By G. Sharmila
A fifth of stock market investments are accounted for by unit trusts. But are those using unit trusts getting a good deal? In the first of three articles, KiniBiz looks at what exactly are unit trusts and how they operate to get to the heart of the problem — their high costs.
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The Malaysian unit trust industry is booming. According to the Securities Commission’s (SC) 2013 annual report, unit trust funds continued to be the main instrument for unlocking latent retail capital, with the net asset value (NAV) of unit trusts amounting to RM336 billion or one-fifth of the stock market capitalisation as at end-2013.
As of January this year, the total size of the industry grew to RM339.84 billion. By August, this number had ballooned to RM356.16 billion. As for the number of funds in the market, there were 599 launched funds in January, which grew to 602 in August. (For detailed statistics, go to the SC website.)
Lynn Cheah
Lynn Cheah, chief executive officer of Eastspring Investments Bhd, tells KiniBiz in an email interview: “Firstly, based on unit trust statistics issued by the Securities Commission, in August 2013, the number of unit trust accounts recorded in the industry amounted to 16.6 million accounts, growing to 17.2 million accounts in August 2014. Essentially it is an increase of 570,727 accounts in the last one year.
“Secondly, in our recent investor behaviour survey conducted in June 2014, unit trusts take up 45% of their investible capital allocation, followed by cash and investment linked products.”
From the numbers, we can infer that the investing public’s confidence in unit trusts is growing. But is this real confidence or misplaced trust?
Before we go into the nitty-gritty of unit trust investing, what are unit trusts, really? The website finance-glossary.com describes unit trusts as “collective funds that allow private investors to pool their money in a single fund, thus spreading their risk across a range of investments, getting the benefit of professional fund management, and reducing their dealing costs”.
In Malaysia, the structure of unit trusts is similar to that of other countries. With a unit trust, investors’ money is pooled together in a single fund that is managed by the unit trust management company. The money is then invested in stocks and bonds, money market instruments and other assets. The investments are invested and managed by a professional fund manager appointed by a trustee.
The fund manager makes investment decisions concerning the fund, while the trustee oversees the fund manager. The fund manager and trustee each charge annual fees in return for their services (see table below).
But that’s not all a unit holder (the investor) pays when investing in a fund. Critics have charged that the sales system, where investors must go to an agent appointed by the fund manager to sell the fund, has proven too costly for retail investors. This is because in addition to paying the fund manager and trustee, the investor needs to pay a one-time sales charge that can go up to 7% of the initial amount invested in the fund. This charge is levied by the fund manager to cover sales and distribution costs.
According to unit trust consultants KiniBiz spoke to, bond and money market funds typically have lower sales charges while equity funds charge as much as 6.5%. The equity funds usually promise higher annual returns (5% and more) and tend to attract investors in their 20s and 30s, the consultants said. (For a better idea of current fees, see the table below).
“The up-front costs can be high for some funds but customers still like buying through an agent as they feel more confident that their investments are being looked after,” a unit trust consultant with an investment bank tells KiniBiz.
But that’s not all the costs involved. If, let’s say, you’re unhappy with your fund’s performance and want to switch to another fund after six months, you’ll incur a switching fee. However, generally when you switch between higher tier funds (e.g. equity funds) or from higher tier to lower tier funds (e.g. equity to bond funds), you are not charged. But you will incur charges if you switch from a lower tier to a higher tier fund.
Another cost involved which investors normally do not think too much about is the exit fee, also known as a repurchase or redemption fee. This fee is a deduction by the unit trust management company from the proceeds of disposal of the investor.
This fee is usually levied on closed-end funds, whereas open-end funds do not impose exit fees. (The difference between these two kinds of funds is that the number of outstanding shares of an open-end fund varies from day to day, whereas a closed-end fund’s shares have a fixed number.)
There is a way for investors to “escape” some of these charges, however, and that is by investing in unit trusts via online distributors. Two such portals that allow investors to bypass the sales system to some extent are eUnittrust.com.my and fundsupermart.com.
According to a customer care consultant at Fundsupermart.com, investors pay between 1.5% and 2% in sales charges for balanced equity funds, while bond and market funds are at 0% sales charge. However, a platform fee of 0.05% per quarter is charged for selected bond funds. As for eUnittrust.com.my, the typical sales charge for unit trusts is 2%. The portal does not charge any platform fees.
At this stage, the question on every investor’s mind is: when do I start seeing returns on my investment? Unfortunately there is no direct answer to that question. Unit trust consultants that KiniBiz spoke to said that you will start seeing decent returns about two years after investing regularly in a fund, mainly because of the costs incurred by the investor in the first year.
To give you an idea of the different types of unit trust funds and their annual returns, take a look at the table on the right:
In other words, if you’re an investor, there’s no escaping the costs involved when you’ve chosen to invest in unit trusts. The question to ask yourself is whether these costs are excessive.
Tomorrow: How unit trust funds in Malaysia compare to those in other countries
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