Eight Principles Of Successful Unit Trust Investing
• | have a similar investment objective as a fund. |
• | are willing to take some form of risk through participation in the stock market and/or fixed income market. |
• | want to hold investments that are liquid and easily redeemed. |
• | want to enjoy a lower transaction cost while investing in the stock market. |
• | want to have a well diversified investment portfolio which is professionally managed. |
• | Diversification - For any given amount of investment return, investment risks may be spread over a wide variety of securities in different countries, sectors and securities for a small investment sum. On your own, this will normally require a large amount of effort and capital. |
• | Professional fund management - A fund's pooled resources makes it cost-effective to engage a team of qualified and experienced in-house investment professionals such as our fund manager. We conduct full-time regular investment research and analysis and make on-site visits to gain greater insights into the investments that a fund holds. We also invest in research facilities and information resources essential for making sound investment decisions. |
• | Liquidity - We stand ready to repurchase all or part of your unitholding on any business day. |
• | Hassle free - It is convenient to buy and sell investment units and you are spared the time, trouble and expense of researching and monitoring investments on your own if you are to invest directly in the stock market. |
• | Affordability - Only a relatively small amount of money is needed to participate in a professionally managed portfolio of investments. For personal direct investments, you will have to invest considerably more in order to have the same reach in investment opportunities and to benefit from the same level of expertise in portfolio management. |
• | Company specific risk - This risk refers to the individual risk of the respective companies issuing securities. This risk could be a result of changes to the business performance of the company, consumer tastes and demand, lawsuits, competitive operating environment and management practices. Developments in a particular company which a fund has invested in would result in fluctuations in the share price of that company and thus the value of a fund's investments. This risk is mitigated by diversification in a portfolio comprised of stocks of many companies. In addition, this risk may occur when an investee company's business or fundamentals deteriorate or if there is a change in management policy resulting in a downward revision or even removal of the company's dividend policy. Such events may result in an overall decrease in dividend income received by a fund and possible capital loss due to a drop in the share price of a company that cuts or omits its dividend payments. This risk may be mitigated by investing mainly in companies with a consistent historical record of paying dividends, strong cash flow, or operating in fairly stable industries. |
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• | Concentration risk - This is the risk of a fund focusing a greater portion of its assets in a smaller selection of investments. The fall in price of a particular equity investment will have a greater impact on the fund and thus cause greater losses. This risk may be mitigated by the unit trust fund manager conducting even more rigorous fundamental analysis before investing in each security. |
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• | Country and/or foreign securities risk - This risk refers to the risks of investing in foreign markets. Emerging markets may have relatively underdeveloped capital markets, less stringent regulatory and disclosure standards, concentration in only a few industries, greater adverse political, social and economic risks and general lack of liquidity of securities. The risk of expropriation, nationalisation, exchange control restrictions, confiscatory taxation and limitations on the use or removal of funds also exist in emerging markets. Emerging markets may also have less developed procedures for custody, settlement, clearing and registration of securities transactions. Developed markets while not possessing similar levels of risks as emerging markets, may experience risks such as: changes in economic fundamentals, social and political stability; monetary policy and currency fluctuations. This risk may be mitigated by conducting thorough research on the respective markets, their regulatory framework, economics, companies, politics and social conditions as well as minimising or omitting investments in markets that are economically or politically unstable or lack a regulatory financial framework and adequate investor protection legislation. |
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• | Credit and default risk - Credit risk relates to the creditworthiness of the issuers of the debt instruments and their expected ability to make timely payment of interest and/or principal. Any adverse situations faced by the issuer may impact the value as well as liquidity of the debt instrument. In the case of rated debt instruments, this may lead to a credit downgrade. Default risk relates to the risk that an issuer of a debt instrument either defaulting on payments or failing to make payments in a timely manner which will in turn adversely affect the value of the debt instruments. This could adversely affect the value of a fund. |
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• | Currency risk - As the investments of a fund may be denominated in currencies other than the base currency, any fluctuation in the exchange rate between the base currency and the currencies in which the investments are denominated may have an impact on the value of these investments. Investors should be aware that if the currencies in which the investments are denominated depreciate against the base currency, this will have an adverse effect on the NAV of the fund in the base currency and vice versa. Investors should note that any gains or losses arising from the fluctuation in the exchange rate may further increase or decrease the returns of the investment. |
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• | Dividend policy risk - This is a risk particular to a fund which has heavy focus on high dividend yielding stocks. This risk may occur when the company's business or fundamentals deteriorate or if there is a change in the management policy resulting in a lower or even a removal of the company's dividend policy. This risk may be mitigated by investing mainly in companies with a consistent historical record of paying dividends, strong cash flow or operate in fairly stable industries. |
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• | Expectation risk - This risk refers to the fact that the following circumstances may lessen the prospects for recovery:
Should a recovery situation not turn out as expected due to the above reasons, there may be a loss or reduction of profits/income resulting in a reduction in a fund's assets. This risk may be mitigated by a thorough study of potential recovery situations (economic, industry and company specific) taking into account the favourable probability of a positive outcome, risks and returns before making any investment in such situations. Continuous monitoring of developments in potential recovery situations may be conducted to ensure that these pan out as expected.
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• | ETF risk - Exchange traded funds (“ETF”) are collective investment schemes designed to track a particular index or portfolio of securities, and are listed on a stock exchange. The following are the key risks of investing in ETF: |
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• | Futures risk - As futures are conducted on an initial margin basis, a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Adverse price movements can create additional losses over and above the initial futures contract costs. This risk may be mitigated by entering into futures contracts only for hedging purposes. Specifically, a fund will only enter into futures sales contracts to hedge against declines in the value of stocks in the portfolio. Futures contracts can play a part in reducing the risk of a fund's investment portfolio by providing a hedge against shorter-term volatility of financial markets. However, futures carry certain additional risks which if not properly managed can result in significant losses or underperformance. These include:
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• | Inflation risk - This is the risk that investors’ investment in a fund may not grow or generate income at a rate that keeps pace with inflation. This would reduce investors’ purchasing power even though the value of the investment in monetary terms has increased. |
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• | Interest rate risk - This risk refers to the effect of interest rate changes on the market value of a bond/sukuk portfolio. In the event of rising interest rates, prices of fixed income securities / sukuk will generally decrease and vice versa. Debt securities / sukuk with longer maturity and lower coupon/profit rate are more sensitive to interest rate changes. Interest rate movements can lead to fluctuations in bond / sukuk prices resulting in fluctuations in the value of a fund. In terms of sukuk, particularly those based on contract of exchange such as Murabahah BBA and Ijarah, any fluctuations in conventional interest rates will also affect the indicative/profit rates of these sukuk, hence, will also lead to a rise or fall in prices of sukuk. This risk will be mitigated* via the management of the duration structure of the portfolio of debt securities / sukuk. The interest rate is a general indicator that will have an impact on the management of funds regardless of whether it is a Shariah-compliant unit trust fund or otherwise.
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• | Liquidity risk - This risk occurs in thinly traded or illiquid securities. If a fund needs to sell a relatively large amount of such securities, the act itself may significantly depress the selling price resulting in a decrease in the value of a fund's assets. As such, a fund is managed in such a way that a portion of the investments is in equity securities and money market instruments that are highly liquid and this allows a fund to meet sizeable redemptions without jeopardising potential returns. |
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• | Manager’s risk - This risk refers to the day-to-day management of a fund by the unit trust fund manager which will impact the performance of the fund. For example, investment decisions undertaken by the unit trust fund manager, as a result of an incorrect view of the market or any non-compliance with internal policies, investment mandate, the deed, relevant law or guidelines due to factors such as human error or weaknesses in operational process and systems, may adversely affect the performance of the fund. |
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• | Market risk - This risk refers to developments in the equity market environment which typically includes changes in regulations, politics, technology and the economy of the country. Market developments can result in equity market fluctuations which in turn affect a fund's underlying investments and hence its unit price. In terms of a fund’s concentration in a single equity market*, this risk is reduced by undertaking active* asset allocation, where in periods of heightened risk, there will be greater allocation in fixed income securities / sukuk and Islamic money market instruments and cash. Where a fund is invested in multiple markets, a higher, if not, full allocation will be in markets that have a track record of economic, political and regulatory stability – allocation between markets and asset classes will also help mitigate risk.
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• | Non-compliance risk - This risk refers to the risk that the unit trust fund manager does not adhere to legislation or guidelines that govern the investment management and operations of a fund or to a fund's investment mandate stated in the deed. This risk also concerns non-compliance with internal operating policies and the unit trust fund manager acting fraudulently or in a manner that is unfair to unitholders. This risk could result in disruptions to the operations of a fund and potentially lead to reduced income/gains or even losses to unitholders. The unit trust fund manager has in place stringent internal policies and procedures to ensure a fund is managed to the full benefit of investors and in compliance with the relevant fund regulations or guidelines. There is also separation of fund management duties such as investment decision making, execution of trades and accounting for/valuation of such trades. A compliance team is in place to monitor such operational and investment activities. |
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• | Participatory Notes (P-Notes) risk - A P-Note is a market access financial instrument that replicates the financial return of an underlying asset - for example, equity securities. P-Notes issued by financial institutions, can either be listed on a stock exchange or unlisted and are generally denominated in USD. Investors of P-Notes enjoy the rights to corporate actions including dividends, rights issues, bonus shares and mergers which usually does not come with voting rights. P-Notes are in general issued for securities traded in restricted markets (such as India, Taiwan and China) where there are one or more complicated and time-consuming administrative hurdles such as foreign exchange controls, controlled regulatory environment and requirement for local licensing for securities trading, among others. P-Notes bear the risk of the single issuer of the instrument, specifically the potential insolvency of the issuer of the P-Note. This risk will be mitigated by investing in P-Notes issued by a globally renowned financial institution with a good investment grade credit rating by Standard & Poor’s or Moody’s or Fitch or any other global credit rating agency. P-Notes also carry with it risks inherent in the underlying asset which it replicates, such as country and/or foreign security risk, foreign exchange risk and market risk. These risks will be mitigated by conducting extensive overall market and macro-economic analysis, as well as fundamental security research and by spreading investments in different sectors to reap the benefits of diversification. |
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• | Real estate investment trusts (REIT)-related risk - The value of REIT can fluctuate up or down depending on market forces, the general financial and real estate markets and the interest rate environment, among other factors. A fund which invests in REIT will also be subject to the risks associated with direct ownership of real estate, whose values can be adversely affected by increases in real estate taxes, government policy restricting rental rates, other changes in real estate laws, rising interest rates and a cyclical downturn in the real estate market. In selecting REIT, a fund manager will undertake detailed analysis, selecting REIT with a consistent track record, run by reputable managers from the property sector, owning properties with income and/or growth potential which are located in countries with a stable economic, political and regulatory environment. |
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• | Reclassification of Shariah status risk - This risk refers to the risk that the currently held Shariah-compliant equities in a Shariah-compliant fund may be reclassified as Shariah non-compliant in the periodic review of the equities by the SACSC, the Shariah adviser or the Shariah boards of the relevant Islamic indices. If this occurs, the Manager will take the necessary steps to dispose such equities. There may be opportunity loss to the Shariah-compliant fund due to the Shariah-compliant fund not being allowed to retain the excess capital gains derived from the disposal of the Shariah non-compliant equities. |
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• | Reinvestment risk - This is a risk that future proceeds (interest/profit and/or capital) are reinvested at a lower interest/profit rate. Reinvestment risk is especially evident during periods of falling rates where the coupon/profit payments (from existing fixed income / sukuk investments) are reinvested at less than the yield to maturity (actual profit rate) at the time of purchase. Such risk may be mitigated by purchasing zero coupon (deep discount) debt securities / sukuk which do not pay profits and holding these debt securities through duration management / holding these sukuk to maturity (note however, there is still reinvestment risk upon maturity of the zero coupon sukuk). Risk is also potentially reduced by duration* management – i.e. increasing duration of the sukuk segment where rates are falling or expected to fall, and vice versa. * Duration is used as a measure of sensitivity to profit rates, which takes into account the maturity and profit rate of a sukuk. |
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• | Stock specific risk - This risk refers to prices of a particular stock may fluctuate in response to the circumstances affecting individual companies such as adverse financial performance, news of a possible merger or loss of key personnel of a company. Any adverse price movements of such stock in a fund will adversely affect the fund’s NAV. |
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• | Structured products risks - Structured products are financial instruments that generally offer capital protection if held to maturity and whose yields or returns are tied to one or more global or local securities or derivatives, which include single or a basket of equity securities or equity indices, options, debt securities, commodities futures, currencies and possibly equity or interest rate swaps. A key risk is potentially high downside price fluctuations (relative to traditional investments) owing to the use of derivative instruments which can amplify market movements of the underlying index or investment used and thus adversely affecting the valuation of the structured product. Another key risk is counter party risk i.e. where the issuer of the structured product is unable to make payments or repay obligations in a timely manner and thus leading to a lower or even zero valuation. The risk of higher volatility is managed by undertaking in-depth fundamental and technical analysis of the securities or derivatives that will be employed to provide returns while counter party risk will be mitigated by ensuring that the counter party / issuer of the structured products carries a minimum A1 rating by RAM Rating Services Berhad or its equivalent. For Islamic structured products, the instruments used for the same must comply with Shariah requirements. |
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• | Timing of asset allocation risk - This is the risk that, given the prevailing economic and financial market conditions, the unit trust fund manager makes the inappropriate asset allocation decisions between equities and fixed income securities / sukuk, potentially resulting in lower returns to a fund. To mitigate such risk, the unit trust fund manager conducts vigorous fundamental macro research and technical analysis. Factors such as economic conditions, interest rate environment, valuations of markets, liquidity, and investor sentiment are taken into account before making asset allocation decisions. |
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• | Warrants and options risk - Warrants and options are a leveraged form of investment. A movement in the prices of the equity securities of the warrants and options will generally result in a larger movement in the prices of the warrants and options themselves, that is, higher volatility. The geared effect implies substantial outperformance when the prices of equity securities rise. Conversely, in a falling market, warrants and options can lose a substantial amount of their values, far more than equity securities. |
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Warrants and options have a limited life and will depreciate in value as they approach their maturity date. If a warrant's exercise price is above the share price at any time during its remaining subscription period, the warrant is effectively "out of the money" and theoretically has little value. Warrants that are not exercised at maturity become worthless. Warrants and options do not participate in dividends or cash flows that accrue from the underlying equity securities. This risk may be mitigated by conducting extensive fundamental analysis of the warrants' equity securities to ensure their viability as an investment for a fund. The percentage allocation of warrants held by a fund will generally mirror the allocation of the equity securities, that is, higher when there is an anticipated market rise and vice versa. Privately negotiated over-the-counter (OTC) options that are not traded on an exchange or through a broker, are subject to the credit or counterparty risk of the issuer of the option. The risk level will be dependent on the financial standing and creditworthiness of the party issuing the options and their ability to fulfil the terms of the options contract. Thus, any default by the issuer will have an adverse impact on a fund’s NAV. To mitigate this risk, only OTC options offered by issuers such as financial institutions with at least a credit rating of AA by RAM Rating Services Berhad or A by Standard & Poor’s or their equivalent by any other recognised rating agency will be considered. Should the counterparty’s credit rating fall below the minimum as stated subsequent to entering into an OTC option, all option positions with the counterparty will be unwound within three months of the credit rating downgrade, subject to the unwinding of the position being in the best interests of the fund. |
- What are my investment goals?
- What kind of returns am I looking for?
- How much risk am I comfortable with?