Trends: Unit trust fees and charges down, sustainable funds on the rise

This article first appeared in Wealth, The Edge Malaysia Weekly, on August 29, 2022 - September 04, 2022.
Trends: Unit trust fees and charges down, sustainable funds on the rise
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Two developing trends — the lowering of fees and charges and the growing number of sustainable funds — are contributing to the changing landscape in the asset management industry. First, sales charges of unit trust funds have fallen by more than a third in recent years, which is good news for investors. Second, the number of environmental, social and governance (ESG) funds is expected to grow fivefold by 2030, says Kaleon Leong.

In an interview with Wealth, the CEO of the Federation of Investment Managers Malaysia (FIMM) points out that those who invested in unit trust funds using cash saw their sales charges drop to 1.9% on average in 2020 from 3.1% in 2014, according to the FIMM 2021 Research on Unit Trust Schemes’ Fees and Charges report. Published at the end of 2021, the report shows that the sales charge of mixed-asset unit trust funds fell to 1.8% from 2.9% during the period, while the sales charge of bond unit trust funds fell to 0.6% from 0.7%. 

Meanwhile, those who invested in the Employees Provident Fund’s Members Investment Scheme (EPF MIS) saw their average sales charge for equity unit trust funds fall to 0.9% in 2020 from 2.2% in 2014. As for mixed-asset funds, the sales charge dropped to 0.7% from 2% during the period, while the sales charge for bond funds fell to 0.4% from 0.6%.

While it is hard to tell if the decline in unit trust fees will continue, Leong says there is traction. “Awareness of this [decline in sales charges] is there, but we want to make sure investors are aware of their rights when they invest and the services they can request [from agents].”

FIMM’s survey highlighted that only 36% of investors cited high fees and sales charges as their main deterrent to investing in unit trust funds and the Private Retirement Schemes (PRS). About 23% of investors quoted fees and charges as their primary cause of dissatisfaction with investing in those funds. The report noted that the main catalyst for the lower fees and charges is the launch of the EPF MIS, which allows members to invest part of their retirement funds in privately managed unit trust funds, online or offline.

EPF members investing in the MIS through the EPF portal i-Akaun from May 1, 2020, to April 30, 2021, were exempted from paying upfront fees, but were imposed a sales charge of up to 1.5% by agents. As at Aug 4, a sales charge of 0% to 0.5% is imposed on members who invest in the MIS via i-Akaun, depending on the fund, a quick check on the EPF website shows.

Unlike the situation in developed nations such as the US, the lowering of unit trust fees and charges did not occur locally because more investors opted for low-cost investment instruments, such as exchange-traded funds (ETFs).

ETFs, the units of which are traded on the stock exchange, provide investors with exposure to a basket of shares. Those in the US only charge an annual management fee that can go as low as 0.2% per annum. People who invest in ETFs, like when buying shares, pay a brokerage fee to the brokers instead of paying a sales charge to the agents.

The first local ETF — the ABF Malaysia Bond Index Fund, which invests mainly in Malaysian government bonds — was launched in 2005. As at June 2022, there were 20 ETFs in Malaysia, with total assets under management (AUM) of RM2.09 billion. This is still a far cry from the AUM of RM533 billion of unit trust funds as at end-2021, according to FIMM and the Securities Commission Malaysia (SC).

While some information on ETFs is submitted to FIMM, it is not the central focus of the organisation, says Leong, as ETFs are not distributed through agents but bought by investors on the stock exchange. Hence, there is little marketing or distribution risk that falls under the ambit of FIMM.

How about the impact of robo-advisory firms, which are online platforms that put investors’ money in ETFs based on their risk profile, on lower fees and charges? These platforms charge investors an annual management fee of 1% or below without imposing any sales charges. Leong says FIMM has yet to conduct a study on this. 

“I can’t say much about that now [as we don’t have enough information]. Perhaps, when we do a follow-up on the FIMM fees and charges report, we will request more data on the fees and performance of robo-advisors for a comparative analysis.”

Leong adds that investors shouldn’t focus only on fees and charges when evaluating a unit trust fund, but also on its performance. “For the report, we analysed fees and charges, and returns generated, to get a comprehensive assessment. Generally, the topic of fees and charges becomes more pertinent when the performance [of unit trust funds] is below expectations.”

Many more ESG and retirement-related funds to come

Another emerging trend that Leong has observed, after chatting with industry players, is the tremendous increase in socially responsible investment (SRI) funds as more investors are putting their money in these funds.

“Based on the work we are doing with the SC and industry players, we expect more development on the ESG and SRI fronts. Last year, we did a survey that asked all our members how many ESG or SRI retail funds they intended to launch. Their answer then was about 20. Now, they are targeting more than 100 by 2030,” he says.

Retirement-centric unit trust funds and products will also come into focus as many Malaysians have drained their retirement savings to put food on the table in the past two years. With more than RM100 billion withdrawn from EPF accounts during that period, investors should urgently start replenishing their nest egg, Leong advises.

PRS funds could be an option for investors to save and invest for retirement as these charge a low fee and have a mechanism in place that discourages and prevents investors from withdrawing money early, he says. However, several reports have shown that investors put money in PRS funds mainly because of the RM3,000 personal tax relief they can claim each year. In fact, investors are requesting a higher amount in tax relief, ranging from RM5,000 to RM10,000, according to Leong and FIMM’s fees and charges report.

From an industry perspective, the net asset value (NAV) of unit trust funds had grown steadily to RM533 billion in 2021 from RM130 billion in 2008, when the global financial crisis struck. The industry saw growth each year, except from 2017 to 2018 due to several market-moving events.

The number of new accounts opened to invest in unit trust funds has increased in tandem with the increase in NAV. Leong says that from March 2020 to May 2022, about three million new unit trust accounts were set up, bringing the total to 23.8 million.

“Assuming one person owns three accounts, about eight million people have [invested in unit trust funds]. And this excludes unit holders’ accounts held under nominee by banks,” he adds. 

Based on the SC’s website, 753 funds were launched as at May 2022. Surprisingly, while more unit trust funds have been distributed online in recent years, the number of agents rose last year, which was a reverse of the declining trend from 2018 to 2020, according to Leong.

“Many thought the agency force would be susceptible to the pandemic as they are always on the ground doing the work. But the reality is that we saw a net increase of about 7,000 new consultants last year. This is in contrast to past years, when we saw net attrition [in the number of agents]. 

“It seems that being a unit trust consultant has become the employment of choice for unemployed freelancers. When talking about the gig economy, some people want more flexible time, but are also selective about their employment opportunities. By becoming a unit trust or PRS consultant, they are able to learn and partake in the capital or financial market space.”

FIMM’s plans

Leong says FIMM aims to create a single registration framework for unit trust and PRS agents. “In the past, when you came to take exams, you would take separate exams for unit trust and PRS. We are in the process of amalgamating that, which we hope can be resolved by next year.”

FIMM will be holding its annual convention on Oct 17 and 18, targeted at unit trust consultants, the public and the investment industry. The theme of the virtual event is “Re:Set”, premised on the “Great Reset” coined by the World Economic Forum in 2020 in response to the economic difficulties brought about by the pandemic.

“The convention will examine ways on how we can reset our future, ourselves and our industry in the best, most efficient and sustainable way,” says Leong, adding that FIMM will continue to play its role as industry thought leader. 

“We want to be the voice of the industry and will continue to work with all stakeholders, regulators, members and distributors to expand on our thought leadership and market advocacy.

“To ensure we obtain as much feedback as possible, we have an ongoing engagement process. The feedback obtained has led to the development of many industry initiatives and reports.”