Then's Musings

The Role of Regulator

The Securities Commission Act 1993 provides that the Securities Commission (SC) is responsible for regulating all matters relating to unit trust schemes.

The SC has drawn up a set of Guidelines on Unit Trust Funds (Guidelines) to ensure a fair and consistent application of policies in considering proposals by management companies of unit trust funds.

The Guidelines are formulated with the objective of providing a regulatory framework that would protect the interests of the investing public and facilitate an orderly development of the unit trust industry. The requirements of the Guidelines are to be complied with by all parties involved in a unit trust scheme.

In addition to the above Act and Guidelines, all unit trust management companies must comply with the Companies (Amendments) Act 1997, the Securities Industry Act 1983 and Trustee Act 1949.

The Role Of The Trustee

Whatever may happen to their performance over time, unit trust managers have a reputation for the stability of their funds that is second to none. Much of this is due the legal framework in which they operate. The government lays down strict rules that unit trusts have to follow and the machinery for ensuring that this is done.

Every individual fund has its own independent trustee, although for administrative simplicity, it is not unusual for unit trust management companies to engage one trustee for all funds. The trustee can be the Public Trustee of Malaysia or any independent trustee of Malaysia or any independent trustee companies.

The trustee’s primary role is to see that the terms of the fund’s deed are adhered to. The deed is a set of rules under which the trust is run, setting out such things as the investment scope of the fund.

The funds’ assets are always in the custody of the trustee. Although the manager makes the decisions about the management of those assets, when to buy and sell, he cannot get his hands on them directly. This system ensures that the funds will not be used for fraudulent purposes. The manager has to deal via the trustee who will ensure that the day-to-day work of running the trust, the funds’ accounts, valuations and calculations of unit prices are carried out properly and in accordance with both the deed and the rules laid down by the SC.

The trustee is also responsible for seeing that all the relevant paperwork is carried out. The trustee takes responsibility for overseeing the creation and cancellation (release) of units in the fund. The Guidelines also stipulate that unit trust managers have to produce semi annual and annual reports to its unitholders.

Where Would The Trust In Units Be Without The Trustee ?

Guidelines On Unit Trust Funds

In addition to the regulatory and safeguarding roles of the Regulator and Trustee respectively, the Guidelines provide additional safety features to protect the interest of the investing public. The Guidelines describe the characteristics of the investments permitted as opposed to prescribing the investments (which was previously investment in authorised Malaysian assets only) Furthermore, the Guidelines also reinforce the safety net by ensuring the funds are not overly exposed to high risk stocks and any single group of companies.

The Guidelines are subject to review by the Securities Commission as and when it deems fit and necessary to protect and ensure the growth of the industry.

The Federation of Malaysian Unit Trust Managers (FMUTM)

The first unit trust fund in Malaysia was launched in 1959. Who would then have imagined that years later there would be billions of ringgit in funds under management?

The rapid growth of the industry in recent years has led to the formation of the Federation of Malaysian Unit Trust Managers on 7 August 1993.

The Federation was set up with four objectives :

a. To promote the industry

b. To agree on standards of practice for the protection of the interests of unitholders.

c. To maintain the good name of the industry

d. To improve regulations, tax and other rules affecting the sales of unit trusts.

The Federation is represented by most of the unit trust managers in the Industry.

Source:http://www.publicmutual.com.my/article.aspx?id=87

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Professional Investment Management

A unit trust combines the capital of many investors to employ experienced management in purchasing securities of many companies. The management of a unit trust provides diversification of investments and supervision which few investors could individually afford. Investment management is a full time job requiring specialised knowledge and training. It involves the study of a variety of factors.

Some of the factors which have to be examined are,

1. Comparisons of all industries in the economy
2. Relative studies of companies within a promising industry
3. Personal contact with management of promising corporations
4. Evaluating the effect of international events, both monetary and political
5. Determining the results of government policies on each industry

Professional management is also interested in studying less obvious factors such as wage rates, which might affect the economy or the profitability of certain companies or corporations. It requires careful study of individual companies within the industry to determine which of the many companies offer the best prospects for the investors. It requires comparing this company with the best companies in other promising industries. Since all this factors are constantly changing, re-evaluation and study have to be continuous.

Diversification

Diversification means spreading one’s investments among many securities. It is an important method of reducing risk. It decreases the danger of damaging losses, which can occur through having all of one’s eggs in one basket.

Diversification is difficult and expensive for a small investor because the cost of purchasing numbers of shares in many companies at the same time is disproportionately high.

Unit trusts with their resources are able to make widely diversified investments available to even the smallest investor. Diversification involves the ownership of many different securities. All the securities owned by an individual investor or unit trust fund are referred to as an investment portfolio.

Liquidity

An investor can sell his units, wholly or partially, at the following trading day’s unit buying price. Units have a high liquidity, that is, they can be readily converted into cash.

It has to be remembered, however, that unit trust’s units will be redeemed at the prevailing buying price on the following day after receipt of the repurchase form. The unit price may be higher or lower than the price at which the investor started the plan. Unit trusts should be regarded as a long term, rather than short term investment.

Advantages of Compounding

Many unit trust funds provide facilities for investors to reinvest their distributions. For those who opted for distribution reinvestment, the fund will automatically credit the distributions into the account, rather than sending distribution warrants.

This process of reinvesting the income from the original investment and also of reinvesting the return on the total accumulating investments is called compounding.

As an illustration, if at 25, you invested RM100 at the beginning of every month at an interest growth of 10% per annum until age 65, your investment would have grown to RM638,000 ! The key element to compounding is time. The longer the period of time, the greater the growth.

Regularity of Investing

Many people do not have substantial sums of cash available to invest, but they can develop an investment account, investing smaller sums regularly in a unit trust.

Most unit trust funds have plans available to make it possible for smaller investors to invest relatively small amounts monthly. It is easy and inexpensive for an individual to acquire units through deposits of RM100 or more a month in a unit trust fund.

Fund Administration – The Convenient Factor

Few people have the experience, time or facility to properly set up an investment programme, much less to supervise it constantly. Unit trust managers have emerged as professional organisation devoted to solving the investment problems of people from all walks of life.

Unit trusts relieve their investors of the need to handle their own securities transactions. Investors in unit trust funds are not obliged to concern themselves with matters such as,

1. Obtaining quotations on securities being bought and sold
2. Delivery and payment for the securities involved in each transaction
3. Safekeeping of cash and securities
4. Accounting and bookkeeping procedures, etc

Investors of unit trust funds will receive semi annual and annual reports which describe

a. The portfolio of the funds

b. Investment changes made in the period

c. Distributions paid, if any

d. Fund manager’s opinion on the economic and market outlook

Source:http://www.publicmutual.com.my/article.aspx?id=87

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