitted investments and any limits or restrictions,
liquidity and gearing policies, how investments are to be valued, and its distribution policy.
HISTORICAL FINANCIAL HIGHLIGHTS
ln this section of UTS prospectuses, the SC requires disclosure of information relevant to prospective investors'
assessment of UTS past performance. For example, details of the last five years'distributions per unit, UTMC
and trustee fees, related party benefits, UTS expenses, NAV at each year-end, brokers commissions paid,
the Portfolio Turnover Ratio and Management Expense Ratio (see below) and explanations of how these
are calculated and their meaning, top five portfolio investments and top three foreign and unlisted securities
(if applicable), and details of suspended companies and how they have been valued.
PORTFOLTO TURNOVER RATTO (PTR)
The PTR provides an investor with an indication of the approach of UTMC to investment of the UTS
portfolio.
The calculation of PTR for a particular year is:
FIMM
Example:
During the year ended 30 November 200X, the fund managers of ABC GroMh Fund sold investments with
gross proceeds of RM1,159,206 and purchased additional investments at a gross cost of RM921,458. The
average fund size during the year was RM3,122,250.
Calculate the PTR of the Fund for the year ended 30 November 200X for disclosure in the prospectus of
the Fund.
PTR = 1l2x[RM921,458+1,159,206]
RM3Jrr250
= 0.33 times (or 33%)
lf the PTR is maintained at the same level for a period, it means that, on average, the portfolio of the Fund
will be completely turned over (replaced) about once in every three years, i.e. a typical investment in the
portfolio is held for about three years before being sold.
A UTS with a relatively high PTR (compared to other UTS) may indicate a more aggressively managed
(hading) portfolio where shares of companies are bought and sold relatively quickly. A low PTR may indicate
a more conservatively managed (buy and hold) strategy where companies are held for the medium or longterm.
A low PTR indicates that UTMC are incurring fewer transaction costs. The amount of stockbroker
commission, etc. incurred in managing UTS, of course, adversely impacts UTS performance.
The SC requires that UTS prospectuses include a calculation of the PTR for the last financial year of UTS
together with an explanation of the result, especially in comparison with previous years' PTR.
SALES AND PURCHASES OF UNITS
Details of how unit prices are calculated, including the valuation point and whetherforward or historic pricing
is adopted, will be disclosed in this section. Where historic pricing is adopted, a warning that re-pricing
can occur (where valuations in excess of 5o/o arise since the previous valuation points) must be given.
Commission rates payable to UTC must be disclosed, together with details of where units may be bought
and sold back to UTMC.
\- The cooling-off right must also be disclosed together with full details of the fees and charges payable on
buying and selling units, the fees payable to UTMC and the trustee, and the MER of the UTS and how it is
determined (see below).
UNITHOLDER'S RIGHTS AND LIABILITIES
A unitholder's rights will be explained in UTS prospectuses. These include the right
. to receive a distribution from UTS . to participate in any increase in the capital value of units . to call for meetings of unitholders . to vote for the removal of UTMC or trustee through a resolution at unitholders meeting . to exercise the cooling-off right . to receive UTS annual and interim reports.
Other rights, such as the right to information and to have units bought back by UTMC as described in the
. deed, will also be disclosed
FIlUIM
A unitholder's liabilities are limited to payment of the initial service charge, and there is no obligation to
indemnify the trustee or UTMC, should either incur liabilities on behalf of UTS.
TAXATION
The prospectus will contain a report on the tax position of UTS, reflecting its investments and on the taxation
obligations of unitholders.
ACCOUNTANT'S REPORT
A UTS prospectus is required to contain an accountant's report, dated not more than six months prior to the
prospectus date, showing the past five financial years of the UTS's
. statements of income and expenditure . statements of assets and liabilities . distributions.
The profit and loss statement and balance sheet of UTMC for the past five financial years will also be
shown.
OTHER PROSPECTUS DISCLOSURES
These include:
. statements of consent of those named in the prospectus . any SC-granted exemptions and variations . UTMC policy on soft commissions . details of how unitholders can keep upto-date with information on UTS . unclaimed moneys policies and procedures . customer services provided by UTMC . any other information required by the SC
' any other information required to evaluate the merits and risks of investing in UTS
list of the documents - such as the deed, audited accounts and consents - that are available for
inspection.
DIRECTORS' DECLARATION
The prospectus will include a declaration signed by all directors of UTMC that they have approved the
prospectus and take full responsibility for the information it contains, and that there are no omissions which
would make any statement in the prospectus misleading.
APPLICATION FORM AND SALES OFFICE DIRECTORY
A prospectus is required to incorporate an application form and Unit Trust Loan Financing Risk Disclosure
Statement. Previously, these documents could be provided to investors separately from the prospectus by
UTMC.
Finally, the prospectus will include a list of places where units can be bought and sold back to UTMC.
FIMM
K SECTION 1.9 FEES AND CHARGES
It is important that investors fully understand the fees, charges and other costs associated with investment
in UTS. As with all financial services, they are delivered to the investor at a cost. Whilst investing in UTS is
an economic method of investing in a range of investments, the costs are not insignificant and should not
be overlooked.
There are two classes of fees and charges in UTS - those borne directly by an individual client, and those
which are deducted from the assets of UTS and which are therefore suffered indirectly by unitholders in
proportion to the number of units each holds.
1.9.1 DIRECT FEES AND CHARGES
INITIAL SERVICE CHARGE
The first cost that an investor incurs in relation to UTS is the initial service charge (sometimes called the
service, sales, entry, or'up front'charge). This is the cost to an investor of investing in, or entering, UTS and
it is levied primarily to cover the UTMC costs of marketing and distributing units, and the costs of opening
an account in the unit register for a unitholder.
The cost of investing in UTS is based on the NAV of UTS. Most UTS in Malaysia would levy a charge of 5
to 7o/o, although some UTS charge less and some do not charge at all.
The initial service charge imposed on the sale of units to investors must not exceed the maximum amount
stated in the UTS prospectus and allowed under the deed of each UTS.
Under the single pricing regime which came into force on 1 July 2007, the transparency of service charges
is further enhanced. The maximum rates of service charge to be imposed by each distribution channel are
now required to be disclosed in the prospectus in order for investors to compare the costs of investing in
unit trusts associated with different channels of distribution.
UTMC, UTCs and distributors are required to clearly inform the investors the actual rate of charges payable
at the point the investors make an investment. All charges paid will be separately disclosed in the statements
confirming investors' purchase/ disposal of units.
Also, the practice of providing discounts and rebates by way of quoting a higher rate of charge but actually
imposing a lower charge is prohibited.
Assuming that a typical UTS charge is in the range of 5 to 7o/o, this means that for every RMl,000 an
investor invests, an amount of between RM50 and RM70 will be taken by UTMC - this is like a stockbroker's
commission that is added to the cost of shares purchased on behalf of an investor. lnvestment in most UTS
should not, therefore, be for the short term, as the cost of investing is reasonably high. When spread over
a longer time frame, these costs become less significant. Rapid purchase and sale of units in UTS can,
because of the costs of investing, become a significant drain on an investor's capital.
ln some cases, UTMC may reduce the cost of investing in UTS, e.g. during the initial launch period of UTS
(when a one per cent of free units is given during the offer period of 21 days), or where an investor is switching
(i.e. disposing of units and reinvesting the proceeds in another UTS managed by that UTMC). This is one
way that UTMC seek to attract or maintain interest in their range of UTS, while saving on marketing costs.
FIMM
FEES FOR SPECIFIC SERVICES
Some UTMC charge a unitholder, who requests certain services, a separate fee or charge that must be
paid directly to UTMC by the unitholder. For example, UTMC that do not normally issue unit certificates to
unitholders may be prepared to do so for an individual investor on payment of an appropriate fee. A fee may
also be charged to transfer units to another unitholder. Some switching fees can also be charged as a fixed
amount rather than charged on a per unit basis.
EXIT FEE
Sometimes called a repurchase charge, this fee represents a deduction by UTMC from the proceeds of
disposal of a unitholder's unitholding. Exit fees may be charged as an alternative to an initial service charge
but they are rare in Malaysia.
1.9.2 NON.DISCRETIONARY FEES AND CHARGES
ANNUAL MANAGEMENT FEE
UTMC are usually entitled, under the deed of UTS, to receive an annual management fee calculated on the
Gross NAV of UTS. This fee is paid out of UTS assets and is therefore borne by investors on the basis of
the number of units each holds.
Annual management fees that average around 1.5% per annum are levied by UTMC to cover the costs of
managing UTS. Some UTS charge less, particularly fixed income UTS and money market UTS - arguably
reflecting the lower costs of managing these UTS. Such costs would include salaries, office rent, computer
systems, depreciation, compliance, training, marketing and distribution costs, funds management and other
operating costs and general overheads of UTMC.
Annual management fees are approved by the trustee before being paid from UTS assets. As such, they are
reflected as a reduction in NAV and, therefore, a reduced unit price. ln some UTS (those with a fixed unit
price), the annual management fee is deducted from the distribution payable to unitholders. ln both cases,
the annual management fee reduces the return to investors and the performance of UTS.
ln addition to proper disclosure of the annual management fee in UTS prospectuses, the SC also imposes
other obligations on UTMC. The annual management fee is the only remuneration to be received by UTMC
for managing UTS. The maximum amount of the fee must be stated in the deed, although UTMC may
charge a lower fee with the trustee's agreement. A higher fee (subject to the maximum in the deed) than
that described in the last prospectus may be charged to investors (with the trustee's approval), but only after
they have been given notice of the change. A prospectus (or supplementary prospectus) must be issued
disclosing that the new rate will apply after not less than 90 days of the date of issue.
The trustee is required to ensure that at all times the annual management fee is reasonable, given the
services provided by UTMC, the fund size, the nature of the UTS investments, and the success of UTMC
in meeting the objectives of UTS and its performance.
Should the trustee believe the annual management fee to be unreasonable, it is required to take appropriate
action - which may include convening a meeting of unitholders - to ensure the fee is appropriate for the
services provided by UTMC.
The annual management fee accrues, and is charged to UTS, daily at the agreed rate. lt is calculated each
day from UTS gross NAV (i.e. before deducting that day's annual management and trustee fees).
FIMM
TRUSTEE FEE
The trustee of UTS is remunerated for its services in a similar way to UTMC, but the rate charged is much
lower. The SC requires that trustees charge a minimum rate of 0.08% per annum of the UTS gross NAV
(calculated as above), and a separate amount may be charged for acting as custodian of UTS assets. No
other fees may be charged by the trustee to cover its operating expenses, although it may reimburse itself
for any expenses properly incurred in the performance of its duties and responsibilities (for example, external
legal advice). The maximum amount of the fee must be stated in the deed, and the actualfee charged (within
the maximum and SC minimum) must be agreed with UTMC and reflect the role, duties, and responsibilities
of the trustee, and the interests of unitholders.
The fee must be disclosed in UTS prospectuses.
UTS EXPENSES
ln addition to annual management and trustee fees, other expenses directly related and necessary to the
operation of UTS may be deducted from the assets of UTS. These include:
. the transaction costs of buying and selling UTS assets . income tax and other government duties . auditors fees and expenses . investment valuation fees . legal costs incurred in amending the deed (except in relation to changes for the benefit of UTMC) . costs of holding meetings of unitholders (except those held for the benefit of UTMC) . cost of issuing a prospectus (but only where unit selling prices do not include an initial service
charge).
Management and administration expenses of UTS that should be payable by UTMC from its annual
management fee are not reimbursable from UTS assets. The trustee is required to ensure that all reimbursed
costs are legitimate and reasonable.
FIMM
MANAGEMENT EXPENSE RAT|O (MER)
The MER represents a single measure (or summary) of the various operating costs of UTS borne annually
by unitholders on each unit held. lt must be disclosed to investors in UTS prospectuses.
The calculation of MER for a particular year is as follows:
The amount represented by'fees + recovered expenses'must equalthe total expenses incurred by UTS as
shown in UTS financial statements for the year.
Example:
For the year ended 30 November 200X, the financial statements of ABC Growth Fund show that the following
expenses were incurred:
Management fee
Trustee fee
Auditors fee
Bank charges & other expenses
TOTAL 41,524
The average fund size of ABC Growth Fund during the yearwas RM3,122,250.
Calculate the MER of the Fund for the year ended 30 November 200X for disclosure in the prospectus of
the Fund.
RM
31,764
6,078
1,200
2,482
FIMM
MER RM41.524 x 100
RM3,122,250
1.3304
The MER allows investors and UTC to assess the previous year's cost of holding units in a UTS and to
compare it to past and prospective returns, to the MER of competitor UTS, and to the costs of other investment
opportunities. lt is a simple measure that replaces the multitude of fees, charges and costs listed above.
A gradually decreasing MER over a period of several years indicates that a UTMC may be managing its
operating costs efficiently for its fund size. UTC should note that UTS with a larger fund size should generally
have a lower MER than smaller UTS, as there may be some economies of scale that can be shared with
unitholders. However, this need not necessarily be so.
A newly launched UTS will have no MER. Some UTMC may include in a prospectus for a new UTS an
estimate of the likely MER.
X sECTroN 1.10 MEASURTNG nERFoRMANCE
Clients expect an investment in UTS to provide them with returns better than those of relevant benchmarks,
e.g. interest on bank deposits, KLCI movements, competitor UTS returns, etc. The correct measurement of
investment performance is therefore very important.
Analysis of UTS performance can be difficult because of the different ways investment performance can be
measured. When making performance comparisons, it is important to ensure that the investment methodology
has been consistently applied.
There are many different ways to express investment returns and it can become quite confusing, especially
when returns over various time periods are measured. Returns can be legitimately calculated in a number
of ways, and this can create confusion.
ln order to properly assess UTS investment performance, it is important to standardise the measure of
investment performance. Common forms of expressing returns in relation to UTS include:
RAW RETURN
Raw return is the investment return that measures the total return achieved by holding an investment over
a particular period.
Example:
An investment purchased in 1994 for RM1.00 and sold in 2004for RM2.00 is said to have produced a raw
return of 100o/o. lf the investment had instead been sold in 1999 at the same price, the return is still 100%.
The problem with raw return is that it is difficult to compare returns over different periods. 100% earned by
UTS over a five-year period is clearly a much better return than a return of 100% over a 10-year period - but
how much better? And how do these returns compare with a UTS that has returned 55% over six years?
FIMM
COMPOUNDED ANNUAL RETURN
Compounded annual return shows the annual compound rate of return achieved by an investment over
its holding period. ln the previous example, the former annual compound rate of return on the investment
would be 14.9o/o per annum (i.e. per year) over the five-year period, and the latler 7.2o/o per annum (i.e.
significantly lower) over the 10-year period. A UTS that produced 55% total return over six years produced
an annual return of 7.6oh per annum.
Compounded annual return is superior to the raw return since it adds a more meaningful, and standardised,
time dimension to the measurement of investment performance. Also, most investors are familiar and
comfortable with the term 'per cent per annum'and of the difference between 'simple'and 'compound'interest.
Most interest rates for fixed deposits and borrowings over one year are expressed as rates per annum and
are calculated on a compound interest basis.
Since benchmarks, such as the KLCI and one-year fixed deposit rates, are normally expressed as an annual
rate of return, comparison with UTS performance measured in the same way is valid, i.e. we are comparing
'apples with apples'.
Compounded annual return is therefore a more useful tool in measuring and comparing investment
performance.
1.10.1 HOW IS UTS PERFORMANCE MEASURED IN MALAYSIA?
lnvestment performance is measured in terms of the total return received from an investment over the
holding period. Total return is the difference between the amount the investor invests and the amount he
or she receives on disposal of the investment, plus any income (or other entitlements) received during the
period of ownership of the investment.
ln measuring the performance of UTS, a number of issues arise. Total returns from investing in UTS are
affected by fees - both initial service charges (a 'one-off'fee), and management and other expenses (which are
on-going). The impact of these on performance, particularly an initial service charge, can be significant.
The initial service charge only impacts the investor who pays it, and it is not an amount that is available to
UTMC to invest in accordance with UTS investment objectives. lf we are trying to assess UTMC's ability to
invest, should we therefore ignore initialservice charges? From an investor's perspective, total returns should
almost certainly be calculated after all charges and expenses - especially if they are to be compared with
other investment opportunities that do not incorporate any fees, for example, fixed deposit rates. However,
initial service charges are much more significant to total returns over shorter periods than over longer periods
when they tend to become relatively insignificant.
Generally, UTS performance tables exclude the cost to the investor of investing in a UTS but do incorporate
the effect of management and other expenses.
The FIMM has collaborated with two international research houses, Lipper and Standard & Poor's, to
produce UTS performance tables for the unit trust industry. Both are highly regarded international research
houses who produce performance tables and other data, and conduct research into collective investments
throughout the world.
The performance tables divide UTS into categories in order to provide more meaningful comparisons. The
categories are broadly as described in section 1.4.3.
:ilsn:
FIMM
Lipper measures UTS performance by taking the NAV of UTS at the beginning and end of a period and
adjusts this for any distributions (and unit splits) that an investorwould become entitled to during that period.
Standard & Poor's computes the performance over a period by comparing the buying prices of units in UTS
at the beginning and end of a period. An adjustment is also made for distributions (and unit splits) during the
period. Both NAV and buying prices exclude the impact of initial service charges. These slight differences
in approach become insignificant over reasonable periods.
The distributions received by an investor during the measurement period are assumed by both organisations
to be reinvested in additional units in UTS. The investment return of an investor, who receives distributions
that are not reinvested, will therefore not be the same as those shown in the UTS performance tables.
However, treating distributions in this way is consistent with accepted practice in calculating returns in the
share market, and in most share market indices.
Both Lipper and Standard & Poor's UTS performance tables calculate total returns over a specified period
rather than convert the total returns to an annual compound rate of return. This may make the returns more
difficult to compare to returns from other investments - particularly fixed income securities and EPF rates
of return.
,1.10.2 UTS PERFORMANCE TABLES
The investment performance of UTS is presented in the form of a performance table. Performance tables
are extremely useful in that they summarise the performance of the whole unit trust industry in a single table
over standardised periods, and on a consistent and objective measurement basis. The performance tables
may incorporate the performance of relevant benchmarks for comparison purposes.
ln many countries, the performance tables alone provide the basis for selection of UTS, such is the perceived
significance of the information contained in the tables.
UTS performance tables usually include a number of elements relevant to the measurement of UTS
performance:
TOTAL RETURN OVER VARIOUS TIME PERIODS.
Commonly, the performance of UTS in performance tables is standardised over one, three and six months,
and over one, three and five years (and sometimes longer). One drawback of UTS performance tables is that
they can cause investors and UTC to focus on the short-term performance of UTS. Short-term performance
is a measure of how UTMC have coped with recent market conditions, but this may not be relevant over the
time period for which UTS is purchased. lf UTS is to be held for say, five years or more, is its performance
over one, three or even 12 months relevant? Performance over long periods shows how UTMC have invested
UTS over a range of market conditions and economic cycles. This may be more relevant to a long-term
investor than performance over the short term.
FIMM
RANKINGS AND QUARTILES
Having measured the performance of each UTS over various periods, it is clearly logical and useful to list
them in order (rank), usually from the highest or best performing UTS to the lowest or worst performing.
The best performing UTS over a period is ranked 1 (i.e. first) over that period; the second best performing is
ranked 2 (i.e. second), and so on. The number of UTS ranked is usually provided so that the reader of the
performance table can see readily how a particular UTS ranks relative to the total number of UTS measured
in the table.
To assist users, some UTS performance tables are divided into quartiles. A quartile includes a quarter of the
UTS measured, and a 'top quartile' UTS is one that ranks in the top 25o/o of UTS measured over the period.
Asecond quartile UTS ranks in the second2S%, and so on. Being 'bottom'or'last'quartile is a position that
UTMC will clearly try to avoid a UTS falling into but, of course, some UTS must be placed in the last 25%
of all UTS measured - even if their total returns are good.
We have seen that it is important to compare'apples with apples', and it is common for UTS performance
tables to group UTS with similar investment objectives. This means that rankings and quartiles become
more relevant and useful.
FUNDS UNDER MANAGEMENT
Funds under management (usually referred to in UTS performance tables as'fund size') are often provided
for each UTS. This may be helpful in assessing UTMC performance as it is sometimes the case that UTS
of a larger fund size perform differently than UTS with a smaller amount of funds under management. The
same may be suggested of UTMC with different amounts of funds under management.
BENCHMARKS
While it is useful to rank similar UTS and to divide them into quartiles, it can also be helpful to incorporate
into the performance tables the total return or 'performance' of a relevant benchmark such as the KLCI,
interest rate, and sometimes the inflation rate and EPF returns. The performance of individual UTS or the
'average' UTS (i.e. the middle ranking UTS, or the average return of all UTS) can then be compared with
other UTS or benchmarks, for marketing and other purposes.
It is sometimes difficult to choose the most appropriate benchmark against which to compare and analyse
UTS performance, especially those UTS with more complex investment objectives.
For example, an equity UTS would tend to use one of the indices produced by Bursa Malaysia as a
benchmark. However, a balanced UTS with elements of cash, fixed income, equities and property would
make the selection of a relevant benchmark much more difficult.
RISK MEASURES
Two UTS investing with similar investment objectives may produce identical investment performance over
the same period. However, the UTMC of one UTS may have taken fewer risks than the other in achieving
a similar return. Cleady, the UTS that achieved the return whilst taking fewer risks is the superior. ln recent
years, UTS performance tables have increasingly considered this aspect of quantitative measurement of
performance.
While a detailed understanding of risk lies outside the scope of this book, it is relevant to see how some
Malaysian UTS performance tables assess this aspect of UTS performance.
As an indicator of risk, Lipper assesses UTS potential for losses by calculating, for each UTS in the UTS
performance table, the worst three months'and the best three months'performance during the last three years.
A less risky UTS will, on this definition of risk, be a UTS with a narrower range between these two extremes.
The range over these two quarters can also be compared with the return over the three-year period.
Standard & Poor's assesses risk as the standard deviation of UTS performance over the last three years.
Standard deviation is a statistical measure of the volatility (or variation) of UTS performance compared to
the average performance over the period. UTS with a lower standard deviation are less risky than those
with a higher standard deviation.
1.10.3 WEAKNESSES OF UTS PERFORMANCE TABLES
Care should be exercised by UTC and others who use UTS performance tables.
It should be remembered that, while the performance tables are factually conect, they are based on historic
quantitative information. A number of studies of UTS investment retums have shown that 'past performance is
not an indicator of future performance'. Therefore considerable care should be used in using UTS performance
tables in selecting UTS for investment, or for a decision to dispose of UTS.
Further, while the historic results shown may be accurate, they are subject to a number of potential
weaknesses. For example, because returns over one, three and five years, for example, are measured to
the same end period, they are sensitive to the more recent returns achieved. Agood one-year return will also
boost the returns over three and five years, perhaps resulting in the appearance of a more consistent longer
term performance. A top ranking UTS over three years, for example, may have performed exceptionally
well over only the last three months, which compensated for abysmal performance over the preceding 33
months.
The returns shown in UTS performance tables for a particular period will not show that the returns achieved
by UTS perhaps came from investment in only one or two highly successful companies, i.e. very high risks
were being taken by UTMC. ln a bull market, the ability of UTMC to obtain large allocations of initial public
offerings can considerably boost UTS performance - especially in comparison with an index that may not
initially include those companies. ls this a fair reflection of UTMC investment skill?
Over longer periods, it is also quite likely that those fund managers responsible for the track record of UTS
have changed. ls it reasonable to consider past UTS investment performance when those responsible for
achieving it are no longer employed by UTMC?
As a result of these - and other - concerns, research houses have started to examine other factors that may
be relevant to the assessment of investment performance of UTS.
CONSISTENCY
We have seen that the performance of UTS can be very sensitive to the period that is selected for
measurement. UTMC may select a highly successful investment period to report UTS performance in
advertising and promotional materials, so such claims should be carefully considered.
Of more significance to long-term investors is the consistency of a UTS's performance over a range of time
periods. lf UTMC have produced consistently above average UTS performance for the past three, six and
12 months, as well as the past three, five and seven years, then the track record may indicate that they
are likely to produce the same superior results in the future. UTMC whose UTS produce, historically, more
variation in returns may not be as reliable in the future as the historically consistent performer.
FIIUIM
Again, we must stress that past performance is not necessarily indicative of future performance. But it does
show how a UTS has performed against competitor UTS in both good and bad times. Long-term investors
look to invest in UTS that perform well throughout all market cycles. After all, most equity UTS tend to
perform well when the stock market is going up. lt is UTS that outperform competitors when the market is
not performing well that deserve consideration. lnvestors should therefore look to invest in those UTS that
have consistently outperformed the relevant benchmark and competitor UTS over reasonable periods.
The Standard & Poor's Star Rankings (which are part of its UTS performance tables) is one method of
evaluating the consistency of UTS performance. Based on the performance of a single UTS relative to its
competitor (pee| UTS, the Star Rankings are awarded to UTS on the basis of consistency in outperforming
competitor UTS.
QUALITATIVE FACTORS
The qualitative analysis of UTS performance is complementary to quantitative analysis. lt involves obtaining
an understanding of how a UTMC operates, the investment process, the structure of the organisation, and its
people. The objective of qualitative analysis is to review the performance of UTS based on an understanding
of the factors that may have contributed to measurable, historic returns.
A qualitative analysis of UTMC will include such elements as:
. UTMC credibility. Who is the UTMC? Who is its parent company?Are they both credible organisations?
What affiliations do they have? Are the senior management - particularly the fund managers - qualified
to fulfil their responsibilities and obligations?
' lnvestment management style. What is the investment management style of the fund managers?
Are they constantly looking for quick profits, resulting in high portfolio turnover? Or are they 'growth'
or 'value' investors? Are they speculative in their investment choices or is the investment process
structured and subject to rigorous scrutiny and ongoing development? Do they rely on their own
research or the advice of brokers?
. Service aspects. ls the UTMC responsive to investors'demands and requests? Are the UTMC business
processes geared to providing above average service? Are they committed to the unit trust industry
and investing in administrative and customer service systems?
Following a review of such qualitative factors, some research houses are recognising (often through the
award of stars on a scale of, say, one to five) UTS that are expected to achieve the investment objectives
set by UTMC. lnvestors can then better assess competing UTS before investing.
1.1O.4 SUMMARY
UTS performance tables published by research houses endorsed by FIMM can be a useful tool for monitoring
investment performance. However, UTC should be aware that the information they provide is only one of
the factors that should be considered in making a decision to invest in UTS.
FIMM
X sECTroN 1.11 uNrr PRICING
ln a listed UTS, units are bought and sold in the same way as listed shares on Bursa Malaysia. A unitholder
disposing of units in a listed UTS - through the market - negotiates a price with a potential buyer of those
units. Atransfer of ownership takes place when the register of unitholders is altered to reflect the new owner
of the units. This is also the position where the UTS is a closed UTS, i.e. an unlisted UTS, where the limited
number of units available, once sold, can only be purchased from other unitholders.
ln an open-end UTS (i.e. a non-listed UTS that is a continuous issuer of units), units are sold to investors
by UTMC and then repurchased by UTMC when investors wish to dispose of those units. UTMC act as a
principal in both transactions. UTMC act like any other supplier of a product and hold a stock of units in each
UTS, from which units are sold to investors or repurchased from them. As the level of stock fluctuates from
day to day, UTMC may need to replenish stocks by acquiring more units through the trustee of the UTS (a
'creation'of units); or, if UTMC hold too much stock, the stock of units can be reduced by asking the trustee
to extinguish units in the UTS (a 'cancellation'of units).
Consequently, there are two sets of unit prices:
a selling and a repurchase price at which UTMC transact with investors, and
a creation and a cancellation price at which UTMC transact with the trustee.
With effective from 1 July 2007, the industry has changed the regime for pricing of UTS from one that is
based on dual-pricing to a single-pricing regime. Under the old dual-pricing method, buying and repurchase
prices are incorporated with initial service and exit charges respectively and are quoted and used separately
for transactions involving buying and selling of units.
However, under the new single pricing regime, all buying and selling of units will be transacted based on a
single price i.e. unit NAV.
ln this section, we will see how each of these prices is determined. The common thread in the calculation
of each is the determination of NAV of UTS. Under the single pricing regime, both sets of unit prices must
be the NAV of that UTS, so the calculation of NAV is vital. lf NAV is inadvertently miscalculated, the effect is
that the integrity of that UTS is undermined since, for example, investors currently invested may have their
interests (i.e. proportionate share of UTS net assets) reduced or diluted by new investors paying a price
below that of the true NAV.
Some UTS have a fixed unit price at which units may be sold to, and repurchased from, investors by UTMC.
ln these UTS, the NAV is fixed at RM1.00 and all unit transactions with investors and with the trustee are
completed at the same price of RM1.00.
FIM]UI
1.11.1 CALCULATION OF NAV
The NAV of UTS comprises the sum of the following:
INVESTMENTS AT MARKET VALUE
The SC Guidelines on Unit Trust Funds include the approved methods by which investments held by UTS
must be valued. Clearly, investments should be valued at 'fair value'. ln relation to investments listed on a
stock exchange, for example, the two permitted bases are
. the last transacted sale price prior to the point in time (called the 'valuation point') at which the NAV
is to be determined, and
the mid-price between the last quoted bid and offer prices prior to the valuation point.
Whichever method is chosen by UTMC, the Guidelines require that it be applied consistently from valuation
to valuation. This helps ensure the integrity of the NAV calculation.
LtQUrDrry (cAsH AVATLABLE FOR TNVESTMENT)
Liquidity is represented by money market instruments (such as bankers acceptances and calldeposits). Net
cash flow in UTS is sourced from:
creations less cancellations of units in UTS. When UTS arrange creation of units through the trustee,
cash for the units created must be paid by the UTMC to the trustee to be held for unitholders in that
UTS. Similarly, when units are cancelled, the trustee will pay cash from that UTS to the UTMC. Both
payments must be made within 10 days of a UTMC's instruction to the trustee to create or cancel
units.
proceeds from the sale of UTS investments, less payments for purchases of investments.
investment income (e.9. dividends, interest, rent, etc) from the UTS portfolio less fees and charges
of UTS.
less Malaysian income tax paid on taxable income of UTS and withholding tax suffered on overseas
investment income received by the trustee on behalf of UTS.
other assets less liabilities, e.g. income receivable less accrued expenses; amounts receivable from
the sale of investments (but not yet received) less amounts payable for investments purchased (but
not yet paid); income tax outstanding on UTS taxable income for the previous year and provision for
income tax on the current year's taxable income.
1.11.2 TRANSACTTON COST FACTOR (TCF)
The transaction cost factor (or expense allowance) is a small addition (in percentage terms) to the NAV of
UTS. lt may be made by UTMC in accordance with SC requirements when units are created (or deducted
from NAV when units are cancelled) in order to protect the interests of the unitholders in UTS. Each time
investments of UTS are bought and sold, transaction costs (such as brokers'commissions on securities
traded on Bursa Malaysia) are incurred. lf no allowance was made for such costs in determining unit prices of
UTS, the interests of unitholders who were not responsible for that UTS incurring those expenses (because
they were not buying or selling units) would be diluted. Therefore, to protect investors in UTS, an allowance
for transaction costs may be added to the NAV in order to determine the unit prices of UTS.
FIMM
lf the transaction costs are not material, no adjustment need be made. ln Malaysia, a transaction cost factor
is usually only applied in determining the creation price of a unit in UTS. With declining transaction costs in
relation to securities listed on Bursa Malaysia following deregulation of the rate of stockbroker commissions
(in line with other international markets), there is likely to be less adjustment necessary to NAV to reflect
transaction costs. Any transaction cost factor applied in determining unit prices must be disclosed in the
prospectus of UTS. The SC requires that UTMC review the amounts regularly and, if necessary, revise them
to reflect changes in actualtransaction costs.
1.11.3 CREATION AND CANCELLATION PRIGES
The creation price is determined in accordance with the formula:
The cancellation price is determined as follows:
During the launch period of a new UTS (a period usually not exceeding 21 days), the creation price is equal
to unit NAV. ln the relatively unlikely event that units are cancelled during the launch period, the applicable
cancellation price is equalthe creation price.
1.11.4 SELLING AND REPURCHASE PRICES
These prices are the most important from the perspective of UTC and investors as they represent the prices
quoted by UTMC, those advertised in the press, and those often used in UTS performance tables.
The selling and repurchase prices of a unit must be the NAV of the UTS.
The selling and repurchase prices of UTS are calculated as follows:
Example:
Assume the NAV of ABC Growth Trust is determined as RM45,626,788 and that there are 65,500,000 units
in circulation. Also assume that no transaction cost factor applies as transaction costs are not material.
Calculate the selling and repurchase prices of a unit by rounding up the unit prices to four decimal places.
NAV per unit NAV of UTS
Units in Circulation
RM45,626.788
65,500,000
RMo.69659218
RM0.6966 is the selling price at which UTMC can sell units to an investor. The same unit NAV will also be
the repurchase price quoted by UTMC for investor wished to dispose of his or her units on the same day.
The SC requires that the unit NAV be published daily in at least one national Bahasa Malaysia newspaper
and one national English newspaper.
FIMM
1.11.5 FORWARDAND HISTORIC PRICING
The selling and repurchase prices of UTS must be the NAV per unit at the valuation point. Traditionally, UTS
in Malaysia have been completing unit transactions with investors on an historic pricing basis. An investor
buying or disposing of units in UTS would be quoted a unit price by UTMC at NAV determined at the close
of business on the previous business day. By contacting UTMC during the day, an investor could be advised
of the unit prices before making an application or requesting a repurchase of units.
While this is convenient for investors and UTC who can advise the precise number of units in UTS that an
investor may obtain (assuming the application is received by UTMC on the same day), it leaves available
an opportunity that may disadvantage others and which is, therefore, considered inequitable.
Assume that Bursa Malaysia rises strongly today. lf UTMC operate on an historic pricing basis in relation to
UTS, an investor may submit an application form with application money, the amount of which will be divided
by the selling price of units that is similar to the NAV determined at the close of business the previous day,
i.e. before today's market rise. The investor can be almost certain that next day, the selling price will be
higher. Therefore, by applying today, the investor has acquired more units than he or she should equitably
be entitled to. This gain is at the expense of other existing unitholders in the UTS.
A more equitable method for determining the number of units to be allotted as a result of an application (and
also the amount of proceeds from a disposal of units) is for UTMC to adopt forward pricing. Under forward
pricing, the investor described previously would become entitled to the number of units resulting from dividing
his or her application money by the selling price which is the NAV at close of business on the day of receipt
by UTMC of the application. The investor pays (or, in the case of a repurchase, obtains) a fair price and
UTMC can create (or cancel) units with the trustee of UTS on the basis of the same NAV calculation.
The Guidelines on Unit Trust Funds state the SC's view that UTMC should transact on a forward pricing
basis - which is considered to be best practice internationally. However, the use of historic pricing is permitted
by the SC where there are acceptable reasons for doing so, and where UTMC agree to recalculate the
selling and repurchase prices of UTS if there is a significant market movement, i.e. where the NAV would,
if recalculated, be different by 5% or more.
1.11.6 UTMC STOCK OF UNITS
We have seen that UTMC may hold a stock of units in UTS to facilitate sales and repurchases of units,
and to reduce the number of creations and cancellations of units with the trustee. The value of its stock of
units can rise and fall in line with the NAV of that UTS. UTMC may, in common with all unitholders, make
a gain or loss through holding units in UTS and this can be a source of profits (or losses) for UTMC. The
SC has set maximum holdings of units for UTMC in UTS in order to limit the UTMC's financial exposure in
this aspect.
UTMC (or their nominees) may hold no more than 3 million units or 10o/o of the units in circulation in a
particular UTS, whichever is the lower. These limits, shall not apply to creation of new units under the EPF
Members lnvestment Scheme.
FIIUIM
I SECTION L.'!.2 uNIT SPLITS AND NAV
A split is the division of a single unit in UTS into two or more units. Sometimes, a split is erroneously
referred to by UTMC as a 'bonus' issue of units. A dictionary definition of a 'bonus' is 'something extra'. As
the following example shows, no additional value accrues to a unitholder who becomes entitled to a bonus
issue of units in UTS.
Example:
The directors of UTMC of ABC Growth Fund declare a split of 1:2 (i.e. one additional unit for every two units
held). An investor with a holding of 1,000 units in the ABC GroMh Fund before the split occurs will therefore
be entitled to 1,500 units after the split has occurred.
ls the investor better off?
NAV before the split RM180,000,000
Units in circulation before the split 100,000,000 units
NAV per unit RM1.80
NAV after the split RM180,000,000
Units in circulation after the split
(1 00,000,000 + 50,000,000)
150,000,000 units
NAV per unit RM1.20
An investor holding 1,000 units before the 1:2 split has an investment with an NAV of RM1,B00 (1,000 x
RM1.80) and after the split, he or she will hold 1,500 units valued at RM1,800 (1,500 x RM1.20). The split
does not add value to the unitholding.
The efiect of splitting units in UTS does not affect the NAV of that UTS; nor does it affect the vatue of a
unitholder's investment.
FIMM
So why do UTMC declare splits? There are a few simple reasons.
The effect of a split is to reduce the stated selling and repurchase prices of a unit after the split has
occurred. Although it makes no difference to the NAV of UTS to do so, for psychological reasons,
investors seem to prefer to hold a larger number of low-priced units rather than a smaller number of
high-priced units. Hence, UTMC like to maintain a smaller unit price simply because the investor can
hold a larger number of units in UTS with the same amount of application money than if the unit price
was higher. By splitting units, a high-priced unit becomes a lower-priced unit and new investors may
be more inclined to purchase units - especially in comparison with competitor UTS that may have
high-priced units.
By reducing the selling and repurchase unit prices and the NAV of UTS, UTMC profit margins on
selling units become less significant in sen per unit, i.e. the spread between selling and repurchase
prices is reduced.
By retaining within the UTS the amounts that could have been distributed in cash, there is no effect on UTS
NAV (and the value of unitholdings) and unitholders receive no income that need be declared for income tax
purposes. By maintaining UTS NAV (and the value of unitholdings), unitholders are maximising the value of
the investment in UTS and, since capital gains on realising units held are not generally subject to income
tax, investors are maximising the after-tax return from investment in that UTS.
ln the past, many UTMC declared 'bonus' issues of units in UTS - sometimes several times in each UTS
accounting year. ln some cases, it could be argued that unitholders in UTS were likely to be misled as to the
true investment returns made by UTS. Consequently, the Guidelines require that UTMC declare splits only
at the time of the annual distribution of returns, i.e. on the last day of the accounting year of the UTS.
A unit split is processed by UTMC by closing the register of unitholders of UTS while the number of units of
each holder is altered to reflect the split. Statements of new holdings or unit certificates are then fonvarded
to investors.
FI]UIM
T SECTIoN 1.13 DISTRIBUTIoNS AND NAV
ln most UTS that have unit prices that fluctuate in line with NAV (i.e. where UTS does not have a fixed unit
price of RM1.00), the effect of declaring and paying a distribution to unitholders in UTS is to reduce the
NAV of UTS by exactly the same amount as the distribution. ln other words, the payment of a distribution
is not a'bonus'.
Example:
Assume the directors of UTMC of ABC GroMh Fund declare a distribution of 10 sen per unit. The Fund's
NAV is RM180 million and there are 100 million units in circulation.
ls a unitholder wealthier following the payment of the distribution?
NAV before the distribution RM180,000,000
Units in circulation 100,000,000 units
NAV per unit before the distribution RM1.80
NAV after the distribution
(RM180,000,000 - 10,000,000)
RM170,000,000
Units in circulation 100,000,000 units
NAV per unit after the distribution RM1.70
A unitholder in UTS, after receiving a distribution, would find that the NAV of his or her investment falls by
the amount of that distribution.
Position of unitholder before the distribution payment:
NAV of 1,000 units at RM1.80
Position after the distribution payment:
NAV of 1,000 units at RM1.70
Distribution received (1 ,000 units at 10 sen)
RM1,800
RM
1,700
100
1,800
ln a listed UTS, too, the NAV of UTS should fall as the distribution is declared and theoretically, the market
price of a unit should fall by the same amount. However, and as with all securities listed on a share market,
the market price of units reflects the actions of buyers and sellers and the market price may fall or rise by
more than this amount.
ln a fixed price UTS, the net income earned by UTS is accounted for by UTMC separately from the NAV (or
capital value of a unit). Consequently, when UTS income is paid out to unitholders as a distribution, there
is no effect on NAV per unit.
FIIUIM
I sECTroN !.L4suMMARY
A UTS is an investment structure or vehicle that allows investors, who share similar financial objectives,
to pool their money. A professional fund manager is employed to invest the pooled funds into a portfolio of
investments.
The portfolio of investments may include one or more of the major asset classes, depending on the category
and investment objectives of the UTS. The Malaysian unit trust industry offers investors a range of UTS
designed to meet investors' differing investment objectives.
UTS offer investors a simple, convenient way to gain exposure to a range of investment opportunities that
may, normally, only be available to larger investors. A significant benefit is diversification - investors in UTS
can usually access a broader range of securities or other investments than they could by investing directly
and individually. Such a diversified portfolio can reduce investors' risk. An investor holding a single investment
that falls in value can only suffer a loss. By exposure to many investments held through UTS, the impact of
a single investment falling is considerably reduced.
lnvestors in UTS also benefit from having full-time professional fund managers looking after their interests.
Furthermore, their investment in UTS is liquid, and investors are able to buy and sell units in UTS easily.
While the benefits of investing through UTS are significant, there are perceived disadvantages - the major
one is the fees and charges payable by unitholders to the promoter of the UTS (the UTMC) and to the trustee.
The fees and charges impact investors' returns through reducing distributions and the NAV of UTS. ln fact,
investing in unit trusts is much more cheaper than direct investment into shares market.
The fees and charges levied by UTMC (which cover the operating costs of UTMC) are regulated and are
required to be fully disclosed to investors in UTS before they invest. Detailed disclosure through a UTS
prospectus means that investors are able to make an informed investment decision.
Determination of NAV is the starting point for the calculation of unit prices. Unit prices of UTS are a key
element in the measurement and assessment of UTS investment performance. Understanding how unit
prices are calculated will assist UTC in explaining to investors that unit splits and distributions do not increase
the value of a unitholding in UTS.
FIMM
Srtr,tnsr QuEsrroNS ON CH.tprrn 1
1. What is a UTS? List the benefits and disadvantages of investing in UTS.
2. Describe the structure of UTS and the role of each of the parties in UTS. Who owns the assets of
UTS?
3. What documents govern the operation of UTS?
4, Outline the major difierences between an equity UTS and a real estate UTS (REIT)from the perspective
of an investor.
5. Explain clearly the difference between an open-end and a closed-end UTS. What is a'closed'UTS?
How may investors buy units in an open-end and a closed-end UTS, and in a'closed'UTS?
6. What is the current size of the unit trust industry in Malaysia? Do you think the unit trust industry will
grow? Give reasons.
7. List the major sections of a UTS prospectus. What are the major costs associated with investment in
UTS?
8. Describe how the performance of UTS can be measured.
9. How is the selling price of UTS determined by UTMC?
10. What impact does a split have on the value of a unit in UTS? Give a numerical example to illustrate
your answer. Will the payment of a distribution affect the value of an investor's holding in a UTS?
FIilIM
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APPENDIX 2:
THE STATE OF PLAY OF THE CAPITAL MARKET
MASTERPLAN : INVESTMENT MANAGEMENT
lnvestment management funds in Malaysia consist
of, among others, funds managed by provident and
pension funds; unit trust management companies;
asset management companies and insurance
companies.
BACKGROUND
The provident and pension fund sector in Malaysia
is dominated by the EPF. The EPF, the world's
oldest publicly managed provident fund, was
first established on 1 October 1951 by an Act of
Parliament under the EPF Ordinance 1951 and
operates as an open-ended defined contribution
fund.62 EPF provides a compulsory savings scheme
to ensure security and well-being of its contributors
in old age. Currently, the EPF statutory rate is 23o/o
of the value of Malaysian employees' monthly
remuneration (the employee contributes 11% of
his salary while the employer contributes 12o/o of
the value of the monthly remuneration). As at end-
September2000, the EPF had over RM167.09 billion
of funds under its management.63 Currently, the EPF
Board oversees the formulation and implementation
of EPF policies. The MOF appoints the EPF Board,
and the EPF lnvestment Panel that devises EPF
investment policies.
Other (non-EPF) provident and pension funds
include the LTAT, Malaysian Estates Staff Provident
Fund, Teachers Provident Fund, Kumpulan Wang
Amanah Pencen (KWAP) or the Pensions Trust
Fund, SOCSO and six other provident and pension
funds. The largest of these is KWAP, which was set
up underthe Pensions Trust FundAct 1991 to provide
pension benefits to public employees. Financing for
KWAP comes directly from the Budget allocations
and employer contributions. Another important
component is the SOCSO, which unlike the EPF, is
funded on the basis of social insurance principles.
The LTAT which is based on the Armed Forces Act
1973, applies to servicemen who enlisted on or after
1972 and who are not eligible for pensions.
il Source: Employees Provident Fund.
53 See footnote 62.
FIMM
Unit trust funds are a form of collective investment
that allow investors with similar investment objectives
to pool their funds to be invested in a single
portfolio of securities managed by professional fund
managers. Malaysia introduced the unit trust fund
concept relatively early compared to other countries
in the region. The first unit trust fund in Malaysia was
established in 1959 by The Malayan Unit Trust Ltd.
However, it ceased operations in 1969. From '1960-
80, five new unit trust companies were established,
namely: Asia Unit Trust Bhd in 1966;Amanah Saham
Mara Bhd in 1968; Kuala Lumpur Mutual Fund in
1975; Pelaburan Johor Bhd and MIC Unit Trust Bhd
in 1977. These five companies launched a total of 18
funds over the same period.
During the period 1960- 80, the unit trust industry
was regulated jointly by the ROC, the Public
Trustee of Malaysia, the Minister of Domestic Trade
and Consumer Affairs and BNM. Such a diverse
involvement of bodies necessitated the setting up of
a committee (comprising representatives from each
authority) to co-ordinate the approval process for
the establishment of unit trust schemes. Accordingly,
the lnformal Committee for Unit Trust Funds was
established in 1975. This period also witnessed the
launching of SkimAmanah Saham Nasional (ASN) or
the National Unit Trust Scheme by the government in
1981 with the purpose of inculcating savings habits
among the Bumiputera community and to encourage
Bumiputera ownership in the corporate sector. ln
1990, the Amanah Saham Bumiputera (ASB) or the
Bumiputera Trust Fund was launched to replaceASN
as a fund that transacted based on daily pricing of
its NAV.
The extensive marketing strategies adopted by the
ASN and ASB played a key role in making unit trusts
a "household product" in Malaysia. ln 1993, the SC
became responsible for the regulation of the local
unit trust industry with the enactment of the Securities
Commission Act 1 993 (SCA).
FIMM
Asset management companies, commonly referred to
as fund managers, are companies that manage funds
on behalf of a client for the purpose of investment.
Under section 15A of the SlA, asset management
companies in Malaysia are required to be licensed.
As at end-1999, there were 71 licensed asset
management companies. At that time, local asset
management funds totalled RM40.7 billion. The bulk
of local funds under management, approximately
RM33.0 billion (or 80.9% of total local funds under
management by asset managers) were from unit trust
funds that had chosen to outsource their investment
functions to external fund managers.n
lnsurance companies also form a significant source
of institutional funds in Malaysia. General and life
insurance companies, together with Takaful play
a major role in managing funds on behalf of their
policyholders. As at end-September 2000, local
insurance funds had a total of RM50.4 billion worth
of assets under management.os
DOMESTIC OVERVIEW
DEPLOYMENT OF DOMESTIC FUNDS
Sources : Securities Commission: Whanul Economc'trics !-orecasting Associates
Group; Bank Negarl Malaysiai Monetary Authority of Singapore: Unired
Nalions Ecolomic and Sociai Cjommission for Asia and thc Pacific; Census
ard Slatistics Depanment. Hong Kong Special Administrative Region
Note ; National savilgs rate equals gross domestic saving divided bv nominal
6DP
*p-prcliuinarf
e Source: Securities Commission.
65 Sourcel Bank Negara Malaysia. This is a preliminary figure.
Malaysia has a relatively high propensity to save
(Figure 69). From 1990- 99, Malaysia's average
savings rate of about32.4o/o of GDP was on average
higher than that of developed countries such as
the US, Canada, Germany and Japan. lt was also
comparable to Hong Kong's. The value of savings
mobilised by banking institutions has grown more
than five-fold during the 1990s, thus increasing
the domination of the banking sector over the EPF
and other forms of managed funds (such as unit
trust funds and insurance funds), which have not
expanded as rapidly (Figure 70).
Brea&do*! of fuad;,raanac6dlw tbi
Malaysian financial ser:vicco sedtor as at end-lgtXl
Sourcss:
Notes :
llank Negea Malaysia; Securities Commission
a) Funds managed by hanking insritutions rcfbrs ro deposits of the ijnucial
sysrem, uhich includes commercial banks. finmce conpanies, merchant
banks. discount houscs. Islanric banks and BSN
b) Funds nanaged by the EPF reflr to total accutnulated contribuhr's balances
c) Fund managed bv other prolident and pension refers to assets of non-EPF
provident and trrcnsior t'unds which include the l.'lAT. Malaysian Estates
Stafl Provident fund, Teachers Provident Fund. KWAP, SOCSO, and six
other provident ard pension funds
d) funds managed by insuance companies rel'ers to tonl asses of life and
gencral insurance funds
e) aunds managed by unit trust companies retbrs to total NAV of unit trust
coupanies
f) Funds managed by asset managemelt compmies ref'es ro total f'6lds
rrranrgr'd h1 as\et managcmenl compsnie\
g) l)ab for lunds managed by the banking sector and other providen! and
pension funds are preliminary
ln 1999, about RM560 billion of Malaysia's financial
assets were channelled into the banking sector in
the form of deposits; by contrast, managed funds,
including EPF, amount to less than half that amount
(Figure 71). Nevertheless, managed funds (especially
unit trusts) have enjoyed growing popularity in recent
years. The dominance of the banking sector in
Malaysia compares with the situation in Japan and
Australia (Figure 72 and Figure 73) but is in stark
contrast with that of the US, where capital market
intermediaries play a far larger role in savings
mobilisation (Figure 74).
a Fltt
:g6.'
5:
E
co
tG
Sources; flank Negara Malaysia; Securities Comnlission
Notes : a) Funds managed by banking institutions refers to deposirs of the financial
system, which includes commercial banks, finance companies. fierchant
banks, discoul houses, lslamic banks and BSN
b) l'unds maMged by the EPF referto toal accumulated contributor's balances
c) Fund managed by other provident an{l pension .efers to dsets of non-EPF
prolident and pension funds which include the LTAT, Malaysian Esates
Staff Provident Fund, Teaches Provident Fund, KWAP, SOCSO, and six
other provident and pension f'ud$
d) Funds managed by insurance conrpanies refers to total assets of lit'e and
general insurance funds
e) Funds managed by urit mst companies releru to tolal NAV of unit trusr
compmies
1) Funds muaged by asset management companies relers to total funds
managcd b; rsct managcment companies
g) Dala tbr lunds managed by the banking sector and other p.ovident and
pcnsion funrJs ue prcliminary
Sources: Resewe Bmk of Autralia: Securities Commission
Sources: Federal Reserye; quoted from Bank of Japmi Securities Commission
Note: Figuresrefertovalueoflinancialassets
Breatdop! of frnd! Farlrged by tbc
J.trscre faeDcfd a€rvlces sec:tor as at ead-lf,af,ch 2ofi)
Souces: Bilk of Japan; Secuities Commission
Nole: Figures refers to value offinancial aswts
Breakdown of frradsnanaged bythe US financial.services sector
as at end-March 20OO
o
E8
)*
Total rueber of investors in the KLSE (end 1994-99 average) Irrvestor pmffle by value of total equity held orl tlle KLSID and
selected exchalges as at endJune 1998
FIMTUI
From 1994- 99, foreign and local institutions
represented on average less than 3Yo ol the total
number of KLSE investors (Figure 75), but held about
43o/o of the total value of KLSE equities (Figure 76).
Figure 77 shows the investor profile by value of total
equity held on the KLSE and selected exchanges as
at end-June 1998.
Foreign
nomlnees
t.1%
Sources:Kuala Lumpur Stock Exchalge; Sectrities Commission
KLSE investor profile by value of total equity held
(end 1994-99 average)
Otherr-*-.
2-Oo/"
Foreign
institutiois
I
The investment management industry in Malaysia
is dominated by provident and pension funds, in
which the EPF features strongly (Figure 78). ln 1999,
provident and pension funds handled 66% of total
assets under management in Malaysia.66 Meanwhile,
unit trust companies and asset management
companies only accounted for about 15% and 3%
respectively of total assets under management in
Malaysia in 1999 (Figure 79).
IForeign retail Domesdc retail
r ForeiEn iostitutions tDomestic institutions
Afthur Andersen: Kuala l"umpu. Stock Exchangc;Salmon Smith
Bamey; Stock Exchange oi tlong Kong;'faiwm Stock E\change;
Tokyo Stock Exchange
Malaysian investment managemerrt ftmds
- assets by category of furd
:: I Asset milagement compmies .Insurance funds
Eo
goa6
e
I
oRou
a
P
Sources:Kuala Lumpur Stock Exchange: Securities Commission Sources : Bmk Negan Malaysia; Securities Conmission
Notes: a) Dah lbr asset management cornpmies funds undea mmagementwere not
available for the period 1990-94. 1998 figures are as atend-Jure. Olher
provident and pension l'unds inciude the LT,A"I, Malaysian Estates Stalf
Provident Fund, Teachers lrovident Fund, KWAP. SOCSO and six other
provident and pension fmds
b) Data for f'unds managed by other provident and pensior firndsin 1999 are
preliminary
s A statutory requirement that uplo23o/o of employees' remuneration must be contributed to the EPF is thought to be a major
reaso4 for this.
Domestic j
nomlnees
J*il.llz
FIMM
Malaysian lnvcstaeat mrnagement fundg
- assetB by category of fund as st erd-1999
Bank Negan Malaysia: Securlties Commission
Data lbr funds moaged by othea provident od pension l'unds
oepreliminary
PROVIDENT AND PENSION FUNDS
Provident and pension funds represent the most
significant sector of the Malaysian investment
management industry. The sector is dominated by
the EPF, which manages 86% of overall provident
and pension funds (Figure B0). The absolute value
of EPF investments continued to rise steadily during
the 1990s, although it declined in proportion to total
unit trusts' NAV from 1992 to 1996 and 1997 to 1999,
reflecting the increasing popularity of unit trust funds
as a savings vehicle (Figure 81). Currently, pension
and provident funds' investment portfolios are
concentrated in low risk assets. ln 1999, for instance,
about 75% of the overall provident and pension fund
portfolio consisted of PDS, MGS, straight loans and
\.- banking sector deposits (Figure 82).67
Provideat antl pensiotr funds as at end-1999 (pr€timiaary)
Non-ePF -
t4.5%
tlank Negaa Malaysia; Securities Commission
Non-EPF provident and pension funds include the LTAT, Ma:aysian
Estates SsffProvident Fund, feachers Provident Fund, KWAp, SOCSO
and six other prcvident Md pension funds
Value of EPF investments relative to total unit trusts' NAV
Sources
Sourcesl Noie:
Note:
26,:
180::
,:
160::
a.
140;:
i:
r20r.
roo,
ao,:
o
I
5
I Value of DPF inves:ments (left uis)
* Ratio of EPF inveslm€nts' value to
unit trusts' NAV (right uis)
lg95
Souces: Bank Negam Malaysia; Securities Commission
Investme[t portfolio of provident And pension funds as at
end- 1 999 (prelininary)
Other assets-,..,,
3.3%
Equity
2s.59;
Bonds
9.3_.6
Lous
t4.5.1,
Deposits and--
money market
inslruments
MGS
27.30/o
67 Source: Bank Nagara Malaysia. Sources: Bank Negara Malaysia; Securities Commission
FIMM
INSURANCE FUNDS
The assets of Malaysian insurance funds have been
growing rapidly (Figure 83). Life insurance funds, in
particular, have accounted for most of the sector's
funds under management. ln '1999, 69% of insurance
funds'assets belonged to life insurance funds (Figure
84). During the same period, local asset management
companies managed RM289.6 million of insurance
funds.68
ln 1999, insurance funds in Malaysia concentrated
their investments in non-equity instruments (Figure
85 and Figure 86). ln the same year, around 90%
or more of life and general insurance funds were
invested in cash and deposits, MGS and PDS. The
bulk of life insurance funds (42%) were invested in
corporate debt securities, while 53o/o of general life
insurance funds were held in the form of cash and
deposits.
Invesfuert porffolio of Malaysian life lnsurance funds as at
end- 1999 (preltntnary)
MGS
17.8o^ Cash an(
deposits
3l.o%
Investmentproperties
6.9%
Sources:Bmk Negda Malaysia; Securities Commission
Insurance funds' assets by type of tund as at end-1999
Source: Bank Negam Malaysia
Investnent porffolio of Malaysian general insurance funds as at
end-1999 (preliminary)
Foreige--
assets
o.1,% MGS
Ceneml-,-.. 21.2%
insumce
funds
30.5%
Life
insumce
funds
69.5%
Corpomte
debt
securities
Investment .__-,_-,
properties
2.9%
Otier
investments
o.50.6
Sources:Bmk Negam Malaysia; Saurities Commission
Source: Bank Negm Malaysia
s Source: Securities Commission.
FIMM
UNIT TRUST MANAGEMENT COMPANIES
Unit trust funds, which are managed by unit trust
management companies primarily for local retail
investors, have enjoyed growing popularity since the
beginning of the 1990s. The financial crisis of 1997-
98 notwithstanding, growth in NAV of Malaysian
unit trust management companies during 1990-99
has generally trended upwards (Figure 87). From
1993-96, the NAV of local unit trust management
companies more than doubled from RM28.6 billion
in 1993 to RM60 billion in 1996. With the onset of the
Asian financial crisis, NAV declined sharply by a4%
from 1996 to 1997 but has since recovered, albeit
more gradually.
NAV of t]te unit trl,'sts irdustry ln Malaysia relatfu€ to
KLS}E market capitalisation
?oa r unit Trust NAv (left ads)
:: * Ratio of NAV to KLSE mdket
OOI capitalisation (right uis)
,, I
of urit.trust&rnds aad urlit.trust matageaent companies
1,1O,.
al
rzol
; loo::
,.
80.::
a
uor!
401:
::
20;
o- - .--.-. - .. .. --.-...-. o
1990 l99I 1992 1993 1994 1995 1996 1997 1998 1999 2000
Bank Negara Malaysia; Securities Commission
a) Data for 2000 is as at end-September 2000b)1993-2000 figures include
firnds approved but not yet launchedc)1990-92 figwes only include
launched funds
Number of unit trust holders and number of units in circulatlon
I Unit in circulation (left uis) * Number of unit holders (right sis)
Bank Negara Malaysia; Securities Commtssron
2000 data is as at end-Seprember
- No. of unit trust funds {left ilis} * No. of unit trust
40
35
Sources
Notes:
L4
I
E,
E
50::
eoi
30:
i1.
2o:,
loj,
1990 r99r l9g2 t993 1994 1996 1996 1997 1998 199t)
Bok Negara Maiaysia; Secwities Commission
2000 data is as at end-September
Growth of the Malaysian unit trust industry can be
seen from a rise in the number of unit trust funds
available, management companies established,
unitholders and units in circulation (Figure 88
and Figure 89). Currently, Malaysian unit trust
management companies offer mainly equity-based
products (Table 36), and have tended to concentrate
their investments within the domestic market (Figure
e0).
$pes of unit trust funds available in Malaysia
as at end-September 2OOO
Soue: Lipper Analytical Swices
Note: The carcgories above are those ofl-ippq Analytical Seryices
Souces:
Sources: Note:
Note:
magem€nt compmies (right [is)
1991 1992 1993 1994 1995
FIMM
lnvestment portfolio of Malaysian unit trust iodustry by value
as at end-October 1999 Malaysia's unit trust management industry
is characterised by a high degree of industry
concentration (Figure 92). Five large companies
manage 85% of the total funds in the industry while
the remaining 29 companies manage only 15o/o of
total funds. This is reflective of the small size of
the industry, as well as because Amanah Saham
Nasional Bhd (ASNB), a unit trust management
company wholly owned by Permodalan Nasional
Berhad (PNB), manages almost 70o/o of the unit
trust industry's NAV. Nevertheless, concentration
remains high even when the impact of ASNB is taken
into account, with the next five largest companies
managing about 59% of total funds in the industry
(Figure 93).
Distriburion of funds managed by unit trust mana€iement
companies as at endJune 2OOO
60'' r a b ? 9 llrgrS rzrszL2g2s2zzgglgB
Nuber of uoit truat managment companles
Souce: SecuritiesCommission
Unlisted,l
securities
5.4v"
Source: SecuritiesCommission
As a result, the risk-return profile of funds managed
by the local unit trust industry appears to be limited.
Figure 91 illustrates a hypothetical case of a balanced
investment portfolio composed of 50% bonds and
50% equities. lf fully invested domestically, the
portfolio would have an annual return of 4.6% with
an annualised standard deviation of 175% during the
period 1990- 99. lf the portfolio invested globally in
stocks and bonds, it would increase its annual return
to 7.60/o and reduce its standard deviation to 12.7%
during the period. Thus, global investing improves the
risUreturn profile of the investment portfolio.
Ilficient fircntier for a Malaysian unit trust management company
that has a portfolio consisting of 50% bonds and 50% equities
Riskketun prolile
when invested lO0%
globalty.
Expected ret = 7.6%
Std dev oi ret =.12,,?%
- Eflicieat ftonuer with
global investEent opportunities
I Cledy, the investor .
I with a 50% bonds and :
I 50% equities asset
I allocation improves
his risk retum prcfile
. wheo global investment
opportudties are a€ilable
Risk/retum profile
when invested l0o% I ia Malaysia. 3.5 Expected ret = 4.6% : :. Std dev of ret = 17.5% l
3.O a9lo1lt213141516t7la
Stildard deviation of retum (percentage points)
Securilies Commissioil; Dahstream/lCV
Estimates are based on historical figures. Monthly retums on the th.eemonlh
Malaysian treasury bill for the period 1990-99 were used as a proxy
tbr the retum on Malaysian bonds. Monthly.etums on the JP Morgan (;-7
Bond Index for the same period were used as a proxy fbr global bond
portlblio retums. Monthl), rctums on the K LCI fbr the psyiod I 990-99 were
used as a proxy for the retum of Malaysian stocks. Monthly retums on thc
Morgan Stanley Capital lntemational lndex (MSCI) Clobal Equity index
pvcr the sameperiod wcrc uscd as a proxv lbr thc relum on a global equily
ponfolio.
d
dE
E
ou6
e
I
:a
90:.
il
701:
o
.E
og
EO
o
E
F€o
OQ
6
a.o.
:
,.o'.
:
6.O,j
b.D
5.O:
:l
4.8:.
Sources
Notel
FITIM
Funds managed by asset management companies
- by type of funds
Source: SecuritiesCommission
Note : a) Converted from US Dollars at a rate of US$1.00=RM$3.80
Aaset Banagement industft funds invested within and
outside Malaysia as at end-i999
Source: Securities Commission
Foreign participation in the asset management
industry is small (Figure 95). ln 1999,78o/o of asset
management companies were 100% locally-owned,
while only 3% were fully-foreign owned. The remaining
18o/o of asset management companies consisted of
joint ventures with foreign fund managers.
E
OUqd
E
o
6g
o0U6
a
Y,
d
Distribution of funds managed by unit trust management
companies excluding ASNB as at endJune 2OOO
3 5 7 I 1r1315L7t921232527 293133
Nmber of unit trust neagement compmies
Sourcer Securities Commission
ASSET MANAGEMENT COMPANIES
Asset management companies manage discretionary
funds on behalf of individual and institutional clients
(Table 37). The bulk of funds under management by
asset management companies were from unit trusts.
Unit trust funds under management totalled RM33
billion at end-1999 compared with RM27 billion at
end-1998. As at end-1999, this amount represented
80.9% of asset management companies'funds under
management compared with 83.2% as at end-1998.
Other types of funds under management include
charitable funds, corporate funds, EPF funds, funds
of government bodies, individual funds, insurance
funds, lslamic funds and private pension funds. The
local asset management industry invested most
of its funds domestically (Figure 94). As at end-
1999, around RM41.0 billion or about 93% of asset
management industry funds were invested within
Malaysia, while only RM3.3 billion or about 7% was
invested abroad.
163.9 149.O
2.8'43.9 1.933.7 r,o48.4 423.3
r,066.o 589.O
432.O 3o9.7
650.4 387.3 rIt.7 106.O
289.6 300.6 5.7
95.3 56.3 1.9 2.3
r.355.O r,076.9 r,984.7 I,135. r
866.3 590. r 6.5 8.4
32-976.5 26,659.5 I I2.5 ao.2
40,739. I 32,O52.2 3.27r.4 1.755.3
FIMM
Ownership Etnreturc of Malaysian asset nanagement companiee
as at md-199!l
FuUy foreign
owned
2.4%
l
l Joint venturLl
witi Bajority
local owaership
5.6%
Source: Securities Commission