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What are Unit Trust Funds?
Unit Trusts or more commonly known in the United States as mutual funds, are a form of collective investment that allows investors with similar investment objectives to pool their funds to be invested in a portfolio of assets. These portfolio may include asset classes such as:

a. Transferable securities;
b. Cash, deposits and money market instruments;
c. Unit/shares in collective investment schemes; and
d. Derivatives.

Investors or unitholders do not actually purchase the securities in the portfolio directly, rather the ownership of the fund is divided into units of entitlement. As the value of the fund increase or decrease, the corresponding value of each unit increases or decreases accordingly. The number of units held depends on the amount of money invested as well as the unit price at the time of investment.

The return on investment in unit trust, if any, is usually in the form of income distribution and capital appreciation, derived from the underlying investment of the unit trust fund. Each unit earns an equal return, which is determined by the quantum of distribution as well as the capital appreciation. Example, if income distribution is 1 sen per unit, each unit held by an investor will be entitled for income distribution of 1 sen.
Parties involved in a Unit Trust
The investment scheme of a unit trust fund can be illustrated as a tripartite relationship between the manager, the trustee and the unitholders. The manager is responsible for the management and operations of the unit trust fund whilst the trustee holds all the assets of the unit trust fund. The obligations and rights of each of the three parties are specified in the Deed, (a legal document entered into between the manager and the trustee, and registered with the Securities Commission).

The Deed regulates the duties and responsibilities of the manager and the trustee with regard to the operations of the trust fund and protects the unitholders' interests.
History of Unit Trusts
The concept of Unit Trust was introduced in Malaysia in the year 1959 and developed over the years in four recognisable periods namely:

The Formative Years: 1959 -1979

The first couple of decades in the history of the unit trust industry were characterised by slow growth and a lack of public interest in the new investment product. Only five unit trust management companies were established, with a total of 18 funds introduced over that period. The industry was regulated by several parties including the Registrar of Companies, The Public Trustee of Malaysia, Bank Negara Malaysia and the Ministry of Domestic Trade and Consumer Affairs. The 1970s also witnessed the emergence of state government sponsored unit trusts, in response to the Federal Government's call to mobilise domestic household savings.

The Period from 1980 to 1990

This period marked the entry of government participation in the unit trust industry and the formation of a committee to regulate the unit trust industry, called the informal committee for unit trust funds, comprising representatives from the Registrar of Companies (ROC), the Public Trustee of Malaysia, Bank Negara Malaysia (BNM) and the Capital Issues Committee (CIC). The 1980s also marked a significant development in the history of the industry when Skim Amanah Saham Nasional (ASN) was launched by Permodalan Nasional Berhad (PNB) in 1981. Despite only 11 funds being launched during this period, the total units subscribed by the public swelled to an unprecedented level because of the overwhelming response to ASN. In addition, the 1980s witnessed the emergence of more unit trust management companies, which were subsidiaries of financial institutions. Their participation facilitated the marketing and distribution of unit trusts through bank's branch network which widened investor reach.

The Growth Period: 1991 to 1999

This period witnessed the fastest growth of the unit trust industry in terms of the number of new management companies established and funds under management. The centralisation of industry regulation, with the establishment of the Securities Commission on 1 March 1993, coupled with the implementation of the Securities Commission (Unit Trust Scheme) Regulations in 1996 and extensive marketing strategies adopted by the ASN and ASB (Amanah Saham Bumiputera), played key roles in making unit trusts household products in Malaysia. Consequently, the total asset value of 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.

Liberalisation: The Period from 2000 to current

In 2005 the unit trust industry experienced another year of strong growth which saw the net asset value of managed funds capitalising 14.2% of Bursa Malaysia’s market at RM98.5 billion at the end of 2005. Further, the liberalisation of overseas investment rules (such as the increase in overseas investment limit from 10% to 30%) by Bank Negara Malaysia has seen unit trust management companies launching numerous offshore funds or realigning investment strategies of domestic funds to invest offshore up to the permitted limit.
Benefits of Unit Trust Fund
The main advantages of investment into a Unit Trust fund is the reduction in investment risk by way of diversification as well as having approved professional investment managers manage the funds.
Unit trust investments generally tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk, investment managers may diversify into non-correlated asset classes. For example, investors might hold their assets in equal parts in equities and bonds.
Affordability
As Unit trusts are a collective investment scheme, the investors can start with an investment amount as low as RM100.
Diversification
In addition, since the investors is investing into a diversified portfolio of investments, rather than an investment portfolio of one or two investments or shares, his risk is better spread out in line with the saying "don’t put all your eggs in one basket"
Liquidity
An excellent return or “paper profit” that cannot be "cashed-in" or converted back to cash (i.e. sold) does not necessarily mean a good investment as poor liquidity constitutes an additional risk factor for the investor. Hence, most investors prefer that their investment to be liquid. That is, that the investment can easily be converted back to cash. Unit trusts provide this feature as units can easily be bought or sold. Some funds can even return your investment to cash within the same day.
Professional Fund Management
Unit trusts fund managers are approved professionals in a highly regulated industry. Their license, background and expertise ensure that decision making is structured and according to sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager can bring.
Investment Exposure
For an individual investor, it may be difficult to have exposure to particular asset classes. For example, if an investor with RM20,000 wants to be invested into property, global equity and bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. However, with unit trust investments, it is possible to spread the RM20,000 around to all of these asset classes concurrently so that the investor can gain the investment exposure he seeks.
Reduced Costs & Access to Asset Classes
If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits). Pooling money with that of other investors gives the advantage of buying in bulk, making dealing costs an insignificant part of the investment. In addition, since the fund managers invest in larger amounts, they are able to get access to wholesale yields and products, which are impossible for the individual investor to obtain. For example, unlike unit trust funds, most individual investors cannot have direct access to the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.
Regulated Industry
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the Securities Commission. The entire range of variables relating to the unit trust industry is governed by various legislations. The sole purpose of such regulations is to protect the interest of the investing public. Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.
Type of Unit Trust Fund
Balanced Funds
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. A balanced unit trust fund generally has a portfolio comprising equities, fixed income securities and cash.
Equity Funds
An equity unit trust is the most common type of unit trust where its concentration of investments is focussed in equities or securities of listed companies. Equity unit trust funds are popular in Malaysia as they provide investors with exposure to the companies listed on Bursa Malaysia. The performance of the units is therefore linked to the performance of Bursa Malaysia. A rising market will normally give rise to an increase in the value of the unit and vice-versa. There is a wide array of equity unit trusts available in the market, ranging from funds with higher risk, higher returns to funds with lower risk, lower returns.
Exchange Traded Funds (ETF)
ETF is linked unit trust fund whose investment objective is to achieve the same return as a particular market index. ETF often have low expense ratios and can be bought and sold throughout the trading day through a stockbroker, on an exchange.
Fixed Income Funds
Fixed income funds invest mainly in Malaysian Government Securities, corporate bonds, and money market instruments. The objective of a fixed income fund is usually to provide regular income.
Index Funds
These funds invest in a range of companies that closely match (or “track”) companies comprising a particular index.
International equity funds
International equity funds are funds primarily invested in overseas stock markets.
Money Market Funds
Money market funds invest in liquid, 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. Hence, money market funds in general have relatively lower risk and provide stable income returns.
Real Estate Investment Trusts (REITS)
REITs invest in real properties, usually prominent commercial properties and provide the investor with an opportunity to participate in the property market in a way which is normally impossible to the small time investor. By investing into REITS, however, it is possible to invest a small amount to gain exposure to the property market and have diversification in your portfolio.
Shariah Funds
The objective of Shariah funds is to invest into Shariah compliant investments which for example exclude companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products.
How to invest in Unit Trust Funds ?
There are generally 3 ways to invest in unit trusts funds, namely through Cash, Regular Savings or investment through your EPF fund.
Cash or Lump Sum Investments
This is where an investor has a lump sum amount to invest into a unit trust fund. Over a period of time, the value of initial investment may increase as income may be earned by the fund, or may decrease as the market value of the underlying assets of the unit trust fund may fall. When the investor redeems his or her units, the value of his or her investment will be based on the net asset value of the fund at the point of redemption.
Regular Savings
An investor may invest in unit trusts funds by making regular (e.g. monthly or quarterly) investments to their fund. This may be a more disciplined approach to invest in unit trust funds. By making equal and regular contributions over a period of time, this may reduce the impact of market volatility. This is commonly known as dollar cost averaging. At the end of the period, the redemption (or sale) price of the units held will represent the accumulation of all contributions, plus returns (if any, as returns are not guaranteed) generated from the total contributions since the first purchase was made. This forms the basis of most retirement investments.
EPF Members Investment Scheme
Investors may also invest into unit trust funds from their EPF Account 1 if he or she is eligible. EPF members can refer to their EPF statement as well as the Basic Savings Table to check their eligibility and quantum of investment allowed.
Investment Risks
Any investment carries with it an element of risk. Hence, prospective investors should consider the following risk factors before making any investment.
Currency Risk
Investment into Unit Trust funds that have exposure to foreign investments may be exposed to currency risk. Currency risk is a form of risk that arises from the change in price of one currency against another.
Inflation Risk
Whilst a fund will constantly seek to maximize returns and exceed the inflation rate, at times it may experience losses, which result in investment returns that are below the inflation rate in the short run.
Interest Risk
Fixed income securities and bonds yields are sensitive to movements in interest rates. When interest rates rise, the value of fixed income securities and bonds fall and vice versa, thus affecting the investment returns of the fund. The general interest rate of the country may also affect the value of the investment even if the fund (e.g Shariah Fund) does not invest in interest bearing instruments.
Liquidity Risk
The various asset classes that the fund manager has invested into may encounter liquidity risk. Liquidity risk can be related to the fund’s ability to easily and quickly trade at a reasonable price, e.g. to sell or buy securities. Should a fund comprise a security that has become temporarily or permanently illiquid or difficult to sell, the fund manager may need to sell the security at a deep discount to its fair value, which will negatively affects the fund’s value.
Market Risk
As unit trust funds principally invest in public listed companies they are exposed to changing market conditions as a result of global, regional and national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations caused by these uncertainties will affect the net asset value (NAV) of unit trusts which may fall or rise, thus causing the returns generated by the fund to fluctuate.
Management Risk
Performance of the fund depends on the investment acumen of the fund manager. Inferior management of a fund can cause considerable losses to the fund which will negatively affect the returns of the investment.
Glossary
Term Definition
Absolute Returns The percentage movement in the value of fund units from one period to the next.
Annualised Returns The percentage movement in the value of fund units from one period to the next, adjusted to a compounded basis.
Bond A security issued by a company or a government which promises to give you a fixed sum at a future date in return for a regular, specified level of income until that maturity date.
Benchmark The performance of a basket of stocks or securities over a time horizon, against which the performance of an investment fund is compared against.
Capital Appreciation Increase in the value of capital - the objective of most equity - invested unit trusts
EPF Employee Provident Fund
Distribution The cash payment that a company or a unit trust pays out annually or half-yearly, if any.
Dollar - cost - averaging The mathematical concept of regular investment of a fixed cash amount in a volatile asset (such as a unit trust), by which the average cost of acquisition is lower than the average value of the asset over a period of time.
Diversification The concept of investing various securities to reduce the risk of investing in one security.
Equity The part of a company’s capital which is owned by its shareholders; shares.
Fact Sheet A short document produced by the fund managers containing useful information about a unit trust, such as recent performance, asset allocation etc. for the benefits of the investors.
Front-end Load The initial service charge paid by the investors when purchasing the funds.
Fund Manager The group of people or organisation managing the unit trust.
Fund Size The total net asset value (NAV) of the fund.
Income Distribution The portion of dividends, interest and capital gains earned by the unit trust and paid out to unit holders.
Investment Objectives What a financial instrument, such as unit trust, is trying to achieve, for example, to achieve a return of at least 3% within a time period of 6 months.
Lump Sum This is where an investor has a single amount of funds which he wants to invest in a unit trust. This may be the only investment the investor wishes to make.
Management Fee The Investment Manager’s remuneration, which is calculated as a percentage of the total net asset value of the portfolio and is usually accrued at each dealing day.
N.A. Not Applicable, unless otherwise stated.
Net Asset Value (NAV) The market value of the fund’s total assets plus income less expenses.
Performance This is usually quoted as the percentage movement in the value of units from one period to the next. This is usually presented in a percentage format on an Absolute Return basis or an Annualised Return basis. Performance may also be judged on a relative basis against a benchmark.
Portfolio A collection of different types of investments.
Prospectus The legal document that contains all the information about a unit trust. The purchaser indicates that he has read this document when he signs the application form.
Reinvestment Unit holders who opt for reinvestment instruct the Manager to use their income to buy additional units at the net asset value per unit of the fund.
Trustee A legal entity runs by a group of people or an organization to protect the interests of a person or a group of people.
Unit Holders The owners of a unit trust.
Unit Trust A pool of financial instruments that is sub-divided into smaller units, and managed by a fund manager.
Methodology
Term Definition
Risk The calculation of risk follows that of standard deviation. For analysis period that is less than a year daily price/return data is used and for a year and above, weekly price/return data is used. The analysis period for risk will start from weekly onwards.
Reward-to-Variability Ratio (RVAR) Reward-to-Variability Ratio (RVAR) as the name implies is a measurement of the fund's average return (less risk-free rate, in this case it is set as default 1% per annum) over a specific analysis period divided by the fund's risk (also known as variability). The numerator of RVAR measures a fund's excess return, that is the return for bearing risk or commonly referred to as risk premium and the denominator is the standard deviation. RVAR shows the excess return per unit of total risk. The higher the ratio, the better the fund performance is as compared to its peers. Weekly price/return data is used for the calculation of RVAR. The analysis period for RVAR will start from 3 months onwards. Background: William F. Sharpe, winner of the 1990 Nobel Prize in Economics, is a Professor of Finance, Emeritus at Stanford University's Graduate School of Business. In addition, he is also a trustee of the AXA Rosenberg Mutual funds and serves as Chairman of the Board of Financial Engines, Incorporated. Years back, Dr Sharpe introduced RVAR as a measurement for the performance of mutual funds (unit trust) which is also commonly known as Sharpe Ratio, Sharpe Index or Sharpe Measure.
Ranking Grade The funds are ranked based on their returns/risk/reward-to-variability. The numbers (after each grade) are the position of the funds within the scope.
Quartile Grade Remark
1st Q A Excellent
2nd Q B Good
3rd Q C Average
4th Q D Below Average


Example: There are 12 funds in a chosen scope, the ranks are as follow:
1st Q A1 A2 & A3
2nd Q B4 B5 & B6
3rd Q C7 C8 & C9
4th Q D10 D11 & D12

If a fund is ranked B5, it means that within the 12 funds, it is in the 5th position under Grade B category.