FIMM - Chapter 3

FIMM
CHAPTER 3
I STnvICING CLIENTS AND MARKETING
I uNrr TRUSTS
LEARNING OBJECTIVES
This Chapter provides a basic knowledge of how to service clients in the unit trust industry and how to
market a UTS to potential clients.
At the end of this Chapter, you should:
' understand the major UTMC business processes, of which UTC need to be aware, including: . how an investor's purchase of units is processed . how an investor's disposal of units is processed . the various reports a unitholder can expect to receive . how a unitholder's income distribution is determined, paid and subject to income tax.
be aware of what quality service is in the unit trust industry and how to handle a client's queries and
complaints
' understand the process of transferring funds from an EPF account to purchase units in a UTS, and
how loan financing can be used to purchase units in a UTS
' be familiar with the fundamentals of marketing unit trusts to potential investors
' be able to describe the benefits and risks of investing through UTS, particularly in comparison with
direct investment
. be aware of the advantages of regular investment in UTS.
\- I SECTION 3.1 ovERVIEw
Providing superior service to clients in the financial services industry is of paramount importance. Some
of the world's most successful financial service companies have built their businesses on providing quality
service.
Potential investors in UTS are not just buying an investment - they are also entering into a financial relationship
(in the broadest sense) with the UTC, UTMC, IUTA,CUTA and trustee. The success of this relationship is
not only measured in quantitative terms (represented by the performance of the UTS) but also in qualitative
terms such as:
. the ease with which transactions can be made
. the responsiveness to requests and complaints made by the investor
. the depth of knowledge of customer service staff of UTMC, IUTA,CUTA and UTC
. the quality of ongoing reporting and customer care.
. Today, businesses pay close attention to business processes, such as forms, ease of conducting transactions,
and to increasing the quality of customer service. Further, technology is playing a crucial role in the unit trust
industry, thus providing even greater opportunities for better service.
FIMM
ln the unit trust industry most new business comes from repeat business with existing clients or through
the network of existing satisfied clients. Therefore, it is important to always have the client's needs in mind
when providing service.
It should be pointed out that the definition of a satisfied client is not necessarily restricted to the short-term. A
client's level of satisfaction will invariably vary over the life of his or her investment in UTS - often reflecting
the underlying performance of the investment portfolio, but also the quality of service and ongoing customer
interfaces with the UTMC, IUTA, CUTAand UTC.
However, in the long term, satisfied clients are the ones that get exactly what they thought they were
purchasing - i.e. an investment that is as described in the prospectus, with no unexpected investment
surprises. This reinforces the fact that in the selling process, UTC should make sure that what is promised
in the sales pitch can, in fact, be delivered.
ln the past, many investors have been enticed into UTS by the promise of high, extraordinary returns, only
to be disappointed by subsequent failure to achieve unrealistic claims. lt is essential that the selling process
includes a full explanation of the various risks associated with investment in UTS - effectively'managing your
client's expectations'. lf a client's expectations are met, then he or she will most probably be satisfied.
An important part of properly servicing clients and investors is 'knowing your product', so we will start PartA
with an outline of the major UTMC business processes associated with the purchase, ownership and sale of
an investment in UTS. The processes outlined are necessarily generic and may not apply to all transactions
or to every UTMC. They are a summary of detailed processes, and serve to illustrate the major steps that
might be involved and of which UTC must be aware.
ln Part B, we will examine some basic marketing concepts and offer pointers to help UTC market UTS,
including a review of the main features of the alternatives to investing in UTS.
FI]UIM
ln the unit trust industry most new business comes from repeat business with existing clients or through
the network of existing satisfied clients. Therefore, it is important to always have the client's needs in mind
when providing service.
It should be pointed out that the definition of a satisfied client is not necessarily restricted to the short-term. A
client's level of satisfaction will invariably vary over the life of his or her investment in UTS - often reflecting
the underlying performance of the investment portfolio, but also the quality of service and ongoing customer
interfaces with the UTMC, IUTA, CUTAand UTC.
However, in the long term, satisfied clients are the ones that get exactly what they thought they were
purchasing - i.e. an investment that is as described in the prospectus, with no unexpected investment
surprises. This reinforces the fact that in the selling process, UTC should make sure that what is promised
in the sales pitch can, in fact, be delivered.
ln the past, many investors have been enticed into UTS by the promise of high, extraordinary returns, only
to be disappointed by subsequent failure to achieve unrealistic claims. lt is essential that the selling process
includes a fullexplanation of the various risks associated with investment in UTS - effectively'managing your
client's expectations'. lf a client's expectations are met, then he or she will most probably be satisfied.
An important part of properly servicing clients and investors is 'knowing your product', so we will start PartA
with an outline of the major UTMC business processes associated with the purchase, ownership and sale of
an investment in UTS. The processes outlined are necessarily generic and may not apply to all transactions
or to every UTMC. They are a summary of detailed processes, and serve to illustrate the major steps that
might be involved and of which UTC must be aware.
ln Part B, we will examine some basic marketing concepts and offer pointers to help UTC market UTS,
including a review of the main features of the alternatives to investing in UTS.
a FIMM
PART A
I sECTroN 3.IuIJRCHASE oF uNrrs rN urs
The following flowchart shows the major steps involved when an investor purchases units in UTS.
WWWWWW
w
FIMM
The flowchart is self-explanatory.
The purchase process begins when an investor becomes interested in, or aware of, the advantages of
investment in a particular UTS and finishes when he or she receives a statement indicating the number of
units purchased in the UTS. (Note that where a UTC represents an IUTA or CUTA an application will normally
be forwarded to the IUTA or cuTA before being passed to the uTMc for processing.)
You should try to link the purchase process in your organisation to the generic process shown in the
flowchart.
Some specific aspects of the purchase process are commented on below
UTC
ln many cases, UTC bring about the purchase process.
It is important to note that the role of UTC should be more than merely to 'sell'. UTC should be actively
involved in providing information to the investor, both during the selling process and on an ongoing basis.
As the market develops, and as investors become more financially aware, the unit trust industry is moving
from 'selling'to relatively unsophisticated (in investment terms) customers, to a situation where informed,
demanding and, increasingly, high net worth clients purchase units in UTS that are needed to achieve their
financial goals. The rise of the financial planning industry in Malaysia is evidence of this (see Chapter 5).
UTC, therefore, need to justify the commission they earn, and that involves demonstrating UTCs' regular
involvement in a process that does not end at the point where an application form is lodged with UTMC. UTC
should be involved in the process to ensure that customers receive quality service. To meet the requirements
of increasingly sophisticated consumers, UTC must fine-tune product knowledge and maintain high ethical
standards in marketing skills. They are also expected to provide timely, value-added advice to their customers
on how to manage the investments, such as portfolio rebalancing.
UTMC
The role of UTMC is obviously important to the entire purchase process. UTMC have a pivotal role in coordinating
and controlling the various stages in the process, from receiving the application form, banking the
cheque, informing the trustee, updating their records and then, finally, issuing the statement (or certificate)
confirming an investor's purchase.
UTMC need to be well-organised and well-equipped in terms of technology, human and other resources, to
ensure that the process works according to plan. There are many interfaces and connections in the process;
if only one of them goes wrong, it could create a problem for the client. Staff members of UTMC need to
keep focus on quality at all stages. A simple data entry error can cause great inconvenience for the client.
The simple admonition of 'do it right, do it once' is highly relevant for the UTMC. UTC, too, can assist by
ensuring application forms are properly and legibly completed.
FllulM
TRUSTEE
The role of the trustee is supervisory in the purchase (and in the subsequent disposal as well) of units. The
trustee will receive a great deal of information throughout the purchase process, and monitors and controls
the process by reviewing the information given to it and by making its own reviews and enquiries.
The trustee is required under the SC's Guidelines on Unit Trust Funds to ensure that the procedures and
processes used by UTMC in buying, selling, valuing and pricing of units are adequate and in accordance with
the deed and regulatory requirements. Should the trustee feel that UTMC processes are inadequate, it will
report this to unitholders - together with the steps it has taken to ensure the shortcomings are corrected.
lf everything goes according to plan (and, of course, according to the deed and the law), the trustee's
intervention in UTMC business processes will be minimal. However, where inconsistencies, errors, or even
fraud, are detected, then the trustee, as watchdog, will become actively involved in safeguarding the interests
of the unitholders and investors, and in ensuring the process is corrected.
BANK
The bank's role in the purchase process is basically to maintain the UTS bank accounts and, on the
instructions of the trustee, to receive funds and to honour cheques drawn.
FUND MANAGER
ln some UTMC, the fund manager is very much part of the business; whilst in others, the responsibility to
manage the investment portfolio of UTS is mandated to an externalfund manager (although often part of
the same corporate group as the UTMC).
ln either case, the fund manager needs to keep an eye on cash flows into and out of the UTS, and to make
sure that the UTS is invested as the law, the prospectus, the deed, and prudent investment policy dictates.
At the end of the day, investors are purchasing the fund manager's expertise in deriving returns from the
portfolio of investments managed by them. The fund manager, therefore, needs to keep a watchful eye on
the portfolio.
For example, consider a situation where a client invests in a UTS with an investment objective of high capital
growth and minimal investment in cash. Assume that the fund manager has not invested in accordance
with the investment policy, but has kept a large portion of the UTS assets in cash. Should the market then
rise sharply, the investor will be exposed to cash (rather than, say, groMh equities), which is not what the
investor had expected and this will subsequently lead to investor queries and complaints.
FIIUIM
COOLING.OFF RIGHT
As a safeguard to an investor who may have purchased units without fully understanding the UTS purchased,
orwho may have been misled by UTC, the SC has imposed upon UTMC an obligation to provide an investor
with an opportunity to reconsider his or her purchase. This is known as the'cooling-ofi'right, which must be
disclosed in the prospectus of UTS.
The cooling-off right, to be exercised within six business days, gives a first time investor the right to a refund
of his or her application money without deduction of any sales charge.
The Guidelines on Unit Trust Funds state that the refund for every unit held by the investor, pursuant to the
exercise of his or her cooling-off right, shall be the sum of:
. the NAV per unit on the day the units were first purchased; and
' the sales charge per unit originally imposed on the day the units were purchased.
The cooling-off right is only accorded to a first time investor other than those listed below:
. A corporation or institution;
o { staff of the UTMC; and
. UTC
UTC should be aware of UTMC policy in applying the cooling-off right.
Example of UTMC policy:
An investor's application money relating to an application for units in UTS is banked by UTMC on Monday
(Day 1). The investor wishes to use his or her cooling-off right. Assuming business days are Monday to
Friday (and there are no public holidays), the last day for receipt by UTMC of the investor's request to apply
the cooling-off right will be the following Monday (Day 6).
Where an application for units relates to an amount transferred from an EPF Account (see Section 3.8), the
cooling-off right applies from the day the application for units in UTS is received and accepted by UTMC,
subject to approval from EPF.
UTC should note that UTMC may apply policies that differ to those stated.
I sEcrroN 3.3 REruRCHASE oF uNrrs rN urs
Although investment in UTS is generally for investors with a medium to long-term investment horizon, a
unitholder has the right to withdraw from UTS at any time. UTMC are obliged to repurchase an investor's
units at the prevailing price once it has received a proper request. lt is important that UTC is aware of all the
requirements of UTMC, otherwise a client's repurchase request and payment may be delayed.
The repurchase process itself is, however, reasonably simple and is depicted (generically) in the following
diagram.
FIMM
REPURCHASE OF UNITS IN UTS wwwwwffi
Many of the comments made in section 3.2 relating to the purchase of units in UTS also apply to the
repurchase process, so they will not be repeated in this section. However, the following comments should
be noted:
FTTIM
REPURCHASE NOTTCE DOgUilENT
Most UTMC have a repurchAse request form, which is to be properly completed by a unitholder before a
request to sell his or her units can be processed. The form of request to the UTMC to repurchase units
may also be printed on the back of the UTS certificate (where one has been issued to the unitholder). The
unitholder must also complete a payment instruction, i.e. an instruction either to credit the bank account of
the unitholder or to fonrvard a cheque for the proceeds to him or her. Some UTMC may allow for payment
to be made by telegraphic trarrsfer.
PAYOUT PERIODAND UTS LIQUIDITY
The Guidelines on Unit Trust Funds require that UTMC pay the repurchase proceeds to the unitholder 'as
soon as possible'and within 10 calendar days of receiving the repurchase request.
To be bble to meet this requirement, UTMC must make financial arrangements so that payment can be made
within this period. ln part, this can include maintaining a sufficient level of cash or liquid assets within UTS.
UTMC can then cancel units repurchased from unitholders and utilise the cash held in the UTS (followingr
payment by the trustee for the cancelled units) to meet its obligations to unitholders.
But what happens if liquidity in a UTS is insufiicient, and the trustee believes it is not in the best interest of
unitholders to sell UTS investments to raise further cash to pay for repurchases? This situation may occur
where the investments cannot be fairly valued - perhaps because the market on which the investments
are listed is temporarily closed. Clearly it would be unfair to try to determine the NAV of a unit in such
circumstances and, consequently, the value of the units cancelled by UTMC cannot be determined.
The Guidelines on Unit Trust Funds, therefore, allow the trustee to suspend (for up to 21 days) the sale
and repurchase of units in UTS where the interests of the unitholders (or potential unitholders) would be
otherwise materially affected. After 21 days, the consent of unitholders to extend the suspension date and
the repurchase of units must be obtained by calling a meeting of unitholders.
ln all cases of suspension of the sale and repurchase of units in UTS, the trustee must advise the SC
of the suspension and give its reasons for doing so. When the suspension is lifted, the SG must also be
advised.
The effect of suspension is that transactions in that UTS cease. You should note that a suspension of the
sales and repurchase of units in a UTS is, fortunately, a very rarb event, but that it is done to protec* investors
in UTS.
SWITCH
A unitholder may request that the proceeds from the disposal of his or her units be reinvested in another UTS
offered by the same UTMC. This transaction is called a 'switctr', and may be broken down into a repurchase
of units in one UTS and a sale to that investor of units in another UTS. The processes are largely the same
as those described in section 3.2 and in this section, except that the payment for units repurchased by UTMC
is automatically processed as the application amount for units in the second UTS.
You should be familiar with UTMC procedures in relation to a switch.
Often a switch will be in an investor's best interest as UTMC may reduce or waive the fee on application
for units. A switch can be useful in varying a client's portfolio as a result of changing market conditions or
personal circumstances. However, UTC must be aware that although switching fees may be waived, sales
charges may be incurred, e.g. when switching from a no-load to a loaded fund.
FIMIUI
I sECTION 3.4 REroRTTNG To uNTTHoLDERS
Keeping investors informed is a vital part of quality customer service. An investor in UTS will receive a
number of statements and reports during the life of his or her investment. (Note that each UTMC will have
its own reporting processes, so your client may not receive allthe reports described below or may receive
combined reports. ln particular, the frequency at which some reports are issued by UTMC may vary.)
3.4.1 ON ACQUISITION OF UNITS IN A UTS
An investor in UTS will generally receive from UTMC:
. confirmation that the investor's application amount has been received.
' confirmation of the number of units acquired in the UTS, and the NAV of a unit on the date of allotment
of units
' confirmation on the rate of initial service charge imposed both in percentage form and actual value
as well as the net amount invested net of service charge
' a certificate for the number of units issued may be provided but this practice is becoming less common
and a statement is issued instead. ln some cases - usually where the unit price is fixed at RM1.00
- in place of a certificate or a statement, an entry is made to a passbook issued in the name of the
investor.
3.4.2 DURING THE PERIOD IN WHICH UNITS IN UTS ARE HELD
At regular intervals (say, quarterly, half-yearly or annually), UTMC will commonly issue to all unitholders a
statement showing not only the number of units held but the valuation at the date of the statement. This is
particularly common where no certificates of units held are issued to investors by UTMC. Such statements
are usually accompanied by a report or update on the performance of the UTS.
The Guidelines on Unit Trust Funds require each UTS to publish at least two reports for each financial
year - an interim report and an annual report. Each unitholder is to be sent a copy of each report within two
months after the end of the financial period. These reports provide comprehensive information about the
performance of a UTS.
UTC are strongly encouraged to familiarise themselves with the reports.
The opportunity to discuss the reports and answer related questions is an excellent way to provide superior
customer service. These reports help your client to monitor the progress of his/her investments and discover
whether the investments continue to meet his/her objectives.
FITIM
ANNUAL REPORT
The major contents of an annual report of UTS include:
. Key Performance Data
This section summarises the highlights of the UTS. Also required to be disclosed is the average annual
return to investors over one, three and five years, and since launch. The SC also encourages disclosure of
relevant benchmark indices to allow investors to properly compare the performance of UTS.
. Manager's Report
This report would state among others:
. the UTS's investment objectives and policies
' the investment strategy and asset allocation during the period and details of any significant
changes
' an economic review, including stock market review, outlook and proposed investment shategy.
. Trustee's Report
The trustee must state whether, in its opinion, the UTMC has managed the UTS in accordance with:
. the limitations imposed on the investment powers under the deed . the other provisions of the deed . the SC's Guidelines on Unit Trust Funds . the law, particularly the Securities Commission Act.
The trustee must also advise of any shortcomings it has found in the unit pricing and transaction processes
of the UTMC, and the steps taken to ensure the shortcomings are corrected.
. Financial Statements of UTS and Auditor's Report
The financial statements should give a true and fair view of the UTS and should be prepared in accordance
with generally accepted accounting principles, statutory and legal requirements, and the deed. Note that an
exposure draft of accounting standards applicable to financial statements of UTS has been published.
INTERIM REPORT
The interim report of UTS should, as a minimum, include:
. the Manager's Report . the Trustee's Report, and . financialstatements.
The interim financial statements need not be audited but, if not, should be endorsed by the directors. The
auditor's report would normally accompany the audited interim financial statements but, if not, a statement
of whether or not the financial statements were qualified by the auditor should be provided.
FITIM
3.4.3 ON DISPOSAL OF UNITS
An investor in UTS will generally receive from UTMC:
' confirmation of receipt by UTMC of a proper request (and, if applicable, correctly endorsed unit
certificate) that it repurchased from the unitholder a specified number of units, all units, or units to a
specific value
' confirmation of the number of units disposed of by the unitholder, the NAV of a unit on the date of
repurchase of the units, and the total amount payable net of fee to the investor by the UTMC
' confirmation of the rate of exit fee imposed both in percentage form and actual value as well as the
total amount repurchased
' confirmation of the current balance (if any) of units held following the disposal
' if the UTMC issues certificates for units held, a new certificate (balance certificate) for the remaining
units
' in some cases, a passbook entry reflecting the disposal of the investor's interest in UTS.
I SECTIoN 3.5 INCoME DISTRIBUTIoNS
With effect from 1 January 2001 , the term 'distribution' rather than 'dividend' is required to be used in relation
to payments of income to unitholders. When discussing a unit trust with a client, UTC should not refer to a
'dividend'payable by UTS but rather to a 'distribution'.
3.5.1 DISTRIBUTABLE INCOME OF A UTS
UTMC will determine, with the trustee's approval, the total amount of income of UTS to be distributed to
unitholders. There is no obligation forthe directors of UTMC to declare a distribution, although the investment
objectives of UTS, unitholders'expectations, competitor UTS distribution rates, and bank deposit rates all
afiect the decision.
The amount available for distribution from UTS may include only realised income or gains, i.e.
. dividend income received . interest income received . other income received . realised capital gains from the sale of investments,
and after deducting expenses and taxation.
The SC requires that the amount of income actually paid to unitholders (or, at the request of a unitholder,
reinvested in additional units) for a period or financial year must be prudent and, in addition to including only
realised amounts, should reflect the objectives of the UTS. UTS with an income objective should generally
make income distributions at a level greaterthan those from UTS with a capitalgrowth objective. The trustee
is required to include, within the annual report of UTS, a statement verifying that the income distribution
reflects the investment objectives of the UTS, and
' total returns (i.e. income and capital growth) earned by the UTS during the period . UTS income for that period or year . that sufficient cash flow exists with which to make the payment, and . the stability and sustainability of the distribution.
FTMM
UTMC must not dispose of investments of UTS for the sole purpose of realising capital gains for distribution
to unitholders in UTS. Disclosure in the financial statements of the source of distributions from the UTS is
also required.
The objective of these requirements is to ensure that investors are not misled by apparently high 'income'
distributions that may be sourced from realised capital gains, and to provide better disclosure to unitholders
and prospective investors as to the possible level of income distributions in future years.
UTC has the responsibility to advise clients that a UTS with a capital growth objective does not normally
pay out a high level of income distribution. Then - with the advice of UTC - clients can better structure an
investment portfolio of UTS likely to produce the desired level of income untainted by amounts of capital gain
paid out at the same time. An investor using distributions of capital gains to meet normal living expenses
may be unaware that his or her investment capital is being eroded.
3.5.2'BUYING'ADISTRIBUTION
The unit day method (or similar time-apportionment methods) of determining unitholder distribution
entitlements is often used where the unit price of the UTS remains fixed at RM1.00. The date of purchase
or sale of a unit by a unitholder is, therefore, accurately and equitably reflected in his or her distribution
entitlement.
However, where the distribution entitlements for an accounting period are made according to the number
of units held on the ex distribution date, it is possible for an investor to become entitled to the full amount
of a distribution (sen per unit) by acquiring units immediately prior to that date. ln other words, the period of
ownership prior to the ex distribution date is irrelevant. UTS that operate in this way determine an investor's
distribution entitlements in exactly the same manner as dividends in a company are determined. lt is possible,
therefore, to 'buy'a distribution entitlement for the full period by acquiring units just before the ex distribution
date.
UTC may attempt to use the forthcoming entitlement to a distribution from UTS to encourage investors to
buy units immediately. ls this appropriate? The client may appear satisfied having received a distribution
entitlement for six months or more, despite being invested in the UTS for perhaps only a few days. However,
the decision to buy immediately prior to the ex distribution date has reduced the investor's capital, since
the UTS prices will fall on the following day by the amount of the distribution. The investor has, in effect,
turned his or her capital into income and is no better off. (lndeed, if an additional tax liability arises on that
distribution, the unitholder may be worse off!)
UTC who use this technique to encourage acquisition of units in UTS close to the ex distribution date may
not be acting in the best interests of the client.
FIMM
Example of a Distribution Warrant:
TRUSTEE COMPANY BHD
TRUSTEE OF XYZ GROWTH FUND
DISTRIBUTION WARRANT
We hereby certify that Malaysian lncome Tax deducted as above has been or will be accounted for by us to the Director-
General of lnland Revenue Malaysia. Please retain this voucher for submission to the Tax Authorities
Unitholder name
Address
Account no.
Yours faithfully,
Trustee Company Bhd
Trustee of XYZ Growth Fund
o
@
@
@
I
TAXABLE INCOME
The amount of income received that is taxable
TAX - MALAYSIAN
Amount of Malaysian tax payable on the taxable income
TAX - FOREIGN
Amount of Foreign tax already deducted at country of source
NON-ALLOWABLE EXPENSES
These are the Total expenses less Tax Allowable expenses, where:
Total expenses include management fee, trustee fee, audit fee, tax advisory fee, bank charges,
printing cost, custodial charges, incidental and miscellaneous fee, etc. as stipulated in the
prospectus;
Tax allowable expenses include expenses wholly and exclusively incurred in the production of
gross income that are allowable as deductions under section 33(1) of the lncome TaxAct. ln
addition, section 638 of the Act provides for tax deduction in respect of managers' remuneration,
expenses on maintenance of the register of unitholders, share registration expenses, secretarial,
audit and accounting fees, telephone charges, printing and stationery costs and postages based
on a formula subject to a minimum 10% and maximum of 25o/o of the expenses.
@
@
FllulM
3.5.3
NON.TAXABLE
Non-taxable income
DISTRIBUTION EQUALISATION
It is a portion of money set aside from investments to equalise unitholders'distribution income.
When there are many new investors, the distribution amount may reduce. This is unfair to earlier
investors; so to ensure a more equitable income distribution, a portion of the investment is set
aside to ensure a flat rate of distribution income irrespective of which point of time a unitholder
comes in.
Example:
Undistributed lncome
NetAsset Value
Distribution Equalisation
RM100,000
RM15,000,000
RM100,000
@
RM15,000,000
= 0.67 sen/ unit
Thus for every unit sold, 0.67 sen will be set aside to equalise the earlier unitholders'distribution
income. This portion of money will be regarded as income of the fund for distribution purpose.
NET PAYABLE
The net amount received by the unitholder as distribution.
HXATION OF THE DISTRIBUTION
Generally, the unitholder includes in his or her income tax return, with all other sources of taxable income,
the taxable income amount (as shown on the distribution warrant) of the diskibution paid (or reinvested),
and will receive a tax credit (also shown on the distribution warrant) to be offset against total tax payable
for the year on total taxable income. lf a tax refund is due, the amount of the UTS tax credit can (in whole
or part) be claimed back from the lnland Revenue.
A unitholder who receives a distribution would complete Form B (Return of Income by lndividual) and include
with Form B the Original Malaysian Tax Voucher to claim a tax credit.
Note that taxation requirements may change from year to year, and UTMC may use forms that differ from
one another.
FIMM
Example:
Using the example of a Distribution Warrant shown above, a unitholder would (assuming the distribution
was for Year of Assessment 2000) complete Form B as follows:
* the total amount of taxable income received for Year of Assessment 2000 is to be entered under Part
B ltem 5 'Dividen (Kasar)'on page 2 of the Form B.
Note: The above format is extracted from Form B for the Year of Assessment 2000. lt may not be applicable
for future years of assessment.
X sECTroN 3.6 ACCouNT MATNTENANCE
The flowcharts showing the processes by which units in UTS are purchased and repurchased include
reference to the Register of Unitholders maintained by UTMC for each UTS. The Register contains a large
amount of personal data relating to each investor.
Clients may from time to time request that the personal data in the Register be updated for:
. a change ofaddress . issue of a new lC number . a change of name . new bank account details . a change of distribution reinvestment instructions, etc.
UTC should be aware of UTMC requirements (e.g.Are certified copies of documents required? ln the case
of a jointholding of units, are all unitholders' signatures required?) in relation to the notification of changes
to the Register, as they will be giving poor service to clients if they are not aware of these requirements
when asked. lndeed, account maintenance is part and parcel of UTMC procedures and should be included
in the Prospectus.
Other changes that affect a unitholder's investment in UTS include the consequences of the unitholder's
death; a desire to transfer units to another person such as a spouse, son or daughter; or the registration of
a mortgage or lien against the unitholding as security for a unitholder's loan.
Page 3 ltem 20 'Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000' under the heading Dividen Kasar*
Page 3 ltem 20'Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000' under the heading Cukai Yang Dipotong
Page 3 ltem 20 'Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000' under the heading Dividen Bersih Seperti Di Baucar
Page 3 ltem 20 'Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000' under the heading Tarikh Dividen Dibayar
FTMIUI
The process of transferring a holding to a third party or to the deceased's next of kin can be complex and,
again, UTC should be aware of the exact requirements of UTMC. UTC who offer quality client service are
aware of these requirements, and will know to whom within the UTMC to direct any queries. lt is simply not
appropriate to ignore a client's request for assistance. UTC need to be aware of all aspects of UTS he or
she sells. 'Knowing your product'is as much about the administrative requirements of UTMC as being able
to describe the investment performance and outlook of UTS; and it is certainly one way of differentiating
your services from those of competitor UTC!
I sncrroN 3.? cLIENT pUERIES AND
I covrPLArNTS
The success of any industry or business is best measured by the feedback received from customers. UTMC
and UTC need constantly to be in touch with their clients to ensure that they are providing value in the
products that they sell.
The major areas of complaint in the unit trust industry can be summarised as follows:
. delays in the issue of unit certificates or statements confirming investment in UTS . delays in receipt of distribution payments . dissatisfaction with the investment performance of some UTS . general discontent with the 'after sales service' provided by some UTC . dishonest UTC or UTC who use unsubstantiated performance figures to'hard sell'UTS.
These areas of complaint need to be kept in mind when servicing clients. lf UTC and UTMC are able to
improve the level of client service, the entire unit trust industry will benefit.
All salespeople face queries from their customers - some of which are clearly beyond the salesperson's
control. lt is, however, very important that all queries are quickly handled. UTC must thoroughly know the
UTS they sellto respond confidently and positively to questions, comments or complaints that investors may
be expected to raise. UTC should immediately update themselves on new UTS and procedures introduced
by UTMC. UTC must also be aware of new regulations and directions issued by the SC and the FIMM.
It is sometimes difficult to assess when an investor's query becomes a 'complaint'. UTMC will normally be
able to provide guidance to UTC.
However, the best person to initially handle a complaint is you, i.e. UTC. However, sometimes your client
may not be satisfied with your explanation. lf this happens, you must know what to do next. UTMC do have
complaint-handling policies, which identify the person(s) to whom the complaint can be referred.
lf the customer is still not satisfied after following this process, a complaint can be directed to the FIMM and
the SC.
UTC should be aware that the FIMM takes a serious view of'all customer complaints. Adisciplinary committee
has been established to investigate any such complaints and disciplinary action will be taken against any
UTC who breach the FIMM Code of Ethics.
ln summary, complaints are a part of life and UTC must be prepared to handle a complaint in a manner that
tells the client they care and that the client is important.
FIMM
3.7.1 PROVIDING QUALITY SERVICE
For the benefit of UTMC and UTC alike, listed below are some suggestions to improve the quality of service
to investors in UTS:
Make sure the investors understand what they are investing in
Make application forms and other documents easy to read and use
lnform the investor about the processes involved in the purchase and repurchase of units and how
long these might take
Provide'information' to the client as well as'sell' material
Be responsive to client requests and queries
Establish an investor hotline and provide it with qualified and knowledgeable staff, who are able to
handle a wide range of queries and are empowered to make decisions
Ensure that the total transaction time, from start to finish, is reasonable
Provide clear and precise reporting
Simplify the handling of applications and repurchases - include some payment options for the client
Ensure that all those involved in servicing the client are well informed and are aware of the extent of
their responsibilities.
I sECTroN 3.8 EPF TRANSFERS
We have seen, in Chapter 1, the significance to the unit trust industry and UTC of the flow of savings from
the EPF to approved UTS managed by UTMC.
The transfer of eligible amounts represents a potentially large source of business. UTC should ensure that
they are fully aware of the administrative processes involved before advising potential clients on the EPF
Members' lnvestment Scheme.
A member's transfer from his or her EPF Account to a UTS represents an application for units in the UTS. A
disposal of units acquired with EPF-source application money is a repurchase with a return of the proceeds
to the EPF. As such, it is appropriate to examine here some procedural differences between applications
and repurchases derived from EPF-source money and 'normal'applications and repurchases.
As you are aware, EPF contributions made by an employee and by his or her employer on behalf of the
employee are paid into the employee's EPF account. Each account comprises three sub-accounts:
' Account 1 comprises savings for retirement at age 55. Sixty per cent of contributions are credited to
this Account
Account 2 comprises savings that can be withdrawn for the purchase of a house, mortgage repayments
relating to a housing loan, education, and/or pre-retirement withdrawal at age 50. Thirty per cent of
contributions are credited to Account 2
Account3 comprises the remaining ten per cent of contributions that can be withdrawn to meet medical
expenses.
FIMM
However, Account 3 no longer exists with effective 1 January 2007. All existing savings previously accumulated
in Account 3 are merged intoAccount 2 and the types of withdrawal permifted as well as monthly contributions
credited for each accounts are subsequently re-shuffled as follows:
Account 1 comprises savings for retirement at age 55. Seventy per cent of contributions are credited
to this Account
Account 2 comprises savings that can be withdrawn for the purchase of a house, mortgage repayments
relating to a housing loan, education, pre-retirement withdrawal at age 50 and/ or medical expenses.
Thirty per cent of contributions are credited to Account 2.
Since 1996, a member has, subject to certain conditions, become entitled to make transfers from his or her
Account 1 balance to an approved UTS.
On 1 January 2002, an optional scheme called the Monthly Withdrawal Payment Scheme and open to all
EPF members was implemented, which necessitates the creation of Account 4. The scheme is designed
to provide monthly payments to members over a 20-year period from age 55 to 75. lnitially, members can
transfer not more than 50 per cent of their savings in Account 1 to Account 4. Subsequently, Account 4 will
also grow with up to 50 per cent of the monthly EPF contributions from Account 1. Once members have
chosen this scheme, they will not be allowed to opt out of it.
3.8.1 CONDITIONS FOR WITHDRAWAL FROM EPF TO APPROVED UTS
The EPF will process a request to transfer an amount from a member's Account 1 to approved UTS if:
. the balance in Account 1 is not less than the amount of Basic Savings as prescribed by the EPF. Such
amount changes according to the age of EPF members as follows:
Amount of Basic Savings Required forAccount 1
18 1,000 37 34,000
19 2,000 38 37,000
20 3,000 39 41,000
21 4,000 40 44,000
22 5,000 41 48,000
23 7,000 42 51,000
24 8,000 43 55,000
25 9,000 44 59,000
26 11,000 45 64,000
27 12,000 46 68,000
28 14,000 47 73,000
29 16,000 4B 78,000
30 18,000 49 84,000
31 20,000 50 90,000
32 22,000 51 96,000
33 24,000 52 102,000
34 26,000 53 109,000
35 29,000 54 116,000
36 32,000 55 120,000
Source: "Panduan kepada Ahli: Kelayakan Pelaburan di bawah Skim Pengeluaran Pelaburan Ahli",
Kumpulan Wang Simpanan Pekerja (Jan 2008).
FIIUIM
. the member is less than 55 years old . an account in the approved UTS has been opened into which the transfer can be processed . no transfer has been made in the previous three months from the EPF Members' lnvestment
Scheme . the amount eligible for transfer is not less than RM1,000, and . the amount to be hansfened is not more than 20% of the excess savings in Account 1 after deducting
the amount of Basic Savings as prescribed by the EPF (subject to a minimum of RM1,000).
Example:
Member is not elioible
to apply.
Reason: Savings in
Account 1 is less than
the stipulated amount of
Basic Savings.
(RM8,000 - RM5,000) x20%
= RM600
Member is not eligible
to apply.
Reason: Total eligible
withdrawalamount is
less than RM1,000.
(RM 1 00,000 - RM64,000) x 20o/o
= RM7,200
Member is eligible
to apply. Member can
withdraw up to RM7,200
for investment purpose
(subject to a minimum of
RM1,000).
FIItrM
3.8.2 COMPLETING THE TRANSFER FROM EPF TO UTS
A client wishing to transfer an amount from his or herAccount 1 balance will need to provide the following:
. the completed EPF application form [Form KWSP 9N(AHL)] . one certified true copy.of the client's identity card (lC) photocopied on A4-sized paper, with both the
front and reverse of the lC photocopied on the same face of the paper . the client's right and left thumbprints affixed on the above photocopy.
The client then completes an application form from a UTMC for the selected UTS.
ll documents are then submitted to the UTMC, which will arrange for the application amount.to be collected
from the EPF. Units are 'reserved' on that day for the investor by UTMC at the same price that an investor
making an application with payment would pay, and are allotted when the EPF makes the transfer of the
application amount to UTMC. This may take some time - especially if the application to the EPF is incomplete
or contains incorrect information.
3.8.3 REPURCHASING UNITS PURCHASED WITH EPF.SOURCE APPLICATION AMOUNTS
An investor holding units in UTS acquired with EPF-source application money is able to sell his or her units
at any time and in the normal manner, without the completion of the EPF Form KWSP 9F(3). The repurchase
proceeds must be paid by UTMC direct to the EPF to be re-credited to the member's Account 1. Proceeds
from the disposal of units cannot be repaid to the investor.
Switches between UTMC are not allowed, and must be processed as a redemption from the existing UTS,
followed by an application to the new UTMC according to procedures described earlier. The redemption
proceeds must be credited to the client's EPF Account 1 before the fresh application can be made.
Any distributions accruing to unitholders from EPF-source application money are automatically reinvested
- i.e. distributions cannot be paid out but must be credited to the client's EPF investment account with the
UTMC.
An investorwho wishes to invest in a single UTS with both EPF-source application money and with non-EPF
savings must, therefore, make two applications and have two distinct holdings in that UTS.
Fllullul
fr sncuoN 3.e FINANCING THE PURcHASE
il oF UNITS
The benefits and risks of acquiring units with borrowed funds are discussed in Chapter 1.
ln this section, we look at the additional steps UTC must complete prior to a client's purchase of units in
UTS, where the units are acquired with borrowed funds. You will see that the process reflects the safeguards
introduced by the SC to raise investor awareness of the additional risks faced by investors who wish to
finance an investment in UTS. The process also highlights the potential opportunities to abuse the trust of
investors, where UTC are motivated by the additional commission that may be earned from the purchase
of units using funds borrowed by the investor.
The process is outlined in the following flowchart.
a
FIMIUI
FINANCING A UNIT TRUST PURCHASE
m
FIMilI
The major additional steps in the purchase process to be noted in relation to the financing of purchases of
units in UTS are as follows:
Before an application form is submitted to a UTMC for the purchase of units in UTS, an application for
loan finance needs to be made. The lender will assess the creditworthiness of the applicant - looking
at his or her ability to service the debt, and also at the quality of the security (collateral) being offered
(i.e. the units in UTS). The lender will also assess, according to its own credit policy and relevant
regulations, the amount that can be lent against units in that UTS.
Once approval has been given, most lenders will insist that the payment is made directly to the UTMC,
rather than to the investor. This is to ensure that the loan is used for the purpose stated in the loan
application. The borrower will need to sign the loan contract, which will state the interest rate and the
repayment terms.
Once the application for units has been processed by the UTMC, the lender will be sent the unit
certificate (or confirmation that the interests of the lender have been protected). A certificate will be
held in safe custody by the lender and will form part of the security for the loan. The investor will also
receive a statement from the UTMC indicating the number and total cost of the units purchased in
the UTS.
lf, over the life of the loan, the loan-to-valuation ratio falls below the level prescribed in the loan
document (e.9. in periods of falling investment markets), the lender will generally require a margin
call in the form of a cash payment to the lender (or request that'top-up'collateral be provided). This
ensures that the lender has adequate security in the loan transaction.
When the units in the UTS are repurchased, the proceeds are usually paid by the UTMC directly to
the lender. After repayment of the outstanding loan amount, the net proceeds are fonryarded by the
lender to the investor.
The SC's requirements in relation to financing the acquisition of units in UTS are covered in several of its
Guidelines.
The Guidelines state that UTMC must ensure that UTC do not, directly or indirectly, encourage the sale of
units through loans. ln the past, many UTMC pre-arranged loan and unit purchase packages ('loan plans').
However, the Guidelines now require that all loan plan sales materials must be disassociated from the sale
of UTS. The sale of units in a UTS and the financing of that acquisition are, therefore, to be viewed as two
totally separate transactions. Accordingly, promotional materials containing projections of returns based
on the loan scheme are not allowed. This is to ensure that investors are not misled by attractive projected
returns, which could, at times, be exaggerated by over-enthusiastic UTC.
UTMC must also ensure that, in communicating information on loan financing for units, UTC provide full
and frank disclosure and do not omit any materialfact, so that an investor can make an informed decision
before borrowing. UTC should only provide factual information and, subsequent to that, explain clearly the
risks of leveraging to the prospective investor. UTC should, to the best of their ability, ensure that the investor
understands the risks before investing.
UTC are required to fully explain to an investor the risks involved in leveraging his or her investment. ln this
connection, UTC are required to obtain from the client a signed copy of the Unit Trust Loan Financing Risk
Disclosure Statement (see Appendix 1) to confirm that the risk involved in borrowing to finance the acquisition
of units in a UTS has been explained and that the client understands the contents of that Statement.
FIMIUI
UTC are required to attach the original Risk Disclosure Statement signed by the investor to the application
for units, after which it is to be filed by UTMC for record and inspection purposes, and to forward a copy to
the investor.
The Risk Disclosure Statement clearly outlines the main risks involved in loan financing:
' The higher the margin of financing, the greater the potential losses as well as the potential gains.
. The servicing of loan repayments may become more onerous if interest rates rise. (Note that this does
not apply where the loan is at a fixed interest rate for a specified term.)
. Margin calls (or requests to 'top up'collateral against a loan) may be requested in addition to normal
repayments. Failure to make these payments may cause the units in UTS acquired with borrowed
funds to be sold to repay all or part of the loan.
' Returns on UTS are not guaranteed, and may vary from year to year. The timing of a disposal of units
in the UTS (perhaps to repay the loan) may result in a loss, even if the investment performance was
favourable prior to that date.
The Risk Disclosure Statement encourages borrowers to ask the lender for further information, if he or she
is unsure about any aspect of the risks associated with the loan.
The Risk Disclosure Statement also serves to protect the interests of UTMC and UTC in the event of any
dispute, should an investor's returns fall below expectation caused by circumstances beyond the control of
UTMC, or should the investor face difficulty in servicing the loan.
The Guidelines on Unit Trust Funds also state that the margin of finance for loans should not exceed 67%
of the application amount (UTMC are responsible for ensuring the margin is not breached). This means that
an investor can only obtain a loan of up to twice the value of his initial deposit or investment in UTS. For
example, an initial investment of RM10,000 will entitle an investor to borrow up to a further RM20,000 for
investment in UTS (i.e. the borrowing represents 66.67% of the total cost of units acquired).
PART B
One of the major objectives of this book, and in the registration of UTC, is to improve the efficiency and
professionalism of the unit trust industry.
For example, it may be tempting for UTC to 'take the easy way out', by making outrageous promises of
investment returns in an attempt to encourage investors to purchase units in UTS. ln the long run, such
activities do significant harm to the industry, since such promises are not likely to be met.
The basis of all modern marketing is not just selling, but about identifiTing customer needs and servicing
those needs. lt usually does not involve creation of the need.
Therefore, the aim of UTC must be to always have satisfied clients, i.e. clients who were sold a product that
met or surpassed their expectations.
ln the following sections, we will look at some important aspects of the marketing of UTS.
FIIf,M
I sncrloN 3.10 BASIC PRINCIpLES oF
I nTanKETING urs
The dramatic growth in investment in UTS in Malaysia implies that there are opportunities for professional
marketing management by UTMC, IUTA, CUTA and UTC. lt means that UTS should not just be 'sold'. The
long-term winners in the unit trust industry will be those who establish an image, identity and loyalty for their
particular UTS or family of UTS.
UTS are developed, packaged and marketed by many UTMC and |UTAthat are linked to service institutions,
such as stock brokerage firms, banks and finance companies. lt is envisaged that mor:e participants will
enter the industry, in line with deregulation and increased business prospects of UTMC. Competition is likely
to become even greater.
Unit trusts, therefore, require a disciplined and professional marketing approach. During the time a UTS
is conceptualised, designed, approved, promoted, distributed, serviced and finally repurchased from the
investor, it is the long-term needs of the investor that must constantly be considered.
The same discipline required in the marketing of packaged goods and services have to also be applied to
marketing of UTS. The needs of both customers and distribution channels must be considered. However,
there are numerous differences in emphasis when marketing UTS as opposed to other financial products.
Among the unique considerations in marketing UTS are:
' multiple and alternative distribution channels are available - some UTMC market directly to investors
while others secure sales of UTS through their own network of UTC or through IUTA and CUTA
' regulatory and compliance requirements have a significant impact on communications material -
including prospectus contents, advertising, direct response, sales promotion kits, and public relations
activities
' the varying degree of sophistication and product knowledge of the various distribution channels, and
of the investors who purchase UTS
' pricing and compensation scenarios (e.g. sales charges and management fees, and commissions
and other incentives to distributors).
There are a number of reasons why marketing of UTS sometimes fail to produce sales and business volume,
for example:
PRODUCT AWARENESS
Many potential investors are unaware of how UTS can help them increase their net worth. Others may be
fearful because they do not understand the product.
Both the UTMC and UTC have an important role in helping more Malaysians reap the benefits of
investing.
.NOT FOR ME'
Some may not consider themselves as potential investors because UTC are unable to identity their needs,
and thus the potential clients regard the UTS as inappropriate to their investment objectives or style.
Flluilut
PERFORMANCE
Some UTS have not performed well in relation to their peers and/or their benchmark.
RISK ELEMENTS
Some fear losing their capital by investing in UTS, which they may consider to be Just like shares'compared
to safe havens such as savings accounts and fixed deposits.
These and other objections, such as potential clients' previous bad experience through mis-selling by
UTC, represent a considerable challenge for UTMC, IUTA, CUTA and UTC in increasing the ownership (or
penetration) of UTS amongst Malaysian investors.
I it"";fr^3'11
INVESTMENT ATIERNATIVES
As Malaysians generally become more educated and attuned to matters relating to their financial affairs,
they are looking for better and more sophisticated investment tools that produce returns above simple bank
deposit rates.
Currently, the majority of Malaysia's financial assets are tied to the banking system, which attracts savings
and fixed deposits. ln other countries, a greater proportion of financial assets are held in higher yielding
instruments (such as UTS and pension schemes), which offer significant exposure to growth assets, such as
shares and propefi and to bonds. This trend is becoming more evident here, as Malaysian investors seek
higher returns on their capital and appreciate that this can only be achieved with an associated increase in
risks.
ln marketing UTS, therefore, it is important to be aware of other investment opportunities that exist for the
Malaysian investor. The major alternatives are summarised beloq together with a commentary on how
investment in UTS might be compared.
3.1I.1 CASH AND FIXED DEPOSITS
Cash and fixed deposits with banks and other financial institutions generally offer a safe, but relatively
unattraetive, rate of long'term return. Most people need to have access to a bank account and some maintain
a relatively high portion of their assets in bank deposits. The range of deposit products available is quite
extensive, from simple overnight deposits at cash rates to more long-term deposits, e.g. a two-year fixed
deposit.
Whilst deposits with a financial institution can be considered almost risk-free, there can be a risk of
default.
However, the major problem with cash and fixed deposits is their unsuitability for medium to long-term
investment. Because of their lower risk, they usually offer lower relative returns. Over short periods of time,
this may not necessarily be the case, but over the longer term, it has been demonstrated in most world
markets that assets such as equities, propefi and bonds can provide better real investment returns.
Nevertheless, UTMC have started to develop UTS that appealto the risk-averse investorwho wishes a high
degree.of capital security with regular income payments.
FtMtl
3.11,2 DIRECT SHARE INVESTMENTS
Owning and trading shares directly has been extremely popular with Malaysian investors in the mid 1990s.
ln fact, transactions carried out by small to medium investors (i.e. retail rather than institutional investors)
have been the major driver of Bursa Malaysia during the bull run, accounting for a large percentage of
turnover in the market.
Holding a portfolio of shares can easily be misconceived by small investors, who may believe that they can
make their fortune overnight.
Aproblem arises when the small investor has to choose which counters to purchase. Given the large number
of individual counters on Bursa Malaysia, where does the small investor start? He or she does not have
enough funds to hold every counter, so must put money into only one or two counters and hope that the
selection performs well.
It requires sound financial knowledge and time in order to gain profitably from this type of direct investment.
It takes years of intensive learning to become an investment analyst, and the small investor has limited
opportunity to study and understand the investment markets. The return from investing directly in shares is
usually only attractive if the investor is able to hold shares for the longer term, and invests only in the shares
of fundamentally sound companies. The problem is selecting those companies.
Holding a limited number of share investments does not provide the benefit of diversification offered by
UTS. The direct share investor has 'all his or her eggs in one basket'and is, therefore, exposed to the risk
of losing all his or her capital.
So, for an investor to really benefit through direct share investment, he/she needs a sizeable sum of money
to diversify into 30-40 different stocks, knowledge to know which stocks to choose, and time to constantly
acquire and apply the knowledge.
Unit trust fund managers, on the other hand, have the relevant knowledge and expertise to select appropriate
stocks from various sectors to diversify the risks. ln addition, there are usually full-time research assistants
with the UTMC to facilitate this process. With the pool of funds collected from investors, there is greater
room for diversification and application of the skills of the fund managers.
3.11.3 DIRECT INVESTMENT IN PROPERTY
Once again, many investors in Malaysia have enjoyed the benefits of making a direct investment in property
(e.9. an apartment bought for investment purposes). Many have also experienced the downturns in the
property market over the years, and so understand the cyclical nature of the market.
Whilst property can be a good long{erm 'store-house' of wealth, it is generally difficult for the small investor
to gain exposure to it, given that large amounts of capital are required or must be borrowed before an
investment property can be purchased. ln addition, the property market can be extremely illiquid at times,
so realising the gain (or loss) can be difficult. Furthermore, there is always the risk of non-paying tenants,
property damage, wear and tear, etc. There is also the fact that property cannot be sold in parts, you cannot
sell only part of the house.
UTS that are listed on Bursa Malaysia with an exposure to real property can be a viable alternative for the
small investor. With a small outlay, he or she can obtain exposure to the property market without many of
the problems and risks - instead relying on the skills of professional fund managers, experienced in the
management and development of real property.
FITIIUI
3.11.4 INTERNATIONALINVESTMENTS
By focusing only on the Malaysian stockmarket, investors are missing out on 99% of investment opportunities
in world stock markets.
Whilst international investment can provide a suitable haven in times of volatility within the local markets,
there are some considerations to be kept in mind:
. Tax and other regulations affect the investment of funds overseas and act as a barrier, particularly to
small investors.
. The costs of managing and accounting for the currency exposure of an international investment can
potentially eliminate the returns from investing overseas.
. Where do you start to begin reviewing the 99% of stock market opportunities based overseas? The
need for information is even greater with international investments.
While the opportunity to invest internationally through UTS is currently limited, the Malaysian Capital Market
Masterplan envisages enhanced opportunity through specialist international UTS to be offered by UTMC.
3.11.5 FINANCIALDERIVATIVE PRODUCTS
Another developing avenue for investment in Malaysia is the derivative markets. Derivatives can provide an
avenue to earn potentially very high returns (or losses) without large capital outlays.
The problem is that the small investor is not really equipped to analyse derivative products. He or she needs
to have a sound knowledge and understanding of the products before he or she invests.
Again, it is likely that in the next few years, UTMC will offer UTS specialising in derivative investments.
Currently, UTS may use derivatives only to protect portfolios from expected loss.
3.11.6 SUMMARY OF INVESTMENT ALTERNATIVES TO UTS
The following table provides a summary of the investment alternatives discussed above, and compares
them to investment in UTS. (Note that the analysis is meant for the purpose of general comparison only.
See also Appendix 2.)
"* * excludes speculative investment risk may vary depending on country and currency
w,m
tJTS high{iofi,naftt
withinifOdawl
ffediurt|,to{r0ng1
$gih{aWe{retg
,,, ,96,1111i4611,'
, ,gonCltiorxl
'Slrsstiim*JgWt{:,
,iRrB{wfry,' lorrg' ls{ia' hr.' , $tM{o,:
l'., , higtt',.', .
.tltrort
Gedrdilttiii€*':i
OeWs*t*, :
lor' \rane8 ,l1gq.,
t{w(risr}alties:
, 8raya@}r vely lOrry
lnbriratiomal
inves8rcnts
mo&teb,
high
ircdfum io lwtg* larye high
h$h{arrency
ftnlfuatiims elso
app!$*
FIMM
I srcuoN 3.Lz UNIT TRUSTS AS AN
I rNvrsrMENT
UTS, in general, bridge the gap between low risk investments, such as bank deposits with low returns, and
the much greater risk of investing directly. UTS can provide an investment with more moderate risk and
rewards. They provide an ideal avenue for small investors (and high net worth individuals) to gain exposure
to a wide range of investment opportunities at a reasonable cost.
lnvestment through UTS is one of the best medium to long-term investment decisions that smaller investors
can make with a view to accumulating capital and beating inflation.
g.12.1 ADVANTAGES OF INVESTING IN UTS
ln Chapter 1, we reviewed the key advantages that UTS offer. ln this section, we will examine these in
further detail.
DIVERSIFICATION
lnvestors in UTS can obtain much wider diversification with their capital because the portfolios of UTS
are generally invested in a wide range of securities (20-100 counters in the case of an equity UTS). lf an
investor invested all of his or her capital in a single counter, he or she could lose all if the company went
into liquidation. An equity UTS spreads the risk of loss of investors'capital by holding a portfolio of counters.
Such a portfolio is expected to behave in a less volatile manner than a portfolio of only one or two counters.
ln simple terms, it means risk is reduced.
The investment of some UTS may also be diversified across asset classes. ln addition to shares, a UTS may
invest in fixed income securities, property and cash. These investments will provide an element of stability
in a declining stock market, and may provide some liquidity when meeting the repurchases of unitholders
in UTS.
Small investors would find it difficult to achieve comparable diversification within their investment portfolio as
their capital is limited. Additionally, they may not have access to the upto-date information required to make
informed investment decisions regarding diversification. An investment in UTS would give them automatie
diversification with only a small amount of capital.
To understand how a diversified investment could help an investor, a simple illustration is provided below:
The investor has invested all his money in a single counter. As the price falls, he or she suffers a significant
loss.
Non-diversified portfolio of investor
FIIUIM
Assume the investor instead invests RM10,000 in three counters.
Diversified portfolio of investor
lf the price of X drops to RM 4.00, while Y and Z rise 20o/o, the investor's portfolio will be:
With the same capital outlay, the investor now has a portfolio comprising three counters. The drop in the
price of X has been compensated by the rise in the prices of Y and Z, which results in the investor retaining
the value of his capital despite a20o/o drop in the price of one counter representing half of the portfolio. This
illustrates the benefits of diversification.
Even if the prices of Y and Z had remained unchanged, the portfolio would be worth $9,000 - a fall ol 10o/o
compared to the 20o/o tall in the value of the non-diversified portfolio. The benefit of diversification is a
reduction in overall losses.
PROFESSIONAL FUND MANAGEMENT
For small investors, UTS are one of the few avenues of investment where they can obtain professional
management of their assets at a reasonable price.
When investing directly into listed counters, small investors may not be well serviced by stockbrokers. ln
fact, stockbrokers usually cannot afford to spend a great deal of time with the small investor.
With UTS, all customers benefit equally with respect to investment advice since one unit is equalto another.
The fund managers generally have years of experience in handling investments and focus on investing the
UTS for the benefit of all investors, irrespective of the number of units a unitholder has.
Fund managers have access to a wide range of resources and information including specialised research
and market analysis, which is required for effective investment management in today's markets. The portfolio
management process of UTMC also involves an lnvestment Committee, which sets and monitors investment
policies and strategies for a UTS, while the fund manager provides the research, analysis of asset allocation
and investment recommendations. Small investors investing directly cannot generally match this level of
expertise.
FIMIUI
LIQUIDITY
Basically, liquidity is a measure of how long it takes for an investor to sell his or her investment. ln some
cases, an investor can be left holding shares or property that cannot be sold, sometimes at any price.
With UTS, UTMC are obliged to repurchase an investor's units when asked by the investor to do so. This
liquidity is a very important benefit that investment in UTS offers over other forms of investment.
The procedure for repurchase of units is straightforward. An investor simply needs to fill in a repurchase
form and submit it to UTMC. Units will then be repurchased by UTMC at the appropriate unit price, and the
proceeds paid to the investor - normally within 10 days of receiving the request.
EASE OF PURCHASE
One major advantage of investing in UTS is that investors can easily buy units. An investor interested in
buying units in UTS need only call the UTMC, IUTA or UTC to obtain a prospectus and all the information
he or she needs to make the investment decision.
MEETING INVESTORS' LONGER TERM NEEDS
Generally, the longer an investor is prepared to commit his or her money to an investment, the higher will
be the potential returns. An investment in many UTS can be used to provide for longer-term needs.
From the various types of UTS available, an investment in UTS (or in a portfolio of UTS) could be selected
to meet most of the longer-term savings objectives of investors, including:
. for home purchase or an overseas holiday
. to meet children's future education costs
. to build up a retirement fund to complement EPF, and/or the proceeds of maturing life assurance
policies, for a more comfortable retirement for the investor.
A substantial sum of capital may also be built up through regular savings plans offered by most UTMC.
\_ DOLLAR COSTAVERAGING
lnvestment in UTS is one avenue whereby investors can potentially benefit from applying the concept of
dollar cost averaging.
The concept refers to the systematic and regular investment of a fixed amount of money, irrespective of the
price level of the investment at the time the investment is made. This can reduce the average cost of the
investments acquired to below the average price of those investments during the period.
The rationale for investing in this way is that it is difficult, if not impossible, to invest at the bottom of the
market, and most investors (particularly small investors) are likely to be better ofi investing on a regular basis
throughout all stages of a market cycle rather than investing all their capital at one time.
By using the concept, it is said that investors can turn fluctuating prices to their advantage; especially if prices
are moving down, they can purchase more units and reduce the average cost of their entire investment
portfolio. By buying more units when prices are low and fewer when they are high, investors give themselves
an advantage over other investors who try to time their investment decision - and get it wrong!
FIMM
Take the example of unitholderA and unitholder B who both invest the same amount of money over a fixed
period. Unitholder A consistently buys a fixed number of units, irrespective of the unit price. This means
the investment amount varies according to the unit price. On the other hand, unitholder B applies the dollar
cost averaging concept and invests a fixed ringgit amount each period, i.e. the number of units each period
varies according to the unit price.
The results under different market scenarios are shown below.
ln a falling market:
Average unit cost for unitholderA: RM6.00 (RM30,000 + 5,000 units)
Average unit cost for unitholder B: RM4.38 (RM30,000 + 6,850 units)
With the same capital available for investment of RM30,000, unitholder B, who adopts the dollar cost averaging
principle, has 1,850 more units than unitholder A, who keeps buying the same amount of units when the
price drops. Over the period, the average unit cost for unitholder B is only RM4.38, while the average unit
cost for unitholder A is RM6.00. lf the price of units recovers, this will provide better returns for unitholder
B over unitholder A.
ln a rising market:
10.00 1,000 10,000 600 6,000
,1i::f ,::3*g&w,xii:ii* tti::l.:rli4,:ti$X&:i,a:ii i: :ii::,::i$, 1ii:iiiip i::tarl',,. ::i1;;t* *:€SiW{x:i:
6.00 1,000 6,000 1,000 6,000
l!i|,S1ffi;11911 l::XiW :,,..:,,'i::*':&&
2.00 1,000 2,000 3,000 6,000
*i:{]:iWii:i:.i:riir t1r1l&Wa:::t:t:i ,il*r*€XilWSX,.
Average unit cost for unitholderA: RM6.00
Average unit cost for unitholder B: RM4.38
You can see that over the period of rising prices, unitholder B retains his or her average
advantage.
unit cost
FIIUIM
ln a fluctuating market:
Average unit cost for unitholderA: RM6.00
Average unit cost for unitholder B: RM4.72
ln a fluctuating market, the benefit of the dollar cost averaging concept is even more significant. ln the above
illustration, with the same investment capitalof RM30,000, unitholder B managed to buy 6,350 units, while
unitholder A had only 5,000 units. The average unit cost for unitholder B is RM4.72 and the average unit
cost for unitholderA is RM6.00 The average unit cost for unitholder B in a fluctuating market remains lower
than the average unit cost of unitholderA in a rising or in a declining market.
The popular dollar cost averaging concept helps (but does not guarantee) an investor obtain favourable
long-term investment results where the trend in unit prices is upwards. (Note that both investors in the first
and last examples have lost money over the period of investment!) As the stock market and unit prices
fluctuate, a systematic investment programme in a UTS will tend to enhance performance during periods
of declining or rising prices. lnvestorc, however, must remember that dollar cost averaging should be used
over long periods in order to maximise its benefits.
Given that most investors in a UTS invest for the long term, the concept of dollar cost averaging works well
- although there are no guarantees of investment performance! lts real value lies in a commitment to regular
investment, inespective of market fluctuations. lt avoids the need to decide to invest when the market appears
to be too high, or to be hitting new lows. lnvestors buy more units at market lows when fear is greatest. As
the market recovers, such purchases will prove timely.
3.12.2 RISKS OF INVESTING IN UTS
We face risks every day - for example, whilst driving to work, or of catching a serious illness - and we become
familiar with and accept these risks as part of normal life. Yet the risk of an investment falling in value - even
for a short time - somehow assumes a level of anxiety way out of line with the 'normal' risks we face!
A dictionary definition would suggest that risk is 'the probability or chdnce of injury, loss, damage or harm'.
For an investor, risk is the chance that the actual return will be less than he or she expected to receive. Risk
is, therefore, directly linked to an investor's objectives. To meet an investor's objectives, some degree of
risk must be taken - if high returns are required, high risks will need to be taken. lt is not possible to achieve
high returns without taking on a high level of risk. lf the level of risk required to achieve an objective makes
an investor uncomfortable, then he or she must reduce the level of expected returns accordingly.
FIMM
A long{erm investor with limited capital is unlikely to meet his or her objective of financing a child's education
- or deriving an amount upon which to retire - by investing in a fixed income or cash UTS. lronically, the
traditionally low-risk fixed income or cash investment would now become a 'risky'investment, as it may not
help the investor meet his or her retiremenVchild education objectives.
Risk can also be defined in terms of the variability or fluctuation in total return from an investment. So an
investment that is volatile in price or value - such as listed shares - is regarded as a higher risk investment
than one, such as a fixed deposit, that does not vary in price or value.
However, an investment that is 'risky'to one investor may be much less risky to another. For example, an
investor who can hold units in a volatile equity UTS for the long term can ride out any short-term fluctuations
in values in the expectation that, over the long term, he or she is likely to come out ahead. An investor who
can hold units in the same equity UTS for only a few months (before requiring the funds to meet another
commitment) is taking a much higher risk. This investor may be better advised to purchase a much less
volatile fixed income or cash UTS.
You can see that 'risk' is not only a complex concept but a personal one! UTC must be aware of a client's
objectives, investment time horizon and attitudes toward risk before considering an investment in UTS and
before application is made to a particular UTS. The ability of a client to handle risk is a function of such
factors as:
age
health
marital status and family
time horizon
liquidity requirement
current income
financial commitments
other investments and savings
knowledge and understanding of investments
attitude toward risk, etc.
There are likely to be fewer dissatisfied investors if both clients and UTC are aware of, and take into account,
risk when considering investment decisions. Understanding risk is vital!
There are several risks in investing in unit trusts and investment risk is clearly one of the most important.
INVESTMENT RISK
As with all forms of investment, there is investment risk associated with investing in UTS. For equig UTS,
the movement of share prices in the stock market is reflected in the NAV of the UTS. As these vary so prices
of units in the UTS can go down as well as up. Similarly, REIT, as owners of real property, are affected by
the property cycle.
Of course, share and property prices (both individually and collectively) reflect a host of local and international
economic, political and other factors, including investor sentiment.
Ownership of investments through a UTS does not, and cannot, reduce the underlying volatility in values of
those investments. However, the benefit of diversification across a greater number of individual investments
reduces the effect of that volatility for investors with limited capital to invest.
FIMM
OTHER RISKS
lnvestors in UTS face other types of risk:
' There is a small risk that a UTMC will go out of business, although the effect on unitholders should
be minimised as UTS investments and other assets are held by the trustee of the UTS. Nevertheless,
there could be some disruption to the normal smooth running of the UTS. There is less risk that the
trustee will fail, and even then, UTS assets are separated from those of the trustee company itself.
There is a much greater risk that the senior management of UTMC will change, and it is certainly
true that good investment personnel are in short supply. Hence, past performance of UTS cannot be
totally relied upon as a guide to future performance and losses may occur
. UTS may, in extreme circumstances, be unable to meet the demands of unitholders who wish to sell
units - for example, where investment markets are in turmoil and closed. ln this situation, the liquidity
buffer of UTS may be used up, and there is no possibility of selling securities from the portfolio of UTS
investments. Where this situation arises, a suspension of the sale and repurchase of units would be
called by the trustee of the UTS until market conditions improved. UTMC are required to maintain
reasonable liquidity in UTS and, in normalcircumstances, there should be no interruption to payments
when units are repurchased
a risk of changes in legislation (for example, to taxation law) that could adversely affect
' There may be changes to fees of the UTS, or to its investment policy, but the SC and the trustee of the
UTS will ensure that unitholders are not adversely affected. lf necessary a meeting of unitholders of that
UTS will be called at which all the issues can be discussed and a vote taken. Even then, unitholders
are generally given time to perhaps sell units in the UTS before any changes are implemented
' As we have noted, investors who finance an investment in UTS take on additional risks.
While the risks described do actually exist, they should not generally be of great concern to investors in
UTS or to UTC. lt is the risk associated with investment and the mismatch of expected returns and client
objectives that is most problematic. For this reason, it is worthwhile restating here the risk warnings required
to be included in prospectuses, advertisements and promotional materials:
' Past performance of a UTS is not a guarantee or an indication of future performance . Past distributions are not guaranteed and may not be repeated . Unit prices and distributions, if any, may go down as well as up.
An understanding and appreciation of these risks by UTC and their clients will help reduce considerably the
number of complaints received.
. There is
investors
FIMM
I sECTroN 3.13 suMMARY
ln this Chapter, we have increased our understanding of the major business processes involved in an
investor's purchase and disposal of units in UTS. Units in UTS may be purchased through various distribution
channels, using cash, EPF Members' lnvestment Scheme, or borrowed application money. Repurchase
processes may, in part, also reflect the source of the original application money. We have also seen how
UTMC determine unitholders' distribution entitlements.
We have learned that handling client queries and complaints is an important aspect of providing quality
client service, and that UTC are often able to minimise complaints by avoiding unethical practices and by
the prompt handling of queries. We noted that UTC should see their role as providing quality service well
beyond the point at which the application form is lodged with UTMC, since a client's expectations from
investment in UTS are met only when his or her investment objectives are reached. By providing qualig
service to clients, UTMC, IUTA, CUTA and UTC can all benefit - in part by enhancing the image of the unit
trust industry as a whole.
The advantages of investing in UTS rather than directly in various markets are likely to be well known to
UTC, but must be continually promoted to potential investors. Existing investcirs in UTS, too, may need to
be reassured that the UTS they selected remains appropriate to their needs and why. Of course, there are
risks of investing in UTS - particularly if loan finance is used to add to an investment. UTC must protect
themselves and their clients by ensuring that the client understands and acknowledges the risks of investing
with borrowed money. We noted the detailed procedures required to be adopted by UTC and UTMC where
UTS are purchased with borrowed money.
We have also looked at some of the differences between marketing UTS and other products, and identified
that the real value in investing in UTS is in the satisfaction of client needs. ln satisfying client needs, UTC
must have a proper appreciation of risk since risk is closely linked to investors' needs and objectives.
FIMM
Srrr.rnsr QursrroNs ON CHeprun 3
1. Describe clearly the basic steps taken by UTMC when a unit trust application form is received? What
is the purpose of the 'cooling-off' right? What happens when an investor exercises this right?
2. What do you understand by the term'repurchase'?
3. Why would a trustee suspend the sale and repurchase of units in a UTS? Do you think a suspension
is in the best interests of unitholders? Why?
4. Why is it important to keep investors in a UTS informed? List severalways in which UTMC will keep
an investor up-to-date with his or her investment.
5. How is the amount available for distribution by a UTS determined by the directors of UTMC? What is
meant by'buying'a distribution? ls it appropriate that UTC recommend such a practice?
6. What is a 'switch'? Can a unitholder who sells units in a UTS, which were acquired as a result of a
transfer of EPF funds, 'switch'into another UTS with another UTMC?
7. What is a 'Risk Disclosure Statement'? When is one required? Why is it necessary to have an investor
sign this Statement before investing in a UTS?
8. What do you understand to be the difference between marketing and selling of units in UTS?
9. Outline the major advantages and risks of investment in UTS.
10. Explain clearly why 'dollar cost averaging'could be a better method of acquiring units in UTS for many
investors.
FIMM
APPENDIX 1:
SC'S UNIT TRUST LOAN FINANCING RISK
DISCLOSURE STATEMENT
lnvesting in a unit trust fund with borrowed money is riskier than investing with your own savings.
You should assess if loan financing is suitable for you in light of your objectives, attitude to risk and financial
circumstances. You should be aware of the risks, which would include the following:
1. The higher the margin of the finance (that is, the amount of money you borrow for every Ringgit of
your own money that you put in as a deposit of down payment), the greater the potential for losses
as well as gains.
2. You should assess whether you have the ability to service the repayments on the proposed loan. lf
interest rates rise, your total repayment amount will also increase.
3. lf unit prices fall beyond a certain level, you may be asked to provide additional acceptable collateral
or pay additional amounts on top of your normal instalments. lf you fail to comply within the time
prescribed, your units may be sold to settle your loan.
4. Returns on unit trusts are not guaranteed and may not be earned evenly over time. This means that
there may be some years where returns are high and other years where losses are experienced
instead. Whether you eventually realise a gain or loss may be afiected by the timing of the sale of your
units. The value of units may falljust when you want your money back, even though the investment
may have done well in the past.
This brief statement cannot disclose all the risks and other aspects of loan financing. You should, therefore,
carefully study the terms and conditions before you decide to take the loan. lf you are in doubt in respect
of any aspect of this Risk Disclosure Statement, or the terms of the loan financing, you should consult the
institution offering the loan.
ACKNOWLEDGEMENT OF RECEIPT OF RISK DISCLOSURE STATEMENT
I acknowledge that I have received a copy of this Unit Trust Loan Financing Risk Disclosure Statement and
understand its contents.
Signature:
FullName:
Date:
rimu
APPENDIX 2:
SIX WAYS TO TURN SAVINGS INTO INVESTMENTS
oo
o
Easy to open and maintain.
Minimum requirements.
Very reasonable.
Flexible access to cash.
I ease of cash withdrawal can disrupt your
savings programme.
I netatiuely low interest rate.
oo
Higher interest rate than savings account.
Money cannot be spent on impulse purchases.
lnterest may at times be outpaced by inflation.
Withdrawal less flexible.
ooo
A good "forced-savings" plan.
A good hedge against inflation.
Can bring good returns in "boom" economy.
I As a starting point for savings, it is difficult;
high "start-up" down payment, and you must
qualify for a bank loan.
I Long-term, inflexible mortgage repayment
scheme.
I Not readily converted to cash.
oo
o
A useful saving-cum-protection vehicle.
As many policies have a penalty for premature
break, it acts as a mechanism to promote
saving.
Proven as an effective "forced savings" plan.
I Relatively lower returns compared with other
long-term investment vehicles.
I U* of flexibility.
O lf"fn*, investment vehicle for regular
O Starting amounts are not as small as for
savings accounts, but are reasonable.
O lnvestments are easy to build up on a regular
basis.
O Benefit derived from dollar-cost averaging.
O Unit trusts give a well-balanced investment
portfolio that you do not need to manage
yourself.
O You can sell your units when the price is right
at any time.
Affected by ups and downs of share market
or other markets that the funds invested in.
oo
More exciting than operating a current account.
Can bring spectacular returns when timing is
right.
I Vou need a lump sum to get into the share
market.
I not for the regular saver investing a couple of
hundred ringgit per month.
I Vou need vast amounts of market information,
time and luck in order to manage your
investments successfully.
* From Wise Moves to Retirement, SBB Mutual Bhd