1. Chapter 12
Unit Trust

2. Learning Goals Understand what is Unit Trust.
Differentiate between type of Unit Trust and type of Unit Trust fund.

3. 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.

4. 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.

5. 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.

6. How a Unit Trust Work? Trust deed Trustee
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.

7. Investors or Unit holders
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.

8. 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

9. 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

10. 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.

11. 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.

12. 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

13. 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.

14. 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.

15. 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.

16. Bond Funds Property trust 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.

17. 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.

18. 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..

19. 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

20. 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