This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 16 - 22, 2016.

The proof of an asset management firm’s capabilities is in maximising profit for its investors. But the assortment of fees investors are charged to buy, sell and maintain their holdings in unit trust funds are putting a dent in the investable capital. Defying the norm is Saturna Sdn Bhd, wholly-owned subsidiary of US-based Saturna Capital, which aims to disrupt the industry by not just removing a slew of miscellaneous front-end charges for the wholesale fund that the firm manages, but also in providing transparency in its fee structure.

Saturna president Monem A Salam firmly believes that taking a percentage of profit is better than charging a flat fee. “In Malaysia, funds that target the high-net-worth and retail segments come with really high fees. What we really want to do is try to be disruptive in the market.

“Fundamentally, we shouldn’t be charging sales fees for funds. Basically, you are denting the client’s capital from the very beginning if you do that. 

“For example, if you put RM1,000 into a fund, having deducted all the miscellaneous fees, clients are automatically left with only RM950 because of that 5% charge. Moreover, the fund has a 2% management charge on an annual basis, and over time, that difference grows substantially.

“You are starting off with basically 5% less, and then every year you have to account for 2% more. The only way to do that is to maybe trade more than that [percentage] but doing that increases your risks,” Salam says.

He says Saturna also decided to forgo the redemption charge, transfer fee, switching fee, application fee or withdrawal fee that is payable by an investor for its equity wholesale fund called the Asean Equity Fund. Since its launch in 2013, the fund has returned 8.11% (as at March 31). 

The company set up its office here in 2010. Its US counterpart is best known for its Amana Income and Amana Growth Funds, the world’s largest shariah-compliant equity funds

The fund house, which is in the process of obtaining its unit trust management company status from the Securities Commission Malaysia, is expected to implement similar structures for its retail shariah-complaint fund as well, says Salam.

Local unit trusts were introduced to this country in 1959, by a company called Malayan Unit Trust Ltd, and it has grown into an industry with a net asset value (NAV) of RM352.1 billion. In the earlier years, up to mid-2000, getting onto the unit trust bandwagon in Malaysia meant forgoing 5% to 7% of one’s investment capital to fees. A handful of asset management firms have since dropped their sales charges while others have brought them down to as low as 1.5% and 2%.

Salam stresses that this is becoming a standard practice in more mature markets. In the US, mutual fund managers have waived billions of dollars in fees in the last few years as they have struggled to keep their fund yields above zero.

This was after US Federal Reserve introduced its zero interest rate policy to prevent the world’s largest economy from collapsing on the heels of the crash in its housing market and banking sector between 2007 and 2009.

Salam says Saturna had opted to eliminate the sales fee structure as a commitment to lower fees. So how does Saturna make an income? According to its information memorandum, the fund house receives investment management compensation from the daily increase in the NAV of the fund.

“So, what happens is that if on any given day the fund goes up in value, say from RM1 to RM1.10, we accrue 10% of the up-value. The next day, if the fund goes down in value, we pay back that accrual into the fund. At the end of the year, if the balance is positive, we keep the up-value [as profit].

This philosophy also dictates Saturna’s relationship with its distributors, says Salam. “We have to be very careful with the distributors we choose, as some of them might be looking for products to distribute with maximum fees together with the subsequent charges. 

“Obviously, all of them want that 5% and the subsequent charges that follow. We are telling them we don’t have it, therefore it is fundamental that they have to buy into philosophy that, globally, fees are coming down.

“If Malaysia wants to compete on a global level, which is what everyone here talks about, it is not sustainable with the fee level that is imposed and it hurts the shareholders, the industry and all of us.”

Apart from the distinctive fee structure, Salam adds that transparency is another component that sets Saturna apart from its competitors in the industry.

He says the fund house discloses the mechanism used to charge its clients. “Currently, the industry charges an all-around management fee of 1.5% to 2%. Then, from there, they give it to distributors … but nobody knows, for example, whether I am getting paid for selling you the fund or not, so there is a lack of transparency.

“We wanted to come out with a fund that was a lot more transparent, so, in the [current] information memorandum, and later in the prospectus, we actually say exactly how much we are charging the client and how much the distributor is getting paid,” he says.

Saturna’s operations in Malaysia took off after its US counterpart launched the Developing World Fund in 2009, and found the country to be a suitable platform for the fund’s Islamic portfolio.

Since its launch, Saturna has invested largely in the Philippines, Indonesia, Singapore and Thailand.

The country with the most promising growth is the Philippines, says Salam, as it is growing out of being considered the worst performer in Asia. The peso, the Philippines’ currency, was Southeast Asia’s best performer last year.

Among factors that contributed to the peso’s performance was President Benigno Aquino III’s performance in the last six years — getting the economy going, strong corporate profits and a decline in graft, says Salam.

“But on a government level — which we thought was very good — most Filipinos don’t have government services. They don’t have social security or pensions.

“Basically, people are on their own, so they become a lot more entrepreneurial and they do things to be able to take care of themselves. This, fundamentally, is very good,although it does come with problems, like the stubbornly high poverty rates in the country. But as more people move into the middle class, we want to look closer at the consumer discretionarysector,” he says.

One of the companies that Saturna has a stake in is Jollibee Foods Corp — a McDonald’s-like fast food chain — which is one of the few global brands that have come out Asia.

Manila Electric Co (Meralco), is another company Saturna has holdings in. “It is a solid utility with unique features. It is actually piloting a system that allows you to pay as you go. It is very innovative and they are gaining a lot of traction for that.”

As a long-term value hunter, Salam says the firm looks for similar companies and other themes it is focused on, in healthcare and infrastructure.

“On a macro level, we look at anything to do with the actual migration of demographics, from the lower segment into the middle class. These are themes that play out over a 5 to 10 year period.”

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