Open End Deed of Trust

							Unit Trust
                    Learning Goals
 Understand what is Unit Trust.
 Differentiate between type of Unit Trust and type of Unit Trust fund.
             What is Unit Trust?
 A pooled investment plan where the capital contributions
    of investors are combined into a legally formed trust fund
   Then invested by professional fund managers, acting on
    behalf of the investors, in a portfolio of marketable
    securities
   “Trustee” is appointed to safeguard the rights and interests
    of the investors
   Investors receive “Units” (shares) in proportion to the
    amount of money they have contributed to the fund
   Income derived from dividends, interests and capital gains
    are divided among the unit holders in proportion to their
    investments.
 An indirect investment. It is also called investment
  companies.
 Unit Trust investment offers a reasonable amount of return
  with minimal risk. It is done by professional management
  at minimal cost, minimizing, liquidity, and capital
  appreciation
 Investors money will be pooled together to be invested in a
  single diversified investment portfolio which comprise
  stocks, bonds and others in accordance with the
  investment objective
 One important feature of unit trust is that professional
  fund managers are employed to manage the funds. They
  are highly qualified and experienced in investments.
Who Are The Unit Trust Investors?
 Small or retail investors who neither have the time nor
  the know-how to hold portfolios through direct
  investments.
 Many are highly inexperienced; as a result they turn to
  these unit trusts management companies to act on
  their behalf.
         How a Unit Trust Work?
 Trust deed
    An agreement that binds 3 parties (namely, Unit Trust Management Company,
     the trustee and the unit trust fund’s investors – also called as unit holders) to
     the deed.
    The trust deed will have to be registered with the Securities Commission. A
     copy of the trust deed can be bought at the management company.

 Trustee
    Can be the Public trustee of Malaysia or any independent trustee of Malaysia or
     any independent trustee companies.
    A trustee is generally reputable financial institution appointed by a deed of
     Trust to look after the interest of the unit holders.
    An independent Trustee is appointed to ensure compliance of the management
     company with the requirements of the Trust Deed, Securities Commission’s
     guidelines on Unit Trust Funds and Securities Commissioner Regulations 1996
    As the legal owner of the assets of the fund, the trustee is responsible to ensure
     that the fund manager invests the funds according to the trust deed.
 Management Company
    The promoter of the fund to the public and provides investment expertise to
     manage the fund and has the primary responsibility of investing the funds
     according to the objectives.
    The Management Company also acts as the Registrar of the fund maintaining
     the records of the unit holders

 Investors or Unit holders
    The providers of funds through purchase of unit trusts from the management
     company would expect to receive benefits from the investment.
    If it is an Open-end Fund, the investors can buy units at anytime, as long as
     the fund has not reached its maximum approved size.
    They can also sell the unit trusts back to the management company,.


 The Securities and Exchange Commission
    Responsible to safe guarding the interests of the investors who make
     investments in unit trusts.
    SEC formulates regulations for the operation of unit trusts and has the
     necessary power to ensure the proper conduct of the business.
    It also has the power to license or suspend the licenses of Management
     Company to operate unit trusts.
           Types of Unit Trust
 Open-End Fund
   Investors buy and sell shares directly with the mutual fund
    company without a secondary market
   Have an unlimited number of shares
   Purchase and selling price is determined by the Net Asset
    Value (NAV) of the fund
   All purchases and sales are completed at the end of the
    day after the stock markets have closed
 Close-end fund
   Sell only the initial offering
       Subsequent trades are done in a secondary market, similar to the common
        stock market
   Have a limited number of shares
   Investment advisor doesn’t have to worry about cash inflow or
    outflows
   Purchase and selling price is determined by supply
    and demand
   Generally sell at premium or discount (usually discount)
    to NAV
 How is close-end fund structured
   Has board of directors elected by the shareholders.
   The board of directors will appoint the fund manager for
    research, portfolio management and the administration
    of the fund.
   The fund manager will make recommendation for
    investments.
   The investment committee will make decisions on
    investments.
   The public trustee will be responsible to disburse the
    fund for investment.
         Unit Investment Trust
 Fixed pool of securities, normally bonds
 Not actively managed; securities in portfolio remain static
 Have shares that represent a proportionate share
  of the trust
 A portfolio of shares is put together by the trust
  sponsor and these shares are held in safekeeping
  under conditions set down in a trust agreement.
 Redeemable trust certificates will be sold to investors
  at NAV plus a small commission.
 Real Estate Investment Trusts
             (REIT)
 Closed-end investment company that invests in
 mortgages and various types of real estate investments
 Provide high dividends along with capital appreciation
 potential
 Types of REITs
   Property/equity REITs invest in shopping centers, hotels,
    apartments, office buildings and other real estate
   Mortgage REITs invest in mortgages

   Hybrid REITS invest in both properties and mortgages
                Types of Funds
 Equity Fund
    Primarily invest in the stock market.
    High level of risk and are expected to provide a high
     return in the long term.
    Growth Funds and Index Funds fall into this category of
     unit trusts
 Income funds
    It produces high level of current income- invest in high-
     grade shares that pay good dividend.
    Established companies and generally viewed as low-risk.
    Invest in fixed income securities.
 Balanced funds
   Generates a balanced return of both current income and
    long-term capital gains
   Invest in blend of fixed-income securities and common
    stocks, with 30% to 40% in fixed income
   Allocation between stocks and bonds typically remains
    constant or varies very little
   Emphasis between fixed-income and common stocks
    can be shifted as market conditions change
   Less risky investments for relatively conservative
    investors looking for moderate growth
 Growth Fund
   The primary goal is capital gain and long-term growth.
   Normally offer little dividends or current income. Because of
    uncertain long-term perspective, it can be quite risky.
 Aggressive Growth Fund
   highly speculative mutual fund that seeks large profits from
      capital gains
     Invest in small, unseasoned companies with high
      price/earnings ratios
     Often look for turnaround situations
     Prices are often highly volatile
     High risk investments for very aggressive investors
 Islamic Fund
   Fund will invest in shares which complies with syariah
    Principles.
   The Syariah Principles distinguishes between ‘halal’ and ‘non
    halal’ type of business activities.
   The returns received would depend on whether investment
    objective is for growth, current income or a combination of
    growth and current.
 Bond Funds
    Invests in various kinds and grades of bonds, with income as
     primary objective
    Advantages of bond funds over individual bonds:
      More liquid
      Offer high diversification
      Bond funds automatically reinvest interest

    Lower risk investments for investors who are looking for
     steady income
    Some price volatility occurs with changing
     interest rates
 Property trust funds
    Special type of close-end fund where it invests mainly in real
     property rather than in shares or bonds. Because of the
     nature of the investment, the returns are highly speculative.
          Advantages of Unit Trust
   Diversification
      Many investors lack sufficient resources to establish an adequate diversification on their own.

   Funds with variety of objectives
      Different types of funds are created for different investment objectives. So investors should have
       no problem finding funds that meet their objectives in terms of return and risk

   Record keeping services.
      The management company maintains and administers the records of shareholder’s activity for a
        given year. This is a great convenience for the investors.

   Professional management
      Fund managers who are knowledgeable about investment and they have good track records of
        performance, high integrity, etc.

   High liquidity
      Unit trust can be bought and sold easily. Thus they do not suffer from liquidity risk.

   Affordability
      Only a small amount of money is needed to participate in a portfolio of investment which enjoys
        the same benefits as in direct investment which requires large amount capital.
   Disadvantages of Unit Trust
 Load fee
    This is sales charge added to the fund’s NAV when unit trust is
     sold. It is as high as 10%.

 High annual expense
   The operating expenses like accounting, legal, postage,
    management fees have to be borne by the investors.

 Transaction costs.
    Management companies must also pay transaction costs to
     buy and sell securities even though they trade in large blocks..
Does the Price of Unit Trust fluctuate ?
 Unit prices could rise or fall due to value changes of the underlying securities
  owned by the Trust Fund.
 The value of equity fluctuates due to changes in the share prices in the
  Malaysian Stock Exchange.
 The value of fixed income securities will change due to change in interest rates
  in the market.
 Returns on Unit Trust can be determined using the below measurement.

Holding period    =         Selling price – Purchased price + dividend
Return                                Purchased price

Return of the fund=         new NAV – old NAV
Based on NAV                     old NAV

Market returns    =         new KLCI – old KLCI
                                Old KLCI

Changes of funds return     =        Return on NAV
Relative to market return             market return
Determine the Price of Unit Trust
 Determined by Net Asset Value (NAV) of the funds
  managing the portfolio excluding any liabilities incurred
  and the number of units in circulation.
 NAV represents the underlying value of a unit share of
  stock in a particular unit trust.
 NAV is found by taking the total market value of all
  securities held by the fund, less any liabilities and divided
  by the number of units on issue.

NAV =         Value of Assets - liabilities
              No. of units outstanding