By G. Sharmila
With the high entry and exit costs surrounding unit trust investments in Malaysia, retail investors in particular may want to look at other alternatives in the market to get the best bang out of their buck. One of them is the exchange traded fund.
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In previous articles, KiniBiz took an in-depth look at the unit trust fund industry in Malaysia and looked at some of the disadvantages of this type of investment to retail investors. We also looked at liberalisation and some of the advantages this will pose to investors.
Linnet Lee
But while waiting for liberalisation and the Asean CIS Framework to truly take off, what else is out there for the retail investor? According to Linnet Lee, chief executive officer of the Financial Planning Association of Malaysia (FPAM) there are quite a number of alternatives to unit trust funds.
One option she cites is exchange-traded funds (ETFs). “If you are comparing unit trusts to ETFs or direct investment in shares, the costs are higher (for unit trusts) as you have a fund manager who looks after the fund’s portfolio by active trading according to the fund’s trust deeds and he needs to be paid.
“In direct investments, you decide and you manage your investment, the broker helps you to execute your transactions but is not obligated to help you monitor them. In an ETF, there is minimal monitoring as it tracks the indices. The investor only has to track the performance of a basket of ETFs he holds and whether this basket can help him achieve his investment goals. This explains the lower investment cost,” Lee explains.
According to the Securities Commission’s 2013 annual report, the number of ETFs listed on the Main Board of Bursa Malaysia as at 31 December 2013 were five with a total market capitalisation of RM1.03 billion, as compared to a total market capitalisation of RM929.21 million at end-2012.
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As of October 2014, there are six ETFs listed on Bursa Malaysia. (For the full list of ETFs available in Malaysia, see table.)
Eastspring Investments Bhd chief executive officer Lynn Cheah however, is not entirely convinced about ETFs. “I agree that compared to ETFs, unit trusts do have higher entry costs but currently ETFs are very popular in more developed markets like the US. Exit costs are almost non-existent for most unit trusts unless it’s a closed ended fund and they are more of a deterrent for premature redemptions so as to safeguard the interests of existing unit holders.
“However, the front end load is to cover marketing fees and commission to agents/distributors who in return provide a service to investors. Until such time where agents/distributors are not needed and investors are opting for value added services via investment advisory fees, we do not see front sales charges reducing sooner,” she tells KiniBiz via email.
Apart from ETFs, FPAM’s Lee notes that other common alternatives to investing in unit trusts are businesses, properties, derivatives, commodities like precious metals and stones, antiques and collectibles. “The advantages are good appreciation, for example properties in good location, demand for certain types of antiques or collectibles. The disadvantages are high capital outlay, illiquidity of investment and higher risk,” she says.
“Having a direction in one’s investment helps decide the best instrument to use. If readers are unsure, it is more economical to pay fees for good advice rather than pick unsuitable products which may cause them to suffer higher losses,” she adds.
It is worth mentioning also that different types of investors are attracted to different types of investment options. For instance, investors with a low-to-medium risk appetite may find it beneficial to invest in bonds or property, whereas investors with a longer-term horizon and/or higher risk appetite would invest in ETFs, stocks or commodities.
Below are some alternatives to unit trust funds and the advantages and disadvantages they post to investors:
With investing, whether you choose to go with unit trusts or ditch them in favour of other alternative forms of investment largely depends on factors such as investor risk profile, current financial situation and reasons for investing.
Your risk profile depends on whether you are an active or passive investor. According to Investopedia.com, passive investing is known as a buy-and-hold or couch potato strategy. It requires good initial research, patience and a well-diversified portfolio. Passive investors buy a security and don’t actively attempt to profit from short-term price fluctuations. Instead they believe that the investment will be profitable in the long term.
Active investors, on the other hand, are highly involved in their investments. “Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits,” says Investopedia.
Indeed, FPAM’s Lee says that from a financial planning perspective, it is not which instrument is better than the other. “More importantly is the purpose of the investment, affordability, duration for investment and the ability to take risk that determine which instrument is best for the client.”
Ultimately it is up to investors to decide if paying someone else to manage their investments (i.e. via investing in unit trusts) or actively managing their own investment portfolio is their goal. The idea is not to fall back on unit trusts or any other investment that seems ‘easier’ just because. As with all investments, the old adage “let the buyer beware” always holds true.
Yesterday: Reforming the unit trusts industry
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