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Nov 19th, 2019

Final Answers Essay

The Growth of Unit Trust

The development of unit trust funds in Malaysia has gone through into four phases that are The Formative Years 1959 – 1979, the Period from 1980 – 1990, the Period from 1991 – 1999 and the Period from Current to Present.(www.islamic-invest-malaysia.com):

The Formative Years 1959 – 1999: The first two decades in the history of the unit trust industry were characterized by slow growth in the sales of units and a lack of public interest in the new investment product.

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The Period from 1980 – 1990: This period marks the entry of government participation in the Unit Trust Industry and the formation of a Committee to regulate the unit trust industry, called the Informal Committee for Unit Trust Funds, comprising representatives from the Registrar of Companies (ROC), the Public Trustee of Malaysia, Bank Negara Malaysia (BNM) and the Capital Issues Committee (CIC).

The Period from 1991 – 1999: This period witnessed the fastest growth of the unit trust industry in terms of the number of new management companies established, and funds under management.

The Period from 2000 to Current: In 2005 the unit trust industry experienced another year of strong growth which saw the net asset value of managed funds capitalizing 14.2% of Bursa Malaysia’s market at RM98.5 billion at the end of 2005.

Types of Unit Trust available

Balanced Funds

A balanced unit trust fund generally has a portfolio comprising equities, fixed income securities and cash.

Equity Funds

An equity unit trust is the most common type of unit trust where its concentration of investments is focused in equities or securities of listed companies.

Exchange Traded Funds (ETF)

ETF is linked unit trust fund whose investment objective is to achieve the same return as a particular market index.

Fixed Income Funds

Fixed income funds invest mainly in Malaysian Government Securities, corporate bonds, and money market instruments.

Index funds

These funds invest in a range of companies that closely match companies comprising a particular index.

International equity funds

International equity funds are funds primarily invested in overseas stock markets.

Money Market Funds

Money market funds invest in liquid, low risk money market instruments that are in effect short-term deposits (loans) to banks and other-low risk-financial institutions, and in short-term government securities..Real Estate Investment Trusts (REITS)

REITs invest in real properties, usually prominent commercial properties and provide the investor with an opportunity to participate in the property market in a way which is normally impossible to the small time investor.

Shariah Funds

The objective of Shariah funds is to invest into Shariah compliant investments which for example exclude companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products.

Advantages of investing in unit trust

Diversification: involves the process of spreading risk over a broad portfolio of asset classes which include but are not limited to stocks and/or fixed income securities.

Professional management: Unit trusts are managed by professional fund managers with the expertise and resources to manage the assets of the fund.

Liquidity: You may redeem all or part of your units on any Business Day and have your proceeds mailed to you within 10 days.

Liquidity: You may redeem all or part of your units on any Business Day and have your proceeds mailed to you within 10 days.

Capital gains: Unit trust funds which seek to achieve capital growth over the long-term provide the opportunity for you to achieve capital gains.

Type 1

Fund Name: Public Index Fund (PIX)

Category of Fund: Equity fund

Type of Fund: Capital growth

Equity Range of Fund: 80% to 98%

Launched Date: 2 March 1992

Distribution Policy: Incidental

Suggested Minimum Investment Period: 3years

Designated Fund Manager: Chiang Kang Pey and Ng Joo TsongThe objective of the Public Index Fund(PIX) is to achieve long-term capital appreciation while at the same time attempting to outperform the FTSE Bursa Malaysia Top 100Index. This fund is suitable for medium to long-term investors who are able to withstand ups and downs of the stock market in pursuit of capital growth. PIX invest in a diversified portfolio of Malaysian equities and fixed income securities to meet its investment objective. Its equity content in terms of NAV will range in the region of 80% to 98% of NAV of the fund; with a minimum of 60% of NAV invested in index stocks. The balance of the fund’s NAV will be invested in fixed income securities and liquid assets which include money market instruments and deposits.

PIX is actively managed and invests mainly in index stocks with the objective of outperforming the index and achieving capital growth over the long term. The fund aims to achieve this by maintaining a reasonably high level of exposure to equities over time with a minimum of 60% of NAV invested in index stocks at all times. PIX is not a passive index fund but will invest in a diversified portfolio of index-linked companies, blue chip stocks and companies with growth prospects that are listed on the Bursa Securities. In identifying such companies, the fund

relies on fundamental research where the financial health, industry prospects, management quality and past track records of the companies are assessed. Although the fund is actively managed, the frequency of its trading strategy will very much depend on market opportunities.

The fund provides you with the opportunity to participate in the long-term growth potential of the equity market through investments in a diversified portfolio of index stocks, blue chip stocks and growth stocks that are primarily components of the FTSE Bursa Malaysia Top 100 Index (FBM 100). As it also maintains a fairly high equity exposure range between 80% and 98%, its performance tends to track the benchmark more closely than non-index funds.

It is not a passive index fund but nevertheless is a useful investment vehicle for investors who wish to use it for market timing purposes.

The asset allocation, liquidity management and diversification strategies employed are therefore central to the efforts to manage the risks posed to the fund. There may even be situations such as when a severe downturn in the equity markets is expected and liquidity risks are high, that the equity exposure is reduced to below the levels indicated as a temporary defensive strategy. With regards to the investment in fixed income securities, it should be noted that the performance of the fixed income securities might be adversely affected should interest rates rise sharply. The value of fixed income securities may also ?uctuate based on the credit quality of the issuer.

Type 2

Fund Name: Public Dividend Select Fund (PDSF)

Category of Fund: Equity fund

Type of Fund: Income

Equity Range of Fund: 75% to 98%

Launched Date: 3 May 2005

Stock Selection Profile Fund: Stock which offer or have the potential to offer attractive dividend yields

Distribution Policy: Annual

Suggested Minimum Investment Period: 3years

Designated Fund Manager: Tan Chee Chin and Liew Mun Hon

The Public Dividend Select Fund (PDSF) objective is to provide steady recurring income* by investing in a portfolio of stocks which offer or have the potential to offer attractive dividend yields. The fund is suitable for medium to long-term investors who are able to withstand ups and downs of the stock market in pursuit of annual income* and capital growth. PDSF invests in a diversified portfolio of primarily Malaysian equities and fixed income securities to meet its investment objective. Its equity content in terms of NAV will range in the region of 75% to 98% of the NAV of the fund. The balance of the fund’s NAV is invested in fixed income securities and liquid assets which include money market instruments and deposits.

The fund is actively managed to achieve its goal of providing steady recurring income by investing in a diversified portfolio of stocks that offer or have the potential to offer attractive dividend yields. In terms of stock selection, the fund essentially focuses on investing in companies that have demonstrated consistency in rewarding their shareholders via dividend pay outs. Although the fund is actively managed, the frequency of its trading strategy will very much depend on market opportunities. Notwithstanding this, the fund may also invest in growth or recovery stocks that have the potential to eventually adopt a dividend payout policy. In identifying such companies, the fund relies on fundamental research where the financial health, industry prospects, management quality and past track records of the companies are assessed.

The fund provides you with the opportunity to participate in a diversified portfolio of stocks which distribute or have the potential to distribute reasonably attractive dividends. The equity exposures of the fund are managed actively with exposures ranging from 75% to 98% depending on the Fund Manager’s assessment of the market and economic environment. However, the fund’s equity range may be lower depending on the Fund Manager’s assessment of the stock market outlook. It also maintains investments in fixed income securities to help generate interest income for the fund.

The asset allocation, liquidity management and diversification strategies employed are therefore central to the efforts to manage the risks posed to the fund. There may even be situations such as when a severe downturn in the equity markets is expected and liquidity risks are high, that the equity exposure is reduced to below the levels indicated as a temporary defensive strategy. With regards to the investment in fixed income securities, it should be noted that the performance of the fixed income securities might be adversely affected should interest rates rise sharply. The value of fixed income securities may also ?uctuate based on the credit quality of the issuer. As such, exposures to fixed income securities in the portfolio are managed to ensure that risks levels are commensurate with the potential returns.

Month/Fund Name Unit Trust Funds NAV – Public 2016

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

PIX 0.6549 0.6285 0.6495 0.6374 0.6277 0.6357 0.6350 0.6433 0.6407 0.6462 0.6271 0.6317

PDSF 0.2589 0.2585 0.2664 0.2620 0.2592 0.2590 0.2599 0.2636 0.2636 0.2655 0.2591 0.2563

Steps

Mean

?2 =  ?(xi – ?)2

N

Variance

Standard Diviation

Public Index Fund (PIX) & Public Dividend Select Fund (PDSF)

We are going to find the standard deviation of two different funds. First, we will calculate their average return for the last 12 month for the year 2016.

Mean (PIX):

? = 0.6549+0.6285+0.6374+0.6277+0.6357+0.6350+0.6433+0.6407+0.6462+0.6271+0.6317

12

= 0.6381 @ 63.81%

Mean (PDSF):

? = 0.2589+0.2585+0.2664+0.2620+0.2592+0.2590+0.2599+0.2636+0.2636+0.2655+0.2591+0.2563

12

= 0.2610 @ 26.10%

Since standard deviation is the square root of variance, we must first find the variance of each investment. This is a two-part process with for each investment. You first find the individual variance for each month & square the sums. Then, you divide the sum of the squares from the first step by the 1 less the number of months (?/n-1). For this example, we will divide the sum of the squares by 12 since we found the average return for 12 months in Step #1.

0.6381 – 0.6549 = (-0.01676)?= 0.0002808

0.6381 – 0.6285 = ( 0.00964)? = 0.0000930

0.6381 – 0.6495 = (-0.01136)?= 0.0001290

0.6381 – 0.6374 = (0.00074)? = 0.0000006

0.6381 – 0.6277 = (0.01044)? = 0.0001090

0.6381 – 0.6357 = (0.00244)? = 0.0000060

0.6381 – 0.6350 = ( 0.00314)?= 0.0000099

0.6381 – 0.6433 = (-0.00516)?= 0.0000266

0.6381 – 0.6407 = (-0.00256)?= 0.0000065

0.6381 – 0.6462 = (-0.00806 ?= 0.0000649

0.6381 – 0.6271 = (0.01104)? = 0.0001219

0.6381 – 0.6317 = (0.00644)? = 0.0000415

0.000889729

Variance (PIX):

= 0.00088972912= 0.00007414409722

Variance (PDSF):

0.2610 – 0.2589 = ( 0.00210)? = 0.0000044

0.2610 – 0.2585 = (0.00250)? = 0.0000062

0.2610 – 0.2664 = (-0.00540)?= 0.0000292

0.2610 – 0.2620 = (-0.00100)?= 0.0000010

0.2610 – 0.2592 = (0.00180)? = 0.0000032

0.2610 – 0.2590 = (0.00200)? = 0.0000040

0.2610 – 0.2599 = (0.00110)? = 0.0000012

0.2610 – 0.2636 = (-0.00260)?= 0.0000068

0.2610 – 0.2636 = (-0.00260)?= 0.0000068

0.2610 – 0.2655 = (-0.00450)?= 0.0000203

0.2610 – 0.2591 = (0.00190)? = 0.0000036

0.2610 – 0.2563 = (0.00470)? = 0.0000221

0.00010874

= 0.0001087412= 0.00000906166667The standard deviation of each stock or portfolio is the square root of the variance we calculated in the previous step.

Standard Deviation (PIX):

= 2 0.00007414409722

= 0.008610697 @ 0.86%

Standard Deviation (PDSF):

= 20.00000906166667

= 0.00301026 @ 0.30%

Comparison

There are two type of funds selected to calculate the returns and standard deviation for the year 2016 nav. First type of fund is capital growth from Public Index Fund. Second type of fund is income from Public Dividend Select Fund. Both the type of funds has different objective and features. The Public Index Fund provides you with the opportunity to participate in the long-term growth potential of the equity market through investments in a diversified portfolio of index stocks, blue chip stocks and growth stocks that are primarily components of the FTSE Bursa Malaysia Top 100 Index (FBM 100).

Meanwhile, Public Dividend Select Fund provides you with the opportunity to participate in a diversified portfolio of stocks which distribute or have the potential to distribute reasonably attractive dividends. The investment strategy of Public Dividend Select Fund is to achieve its goal of providing steady recurring income by investing in a diversified portfolio of stocks that offer or have the potential to offer attractive dividend yields. Meanwhile Public Index Fund, The fund invests a minimum of 60% of its NAV in index stocks with the balance invested in a diversified portfolio of blue chip stocks and companies with growth prospects that are listed on Bursa Securities.

Both the funds have different risk of returns and standard deviation.

Unit Trust Fund Type 1 (PIX) Average Rate of Return: 63.8%%Standard Deviation: 0.86%

Unit Trust Fund Type 2 (PDSF) Average Rate of Return: 26.10%%Standard Deviation: 0.30%

Recommendations

I recommend investors to invest in Public Index Fund. The rate or return also higher than the PDSF which is 63.81%.Here is some information on the benefits of investing in index funds.

Guarantee average returns

Most investors aim for above average returns in investing but most fail. Most even fail to achieve average returns.  You can guarantee the market average by investing in index funds. The index fund is the average so as soon as you make an investment you know you have achieved the average.

Outperform over 80% of all actively managed funds

Average still doesn’t sound good enough. Well if you placed your money into an actively managed fund then there was an 80% chance you would end up with less money. Actively managed funds employ analysts and investment experts to try and achieve huge returns. In fact they can’t beat an index fund most of the time. Invest in an index fund and you know that there is a 4 in 5 chance that you will do better than investing elsewhere.

Low cost

One of the reasons that actively managed funds under-perform index funds is that they are expensive to run. They have to employ fund managers, analysts and traders and whole host of other experts to give you perceived value. Index funds just follow the average so they spend very little money. This is reflected in the return you receive. You lose little in fees.

Low maintenanceWhen you are saving and investing for retirement you want to ‘set and forget’ your investment as much as possible. You want to be able to invest your money, achieve the market average and in 20 to 30 years you have a large nest egg for retirement. Index funds allow you to do that. Pick an index fund for so don’t waste valuable time and money.

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