The EPF - Unit Trust Loss and Gain Controversy

The EPF - Unit Trust Loss and Gain Controversy

Utusan Malaysia says: “Loss”

FMUTM says: “Gain”

Investors say: “huh???”

A Malay daily newspaper reports that 80% of EPF contributors to the unit trust investment scheme has suffered losses (6th August 2006). FMUTM questions the validity of the newspaper’s figures and counters the report by coming out with a statement that is totally opposite of what the news daily claims. In its statement, it quotes Standard & Poor, an international research fund house that the average returns from Malaysian equity funds for 7 years is 24%, 5 years is 56% and 3 years is 26%. (8th August 2006)

So, who is telling the truth? Is the newspaper wrong? Is FMUTM right? Actually the answer is that BOTH of them are right!

How can this be?

The answer is quite simple. Both of them are using different methods and standards of measuring performance.

The news daily naturally use the Sell to Bid basis whereas FMUTM uses the S&P figures which uses the Bid to Bid basis. In the fund managers’ world, there are 3 prices to a fund i.e. the NAV price, the Selling price and the Bid price. The NAV price refers to the Net Asset Value of the fund which is the actual value of the fund. The fund manager adds a further 5%-7% sales charge on it and everyone who buys the fund pays this price which is known as the Manager’s Sell price. When an investor redeems or sells back the fund to the manager, the manager buys it back at the Bid price which is the manager’s buy-back price.

Example:

The NAV of a fund is $1.00 per unit on 28^th July 2005. If the sales charge is 6.5%, the Sell price will be $1.065 per unit. If you invest $100,000 in the fund on that day, you will receive 93,896.713 units ($100,000 / $1.065 per unit). Suppose you decide to redeem all your investment (by selling back the fund to the fund manager) after a year and the NAV of the units had appreciated by 5 cents to $1.05 and the Mgr’s Sell price is $1.11825 but the Buy price is $1.05.

You will receive back $98,591.548 (derived from 93,896.713 x $1.05). You will have assumed a loss $1408.46 (your capital $100,000 less your redemption value $98,591.548.

However, FMUTM using S&P will regard your fund as having made a gain of 5% for the year. This is because the NAV of the fund is now at $1.05 from the original $1.00.

A second important factor is the DATE used as the starting point to measuring fund performance.

The chart above shows the volatility range of the KL Composite Index. All equity funds are invested in a diversified range of stocks and shares being traded on the KLCI. The net asset value of the funds therefore also experiences the ups and downs of the KLCI.

A person who invested in a fund in December 2005 when the KLCI was at 882 will do better than someone who invested in early Sept 2005 when the KLCI was at 935.

A third factor that may have caused the contrasting headlines is the funds being measured. (See chart below). The performance of funds depends largely on the fund managers reading the direction of the economy from their research work which then influences their stock selections. If they are right, the results are good, but if they are wrong, the results will be bad. That is why some funds will give excellent returns for the investor whilst others will give barely enough returns to cover the sales charge and yet others will incur losses for their investors.

That is why it is very important to know what are the considerations and basis on which the Malay daily and the FMUTM is debating on. Both of them are right in their own basis of consideration. What is very important therefore is investor literacy. Every investor needs to also invest in knowledge!