Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 5 - 11, 2016.


 

New developments in the industry

The SC has introduced a number of measures to stimulate the unit trust industry over the past few years. On July 19, it introduced an expedited authorisation regime for non-complex unit trusts as well as a move to make prospectuses evergreen.

Eugene Wong, executive director for corporate finance and investments at the SC, says the regulator will not be pre-vetting the contents of fund prospectuses. This will promote self-regulation in the industry.

“Under this regime, we will look for fatal flaws such as inappropriate investment limits or if the fund is not properly constituted. We will expose the prospectus for public comment before authorising the fund, just like how we do for initial public offerings,” says Wong.

“If the feedback from the public warrants clarifications or amendments, we will see that they are addressed. However, we will do post-vetting on a sampling basis. Where we find errors or shortcomings, action will be taken against the unit trust management company. These could range from a reissue of the prospectus to a penalty, depending on the severity of the shortcoming.”

Wong says the regulator migrated to the expedited authorisation framework only after the Guidelines on Sales Practices of Unlisted Capital Market Products were fully implemented. This was also after the Federation of Investment Managers Malaysia (FIMM) issued a disclosure guide to its members — a step to further liberalise the unit trust industry.

“The Expedited Authorisation Framework was preceded by the Lodge and Launch Framework for Wholesale Products. With the Expedited Authorisation framework, funds can come faster into the market. This enables investors to take advantage of investment opportunities while fund managers will have to be more self-disciplined,” he adds.

Wong stresses that the SC is looking at the proportionality of regulation. It is present where it needs to be, in a very focused and uncompromising way, while instilling greater industry discipline and promoting investor empowerment, wherever feasible.

“The strategy is to ensure proportionate regulation — we should not get in the way of doing business and must make business more efficient. But at the same time, we must continue to protect investors,” he says.

“In conjunction with the Expedited Authorisation Framework and the evergreen prospectus, the SC has specified situations where investors need to be informed beforehand or to give their consent. Collectively, these initiatives save resources without compromising protection.”

Munirah Khairuddin, CEO of CIMB-Principal Asset Management, says with the SC’s new initiatives, fund providers will be able to match the needs of investors with an investment mix aligned with their investment objectives in a timely manner.

“From the distributor’s perspective, the predictability of the timing of new fund launches allows them to schedule new products and fill the product gaps to better serve or expand their customer base,” she adds.

Investors, she says, will benefit from this as they will be able to invest in funds that are suited for the prevailing market conditions to diversify their portfolio.

According to the SC, the fund management industry has consistently grown its assets under management (AUM). Its AUM has seen a compound annual growth rate (CAGR) of 17.2%, from RM161 billion to RM668 billion, over the last 10 years. One critical growth area is unit trust funds, which account for 51.7% of the total AUM.

Unit trusts maintained their overall net sales last year despite the challenging market environment. Net asset values have seen a CAGR of 12.4%, from RM121 billion to RM347 billion, over the past decade.

Meanwhile, FIMM declines to comment on whether the unit trust industry will still be relevant in the changing environment. FIMM is a self-regulatory organisation with the mandate to ensure that the unit trust industry continues to grow. The interests of unit trust investors are its main priority.

 

LOWER SALES CHARGES OR ABOLISH THEM?

Robert Foo, managing director of MyFP Services Sdn Bhd and a certified financial planner, says unit trusts are still relevant as an asset class as they provide diversification for investors. However, the industry should provide investors with an open architectural model so that they can have access to various channels to buy into unit trust funds without having to pay a sales charge or advisory fee if they do not need advice.

“If an investor knows what he wants to buy, he should be able to buy it through a free-of-sales-charge platform. If he does not, he can pay an advisory fee to get help. Don’t make them pay a sales charge. Give investors more options to buy into unit trusts and let them decide which channel to go with, so that it remains a relevant and appealing asset class,” says Foo.

He points out that the agency force, being the biggest driver of the unit trust industry, is the main reason sales charges are still on the relatively high side. “I think the issue here is that the cost to access unit trust funds in Malaysia is very high as you need to buy through agents. If you are paying a 5% to 6% sales charge and only earning a return of 6% to 7% per annum, it will take at least three years for you to break even. If the fund underperforms for a certain period, your investment period will have to be stretched to five years and above.”

Investors will eventually realise that it is the expensive upfront cost that eats into their returns, which are generally not high, says Foo. Thus, they may look to other investment vehicles with lower entry cost, such as exchange-traded funds.

Some fund managers have clarified that the actual sales charge is much lower than what is stated on the fund’s prospectus. But Foo disagrees, saying that he has not seen this among his clients.

“I don’t think it is true. Unfortunately, the biggest driver of the unit trust industry in Malaysia is the agency force. Without it, some of the unit trust management companies may collapse. They need to protect the goose that lays the golden egg.

“If investors are buying through agents and paying 2% to 3% sales charge, it is not enough for the commission-based agency force to survive … some of the big unit trust management companies have put the industry in a strangle hold to lock in profits. This has to change.”

Danny Wong, CEO of Areca Capital Sdn Bhd, says the agency force and commissions are giving the industry a hard time and preventing it from growing further. “I agree that the upfront fees are too high. The agency force needs to keep it reasonable, at 1% to 2%, so they do not eat into investors’ returns. Currently, all our funds carry a sales charge of less than 1%.”

Ismitz Matthew De Alwis, CEO of Kenanga Investors Bhd, says market forces will eventually drive the upfront fee down. If investors compare the figures on the prospectus, it would appear that Malaysia still charges the highest upfront fee in the region. But this is not true, he points out.

“We let our distributors have the flexibility to charge up to 5.5% and they tend to let market forces decide. For example, for the Kenanga Growth Fund, investors are paying about 3% on average. I think this is because online channels charge a much lower fee, which is about 1.5%, while the sales charge of Employees Provident Fund-approved unit trusts is capped at 3%. The distributors need to be competitive.”

Ho Seng Yee, CEO of RHB Asset Management Sdn Bhd, also says the actual fee charged is lower than what is stated in the fund’s prospectus. “We are charging 2.5% to 3% and it is quite fair. However, the final charge ultimately depends on the relationship between the fund house and its distributors, as well as the size of the investment. We let the distributors have the flexibility. Investors can negotiate and buy from the channel that offers the best price.”

Investors should not just look at the upfront fee but the overall charges, says Ho. While some independent financial advisers advocate a lower sales charge, they charge their clients an advisory or exit fee. Investors should be aware of all the charges they have to pay before signing up.

   
   
Cover Story: Unit trusts being put to the test (Part 1)
   

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