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How pricing policy affects unit trusts returns

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


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Continuing last week's discussion, Encik Saidi gained 41.6% return from his unit trust investment for a period of one year. The gain which was based on bid-to-bid basis did not include fees, charges and expenses. Thus, the net return for Encik Saidi should in reality be lower.

In addition to the investing costs, the managerís pricing policy also influences the rate of return of unit trust investments. Based on the same illustration, if Fund X's bid price (the price at which investors redeem) were not fixed at Net Asset Value (NAV) and on the day of redemption the bid price was instead say 5 sen above NAV at RM1.23, using the same measure above, his return excluding the investment costs would be 47.6%.

In this case, although your return should have been 41.6%, you are able to achieve a return that is 6% "higher" than what it should have been all because of a change in pricing policy. At a glance;

On the day of redemption on Jan 1, 1997;    
Return if bid price fixed at NAV (1.18)

=

41.6%
Return if bid price 5 sen higher than NAV (1.23)

=

41.6%


Table 1 shows the computation made last week including the new transaction. In short, not pricing a fund at NAV could distort the returns that you receive on the day of redemption.

Table 1. Summary of Saidi's Transaction (bid-to-bid)

Date
(1)

Action
(2)

No of Units
(3)

Total Units
(4)

Bid Price
(RM)
(5)

Value on bid price (RM)
(4 x 5)

NAV (RM)

Jan 1 96

Buy

1,000

1,000

1.00

1,000

1.00

June 30

 

 

1,000

1.20 cd

1,200

1.20

July 1

* Dividend

90.91

1,090.91

1.10 xd

1,200

1.10

Dec 31

 

 

1,090.91

1.30 cbi

1,418

1.30

Jan 1 97

* Bonus

109.09

1,200

1.18 sbi

1,416

1.18

Jan 1 97

* Bonus

109.09

1,200

1.23 xbi

1,476

1.18

cd - cum dividend, cbi - cum bonus issue
xd - ex dividend, xbi - ex bonus issue
*Assume dividend units are reinvested

Normandy Research

It should be noted that not all unit trust funds have the same pricing policy. Fund managers normally adjust their prices accordingly at their own discretion. The adjustments may or may not work in favor of the investors.

If return was calculated based on the difference between the offer (when you invest) and bid price was calculated (when you redeem), the manager's price adjustments could affect your returns significantly. Consider another simplified case involving investor Mei Lin.

During a bear market, Mei Lin, hoping for a market rebound, bought some units in a growth fund, Fund Y at an offer price of RM1.10. The bid and NAV at that time were RM1.05 and RM1.00 respectively.

The entry cost for Mei Lin was 10 sen (cost RM1.10 less NAV RM1.00). One year later, the the Fund performed well and its value increased by 30% (pure capital appreciation). Its NAV rose to RM1.30.

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