Table of Content
CHAPTER 1
WHAT IS UNIT TRUST?
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Types of Charges & Fees
— Direct Charges
— Indirect Charges
Management Expense Ratio
Portfolio Turnover Ratio
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CHAPTER 1: WHAT IS UNIT TRUST? (Part 2)
Types of Charges & Fees
 
Generally, all types of investments incur charges or expenses. For investment in shares, the charges are known as ‚Äúbrokerage charges‚ÄĚ.In the case of unit trusts, the fees and charges can be categorized as direct (fees that you incur directly when you invest in a fund) and indirect (fees that you incur indirectly). All this information can be obtained from the unit trust‚Äôs prospectus, which is available for the public either via the website of the unit trust management company or through their distributors and agents.
 
[1]. Direct Charges
 
Direct charges are charged directly to investors. Sales charge, repurchase /redemption charge, and switching fee are the three main direct charges relating to unit trusts.

Sales charge

The sales charge usually serves as the commission for unit trust agents. It is charged at the inception of the investment. Sales charge is common among equity and balanced funds. As mentioned earlier, sales charges can range from zero to five percent in our local context.

Assume that Fund A imposes a 3% sales charge. This means that if an investor invests RM1,000 into Fund A, a sales charge amounting to RM30 (i.e. RM1,000 X 3%) will be deducted at source. The amount of investment that goes into Fund A would be RM970 (i.e., RM1,000 minus RM30 sales charge).

Redemption / Repurchase charge (or exit fee)

Repurchase or redemption charge is the opposite of sales charge, i.e., it is charged when the investor withdraws money from the fund.

Assume Fund B imposed a redemption charge of 2% and its NAV is RM0.85. You wish to redeem 4,000 units from Fund B. The value of your redemption would be RM3,400 (RM0.85 X 4,000 units). The redemption charge would be RM68 (2% X RM3,400) and your net proceeds from the redemption would be RM3,332 (RM3,400 minus RM68).

Usually, a fund will only have either sales charge or redemption charge, and not both together. A redemption charge is mainly imposed by fixed income funds, as fixed income investments require a longer investment tenure, and any constant movements in the fund, which is caused by investors withdrawing money from the fund, will affect the investments of the fund. Thus, redemption charges serve to manage the outflow from the fund by discouraging investors to withdraw their money within a short period of time.

Switching fee

Switching fee is the fee paid if an investor wishes to switch between different funds provided by the same unit trust management company. For instance, the investor of Fund A may wish to switch their investment from Fund A to Fund B, both of which are provided by the same unit trust management company. Switching is a better alternative as the investor would otherwise need to sell Fund A and buy Fund B, which will incur time and additional sales charges.

For switching fees, some funds charge a fee, while some may exempt the fee for a certain number of times, whereas some may waive it in total, such as Inter-Pacific Asset Management’s funds.

 

[2]. Indirect Charges

Indirect charges are charged to the fund, instead of directly to investors.Table 2 shows an extract of the indirect charges for two equity funds managed by Inter-Pacific Asset Management, namely InterPac Dana Safi (Malaysian Shariah equity fund) and InterPac Dynamic Equity (Malaysian conventional equity fund), as reported in the funds’ Master Prospectuses dated 23 July 2017.

 

Table 2: Indirect Charges of InterPac Dana Safi & InterPac Dynamic Equity Fund
Annual Management Fee 1.50% per annum of NAV.
Annual Trustee Fee 0.07% per annum of NAV subject to a minimum fee of RM18,000 per annum.
List of Expenses directly related to the Fund These include but are not limited to:

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Commission paid to brokers;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Auditor‚Äôs fee;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Tax Adviser‚Äôs fee;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Valuation fee;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Taxes;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Custodial charges;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Tax vouchers;

–¬†¬†¬†¬†¬†¬†¬†¬†¬† Annual/Interim reports

 

Annual management fee

Annual management fee is the fee that is earned by the fund management house for managing the fund, i.e. making investment decisions for the fund. In Malaysia, the common range of annual management fee is of 1.0% to 1.5% for equity funds.

Trustee fee

The role of trustee is to act as a trustee and custodian to safeguard the interests of investors (or unitholders), since the assets of the funds belong to investors and are just being managed by the unit trust management company. Since the assets are held by the trustee and not the unit trust management company, this gives the unitholders confidence that the unit trust management company will not take away their money.

In addition, the trustee also ensures that the unit trust management company invests and acts in accordance to the investment mandate and restrictions spelled out in the fund’s trust deed and prospectus.

 

Other fees

Other fees include commission paid to brokers for trades, auditor’s fees, tax advisory fees, valuation fees, taxes, and custodial fees. All these fees are incurred as part of running the funds.

 

Management Expense Ratio

Management expenses can be divided into two categories: one for the running of the fund and for safeguarding the interest of investors; and the other is the transaction cost, i.e. brokerage fees paid in the buying and selling of shares (in the case of equity funds).

For personal investing, we technically only incur brokerage charges. However, for a fund, there are additional costs incurred to safeguard the interest of unit holders, such as valuation, audit, and custodial fees. Thus, it is not a like-for-like scenario to compare the cost of both.

There are many commentaries that investing in unit trusts incurs a lot of charges. However, by referring to this ratio, investors can assess how high the indirect costs incurred are.

Management expense ratio is a measurement of how much of a fund is used for the running of the fund. In the calculation of management expense ratio, direct charges incurred by investors when investing are excluded.

If a fund reports a management expense ratio of 1%, this means that, on average, 1% of the fund is used as operating costs.

Management expense ratio can be derived from the fund’s interim report (i.e. semi-annual report) and annual report. Table 3 below is an extract of InterPac Master Trust Annual Report for the financial year ending 31 March 2017.

 

Table 3: Management Expense Ratio
2015 2016 2017
InterPac Dana Safi 0.52 0.31 0.79
InterPac Dynamic Equity Fund 0.47 0.31 0.76

 

 Portfolio Turnover Ratio

When looking at management expense ratio, one cannot ignore the Portfolio Turnover Ratio (‚ÄúPTR‚ÄĚ). PTR is an indication of how frequently the fund changes its holdings in a year. It is derived by taking the value of buying or selling done by the fund, whichever is higher, divided by the average asset of the fund. The higher the PTR, the higher the transaction costs, and thus the higher the MER.

 

Table 4 is extracted from InterPac Master Trust Annual Report for the financial year ending 31 March 2017, which shows the PTR for two of its funds.

 

Table 4: Portfolio Turnover Ratio
2015 2016 2017
InterPac Dana Safi 0.29 0.38 1.11
InterPac Dynamic Equity Fund 0.23 0.43 1.18

 

In 2015, the PTR is less than 0.3 times, meaning to say on average the funds held its investment for between 3 to 4 years. In 2017, as the fund’s PTR increased by almost 1.10 times, this means the funds held the assets for a year. In InterPac’s case, the higher PTR in 2017 was due to portfolio restructuring, i.e., changing of the investments held by the funds.

Growth funds will generally have a higher PTR, whereas a more conservative fund will have a lower PTR. Higher PTR may not necessarily be bad, as long as the performance of the fund can justify the higher PTR rate.

 

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