Over the past decade the mutual fund industry has experienced rapid growth . These funds distinguish themselves by investing in shares of other mutual funds rather than buying individual
securities, thus providing a unique opportunity to examine several relevant issues regarding mutual fund management, services and performance. In particular, this paper analyzes the characteristics of Public mutual funds to determine whether or not they provide significant investor benefits including enhanced performance due to management expertise and/or better risk return trade-offs than other security markets.
We also discuss the feasibility and cost of replicating a of public mutual funds' portfolio strategy.
In addition to offering the same advantages as traditional mutual funds, the public mutual funds offer instant diversification across different fund companies and managers. Public mutual funds expand investment opportunities by providing a mechanism for investing in those traditional
Funds with high minimum initial investments and funds that are closed, as well as
funds that might otherwise be restricted to a specific investor type (i.e. institutional
investors). In terms of management expertise, public mutual funds enable investors to access
foreign funds and create portfolios of top-quality managers whereby investors gain
from embedded and affordable advice. Managers also have greater flexibility in
reacting to changing market conditions due to the unique composition of FOFs.
Finally, when an investor selects a public mutual fund the individual fund selection dilemma is
easily resolved.
1.1. Introduction
Public Mutual Berhad (Public Mutual) is the largest private unit trust company in Malaysia and currently manages more than 70 funds with total NAV of more than RM35.2 billion for more than 2,300,000 accountholders. Incorporated in July 1975, Public Mutual began its operations in 1980 with the launch of the Public Savings Fund, and soon went on to become an industry leader and setting forth new trends in innovative fund development.
Public Mutual currently promotes five categories of funds, namely equity fund, balanced fund, bond fund, fixed income fund and money market fund. The difference among the five categories lies with the (asset) allocation among the various asset classes i.e. between equities, bonds and money market instruments, resulting in different emphasis being placed on capital growth and income.
2.0 .The objective of public mutual funds
When you embark on stock investing you should first define your financial objectives. The latter should determine your investment style in order to get the desired results.
Typically there a four major investment styles conformed to the different financial objectives are distinguished.
Long Term Stock Investing
Sacrificing Return for Security
Searching for Investments that Pay Regular Dividends
Frequent Trading (Speculation)
According to Bogle, J.C. (1998), it is not obligatory to use only one of these investment strategies, but instead of using one you can combine them.
so investing in a public mutual funds depends which investment style category applies to you, whether you are seeking long term investment or regular income it depends on your investment needs.
2.1. Investment Style 1 - Long Term Stock Investing
The main investment objective when choosing this option is capital appreciation. This objective is most commonly met in different retirement plans. This is so since investments are left to grow for long periods of time until retirement is reached. Still, capital appreciation is not restricted only to retirement plans.
You can apply this investment style when like when you want to invest like Public regular savings fund, public aggressive fund, public industry fund, public grow fund, saving fund and so on.
Having a long-term focus, the everyday market fluctuations are of no difference to you. However, you should make regular examinations of the business fundamentals, which may have a negative long-term impact on your stock.
2.2. Investment Style 2 - Sacrificing Return for Security
This investment strategy is typically preferred by people that are nearing their retirement or have already entered it. Their main financial objective is capital preservation and safety represents their top priority.
Since these elderly people are nearing their retirement unreasonable investments are not allowed because these investors don't have enough time to fix the losses.
If your objective is capital preservation, then it is recommended to keep your money in like public far east property resort fund, public balanced fund, public far east balanced fund, public global balanced fund and public enhanced bond fund.
2.3. Investment Style 3 - Searching for Investments that Pay Regular Dividends
Generally, investors follow this investment style when their financial objective is current income. Following it means searching for investments that pay regular dividends. Besides, top-quality real estate trusts (REITs) and highly-rated bonds are also often recommended as investment solutions if you are an income investor. This is so since they will provide you with income on regular basis.
If your objective is income which means looking for investment which pays regular dividend like public dividend fund, public far east dividend fund, public bond fund, public institutional bond fund, public selected bond fund and public money market fund.
2.4. Investment Style 4 - Frequent Trading (Speculation)
If you are a speculator then you are probably buying and selling stocks very frequently. Thus, sometimes speculators are not classified as investors due to their frequent trading activities.
Often referred to as traders, speculators' main financial objective is to win profit by selling and buying stocks through the implementation of such tools as trading on the margin, shorting stocks, options and etc. Contrary to investors, traders don't establish any link with the company of which they purchase a stock. All they are interested in is the volatility of the stock and its profitability.
Speculators main focus is profits and their quick generation. However, speculation carries a high level of risk, so if you want to embark on such activities make sure that you are ready to lose the money you are using.
Finally, having in mind these financial objectives make sure that your style of investing meets the objectives you follow.
3.0. The Financial Risk Management policies in Public mutual fund.
The fund is exposed to variety of financial risk, which includes market risk, interest rate risk, credit risk and liquidity risk. The overall financial risk management objective of the fund is to mitigate capital losses.
(Interim report 2008)Financial risk management is carried out through policy reviews, internal control systems and adherence to the investment powers and restrictions stipulated in the securities commissions guidelines on Unit Trust Funds in Malaysia.
A unit trust fund is expected to a verity of risk by nature of investment schemes it in engaged in.
Where the unit trust participates in stock market -related investment, the following risks become key considered.
3.1. Market Risk
Market risk arises when the values of the securities fluctuates in response to the activities of individual companies, and general market or economic conditions.
In other words, it involves factors that effects overall economy or security markets. It is the risk that an overall market will decline, bringing down the value an individual investment in a company regardless of that company's growth, revenues earnings, management and capital structure.
The market risk is managed through portfolio diversification and asset allocation whereby the securities exposure will be reduced in the event of anticipated market weaknesses.
3.2. Interest Rate Risk
Interest rates move in the opposite direction of bond prices. When the interest rates rise, bond prices fall and vice versa. When interest rate trend is anticipated to rise, the exposure to fixed income securities will be reduced.
It relates to the risk reduction in value of the security due to change in interest rates. Interest changes direct effect bonds- as interest rates rise, the prices of previously issued bond falls; conversely, when interest rates fall bond price increases.
The rationale is that the bond is promise of future stream of payment; an investor will offer less for a bond that pays out at a rate lower than the rate offered in the current market.
Credit risk
Credit risk refers to the ability of an issuer or counterparty to make timely payments of interest, principles and proceeds from realization of investments.
Is also called default risk, is the chance that issuer will fail to make interest payments to pay back your principal when your bond matures.
The manager manages the credit risk by setting counterparty limits and undertaking credit evaluation to minimize such risk.
3.4. Liquidity risk
It relates to risk of not being able to buy or sell investments quickly for a price that tracks the true underling value of the asset. Sometimes one may not be able to sell the investment at all- there may be no buyers for it, resulting in the possibility of one's investment being worthy little to nothing until there is a buyer for it in the market. The risk is usually higher in over-the-counter markets and small capitalization stocks.
The fund maintains sufficient level of liquid assets after consultation with the trustee, to meet anticipated payments and cancellation of unit holders. Liquid assets comprise cash, deposits and placement with licensed financial institutions and other instruments, which are capable of being converted into cash within 7 days. The funds policy is to always maintain a prudent level of liquid asset so as to reduce the liquidity risk.(interim report 2007)
3.5. Currency Risk
It comes into play if money is to be converted to a different currency to purchase or sell an investment. In such instance, any changes in the exchange rate between that currency and Malaysian Ringgit can increase or decrease your investment return.
These risk usually only impacts one of one invest in stock or bonds issued by companies based outside Malaysia or fund that invests in international securities.
Furthermore the fund may invest in financial instruments and enter into transactions denominated in currencies other than its functional currency. Consequently, the fund is exposed to risk that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has significant effect on the value of that portion of the fund's assets or liabilities denominated in currencies than Malaysian Ringgit.
4.0. Asset allocation policy
The fund manager may adopt various investment strategies, such as varying the asset allocation to adjust the risk and return characteristics of the fund. However should the fund manager judge market conditions incorrectly or apply an unsuitable investment strategy, the performance of the fund may be adversely effected.
Securities Commission Malaysia, (2004),Asset allocation is based on the proven theory that the type or class of security you won is much more important than the particular security itself. Asset allocation is a way to control the risk in your portfolio. The risk is controlled because the six or seven asset classes in the well-balanced port folio will react differently to changes in market.
However the asset allocation is the cornerstone of good investing. Each investment must be part of an overall asset allocation plan. And this plan must not be generic" one size fits all" but rather must be tailored to your specific needs.
Furthermore a asset allocation is generally most important factor in determining the return on your investment. In fact, according to research asset allocations determines approximately 90% of the return. The remaining 10% of the return is determined by which particular investment you select and when you decide to buy them.
Markets and asset classes do not move in tandem, what is hot today may be cold tomorrow. Spreading your investment among different types of asset classes and market-stocks and bonds, domestic and foreign markets, lets your position yourself sized the opportunities as performance cycle shifts from one market or asset class to another.
Finally it depends on your investment style and goals, your asset allocation will vary, one should work with this financial advisor to create with a create personalized asset allocation for this port folio.
5.0. The investment constraints faced by public mutual funds
The fund is subject to the following constraints in the course of execution of its investment policies and strategies:
• Professional Management - Many investors debate whether or not the professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still gets paid.
• Costs - Creating, distributing, and running a mutual fund is an expensive proposition. Everything from the manager's salary to the investors' statements cost money. Those expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences. Remember, every ringgit spend on fees is a ringgit that has no opportunity to grow over time.
• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
• Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax sensitive mutual fund in a tax-deferred account.
6.0. The general economy outlook of Malaysia for 2010
The Malaysian economy is still expected to benefit from ongoing global measures to stabilize its current economic situations through effective fiscal measures and loose monetary policy as a soft growth of Gross Domestic Product (GDP) is projected to register between 2%-3% in 2010. The Asian Development Bank (ADB) expects Malaysia's economy to return to growth in 2010¹. According to Alianz Group Chief Economist - Michael Heise, Malaysia's economy is expected to see a solid growth of 3.5% in 2010².
Growth this year will be driven by domestic demand, particularly the private expenditure which driven by expected recovery in world trade (refer to Comparison of Quarterly GDP Rate 2008-2009³). For 2010 as a whole, nevertheless, Malaysia's GDP is expected to register at least in soft positive territory.
Accordingly, the Southeast Asia's third-largest economy has been hit robustly by the downturn in world trade, probably the worst economy since the 1930s, ensued from the financial crisis in U.S. and other developed countries as booming exports had been the major driver of Malaysian economic growth in recent years.
For 2010, we are forecasting a fairly soft GDP growth of 3% for the emerging Asian countries such as China, Hong Kong, Indonesia, Thailand, South Korea and Singapore. The services sector will be the pillar of strength amidst a glum manufacturing sectorâ´.
Apart from the projected moderate improvement in the G3 economies of Europe, Japan and U.S., the key reasons for a soft recovery in Malaysia due to its relatively strong fiscal and monetary stimulus policies, large currency reserves and current account surpluses. More importantly, Malaysia's Consumer Price Index (CPI) rose in December 2009 for the first time in seven months as food and housing costs re-climbed coupled with Malaysia's historic auto sales rose 33% (50,622 units, Jan 10; 38,107 units, Jan '09) year-on-year in January 2010âµ which underpinned Malaysia's economic recovery.
7.0.conculusion
Since there are thousands of mutual funds in public mutual funds ,careful examination before purchasing and at least yearly monitoring of the fund's performance are necessary. Mutual funds are an excellent first investment. Remember that the stock market does go up and down and a long-term perspective is needed. Changing from one mutual fund to another is costly and not as productive as buying and holding a fund that performs well. Therefore, read the prospectuses and select a fund very carefully before investing. You need to consider your needs and your willingness to take risks
