SHARIAH

INVESTMENT
MANAGEMENT
AFS 4523
PENGURUSAN PELABURAN SHARIAH

LECTURE 7

SHARIAH-BASED UNIT TRUST FUNDS

Learning Objectives
• Understanding the operations of unit trust
• Cost and charges of unit trust funds
• Advantages and Drawbacks of unit trust
• The Industry tracks of Shariah-based unit trust
funds
• Types of Shariah-based Unit Trust Funds
• The performance evaluation of unit trust funds
• Pricing of Unit Trust
• Dollar-Cost Averaging Method
Introduction - Unit Trust
1. Unit trusts scheme aims to provide above average returns (dividend and
capital growth) at reasonable risks, by investing pool of funds in a
diversified portfolio with specific investment goals.
2. For medium to long term investors who can tolerate short term
fluctuations of price to pursuit long term objective (potential capital
growth).
3. Investors choose unit trust fund schemes which investment goals suit the
investors’ own investment objectives
4. Investors are the unit-holders of that unit trust fund scheme.
5. Professional fund managers will provide the unit-holders their expertise
in terms of portfolio allocation, timing, diversification strategy and etc.
6. Investment management industry acts as intermediary between retail
savings (investors’ money) and financing economic activities.
7. SC 2005: introduced Real Estate Investment Trusts (REITs) and Exchange
Trade Funds (ETFs). Also, Islamic Real Estate Investment Trusts (i-REITs).
Regulation of Unit Trust
• Government Regulation of Unit Trusts in Malaysia:
• Capital Markets and Services Act 2007 which consists of:
• Securities Commission (Unit Trust Scheme) Regulations 1996
• Guidelines on Unit Trust Funds 1997
• Self-Regulated Body:
• Federation of Investment Managers Unit Trust Managers
(FIMM)
• Formed in 1993
• Agents selling unit trusts must be a member of FIMM
The Operations of Unit Trust
• Three partite relationship in a unit trust involved:

Manager

Unit-holder Trustee
• The agreement between these three parties are documented in a legally binding
Trust Deed and registered with Securities Commission.

• Manage fund in accordance to SC Guidelines and avoid Shariah prohibited

elements: Riba (conventional banking, insurance, financial services business),
gambling, liquor, non-halal food production and etc.

• Two models of arrangement between Investor and Unit Trust Fund Management
Company (Manager):
1. Wakalah
2. Mudharabah
Models: Wakalah vs Mudharabah
Unit-Holder Manager
Wakalah
(Investor) (Company)

1. Manager is the agent (wakil).

2. Manager uses his expertise to manage investors’ funds
3. Unit-holders pay management fees to manager.

Unit-Holder Manager
Mudharabah
(Investor) (Company)

1. The management co. and the investor enter into a profit-sharing

contract.
2. Both will share pre-determined profit ratio.
3. Not a popular model.
Services of
Fund Management Companies
Recommend on the
purchase, sale and Promote the sales of
portfolio units to unit-holders
administration

Adhere to SC guidelines
Provide repurchase while investing based
facilities to buy-back on unit trust fund
units from unit-holders scheme’s investment
goals

Provide confidence to unit-

holders by appointing Shariah
Advisors to ensure compliance
to Shariah principles
The Role of Shariah Advisor

Advices Guidance Review Prepare Consult SC

• All aspects of and Shariah Reports • In case on
unit trust and Expertise Compliance • include in ambiguity or
fund Reports company’s uncertainty on
management • All matters: investment,
• Fund’s deed interim and
business in • Fund’s annual reports instrument,
accordance to • Prospectus compliance process,
report • State opinions
Shariah • Fund structure on Shariah procedure and
Principles • Investments • Investment compliance for system.
• Operational transaction that period
matters report

Shariah Advisor Requirements:

• Independent of the fund management company
• Registered with SC
• Comprise at least three individuals (appointment of individuals)
• Engage with at least ONE Shariah expert that fits clauses 6.18 and 6.19
(appointment of a corporation)
 Tri-partite Agreement
• Trust Deed Manager:
• Efficient and proper management of fund.
• Legally bound agreement • Managing fund to the interests of unit holders with integrity and fair
deals
between manager, trustee and • Exercise due care, skill and diligence to manage fund effectively and
comply to procedures, to the best performance of the fund.
unit-holder
• Contents include: Manager
• Valuation and pricing of units
• Proper accounts and reports
• Collection and distribution of
income
• Rights of unit-holder
• Duties and responsibilities of the
manager Unit-
Trustee
• Duties and responsibilities of the holder
trustee Unit-holder: Trustee:
• Protection of unit-holder’s • Investor who hold units • Appointed by BOD of unit
(=shareholders of equity) trust co.
interests • Each unit rank equally among • Approved by SC
• Compliance of managers, other units in the scheme • The custodians of all the
• The value of each unit is based assets
trustee and auditors to Shariah on a formula: • Ensure compliance to Trust
Principles in management, Total assets value/no. of units Deed
• Unit is purchased when • Areas include:
investment and reporting of completing the application • Create and cancel
fund. form issued with prospectus units
• Exercise of fund
Types of Funds
Open-Ended Funds Close-Ended Funds

• Buy units from manager, sell back to • Have fixed number of units.
manager if need to liquidate (convert to • Do not issue additional new units, once
cash) the units are bought.
• Fund managers guarantee the buying of • Traded freely in secondary market.
units if investors need to sell • Listed unit trust funds.
• Unlisted unit trust funds • Once listed, need brokers to buy and sell.
• Once unit are bought, the fund will issue • Buy and sell price at market value based
new units to replace them. on supply and demand.
• Can be temporarily be closed to keep • Manager’s sole duty is to manage the
check the fund growth fund within specific period in accordance
• Buy and sell price at Net Asset Value to Trust Deed, units are sold and proceeds
• Net Asset Value = (Total market value of are distributed among unit-holders.
securities in portfolio + assets in fund – • Commonly used in property trust funds.
liabilities) / no. of units outstanding. • Some are in equity (shares) trust funds.
• Most trust funds in Malaysia are Open-
ended.
 Costs and Charges
• Up-front fees charged (by the manager)
to cover the cost distributing and
• Fees on financial planning. selling the unit trust
• Sales and distribution are done • Average open-ended funds: 5sen per
through independent financial i. Initial
unit
advisor Service • Very high rate – not meant for short
• Specialised professional term.
individuals/franchisees • Some countries up to 9%
• Charged based on time and size of • Some countries 0%
portofolio.
• Some countries, advisor is more
visible than fund manager.

Charges ii. Ongoing

Management
Fee
iii.
Advisory
• Annual fee
Fees • Average: 1.5% p.a.
• To cover the management expenses: Salaries, office rent,
stationery, utilities, etc.
• Varies between different types of funds: Fixed income
charges lower fees than Equity unit trust.
• Deduct directly from fund – affect the overall returns.
Advantages and Drawbacks

1. Invest in diversified portfolio of

securities and issue shares to 1. Involves fees such as load funds,
investors. annual fees, trustee fees.
2. Diversification through ownership 2. In long term performance, the
of managed portfolio overall average is not that well.
3. Diversification reduces the risks 3. The performance is correspond to
4. Provide full-time professional the market performance as a
management whole
5. Provide attractive services:
monthly withdrawal plans etc.
6. Handle the paperwork and book
keeping, deal in fractional shares
and reinvest upon investor’s
approval.
7. Provide expertise in research,
investment analysis, operations,
laws etc.
Industry Tracks of Shariah-
Based Unit Trust Funds
• Pg178-179
Types of Shariah-Based Unit Trust
Funds
• Major portion of funds held in equities of listed companies
• 5% or more in liquid assets for selling requirement.
• Follows the equity market movements
Islamic • Wide range: higher to lower risks funds
Equity • Higher risks: Growth Fund, Aggressive Growth Fund, Industry Fund
Funds • Lower risks: Savings Fund, Regular Savings Fund
• Index Funds: KLCI – generate returns
• Income Fund: generating periodic income – shares with dividend
• Shariah Fund: Steady growth, compliant to Shariah principles, moderate risks

• Generate regular income

• Known as bond funds
• Focus on government or corporate bonds, government, negotiable cert. of deposits,
bills, money market and cash deposits.
Fixed • Islamic Private Debt Securities – new invention
Income • Possible to generate both income and capital gains during volatile interest rates.
• Lower risks than equity fund. Lower returns.
• Provide better capital protection.
• Hold together with equity fund for diversifications.
• Negatively correlated with equity.
Types of Shariah-Compliant Unit
Trust Funds
• Consists both shares and fixed income securities
• Generate balanced return of current return and long term capital gains.
• Known also as managed fund.
Balanced/ • 25%-50% are fixed income securities
Mixed • May shift focus to fixed income, if the equity market is in expected to decline
• High grade securities, high quality income shares
• Safe form of investment: less price volatility

• The development of Islamic Capital Markets – possible to launch Islamic Money Market
Money • Prefer short-term fixed income investments
• Park/place their money before moving to another funds.
Market • Invest as storehouse of the value of money

• For small investors

• Opportunities to participate in property market
• Invests in real property: retail and commercial office properties
Property • Returns: rental income or capital appreciation over time
• Effected by economy.
• Very illiquid asset
• Mostly listed in the share market.
Selecting a Unit Trust Fund
1. Investment goals/objectives and time horizon
2. Understand the unit trust fund specific goals, characteristics
and returns.
3. Load charges and annual fees.
Performance of Funds
Performance
Measurement

Risk Classification Performance Comparison

Investment
Raw Annualized Bench Other
Performance
Return Return marking Factors
Table
Pricing Unit Trust Funds
Price of Unit Trust NAV consists of:
• Equity investment portfolio based on the
= Total Value of Assets held – Total liabilities
last transaction price of the stocks
= Net Asset Value (NAV) • Brokerage cost, stamp duty and other
charges
• Money market investments
Net Asset Value (NAV) per unit
• All un-invested cash and cash balances
= (Total Asset of previous day – Total• Liabilities
All acrruedofgross
previous day)
dividends and profit
after deduction of
No. of units outstanding
• annual management fees
• Trustee fee
Costs of buying unit trust = initial management and distribution
• Administration expenses
fee (disclosed in the prospectus)

Selling Price per unit

The Selling Price is based on forward pricing
= Net Asset Value per unit + Cost of buying unitobtained
as the price trust is on the last available
valuation (previous trading day)
Pricing Unit Trust Funds
• Example 1 – Pg 192
• Example 2 – Pg 193

• 10 minutes class presentation

Dollar-Cost Averaging Method
• Decision to invest in unit trusts fund:
1. One lump sum
2. Regular basis: Dollar-cost averaging Method

• Dollar-cost averaging Method:

1. The principle is to invest fixed amount of money irrespective
of price levels
2. Benefits from fluctuating prices – when price falls, buy more
units and reduce average costs of entire investment
Notes to Unit Trusts Investors
• A disciplined and methodical approach to invest is the key to long-
term investment
• When invest in unit trusts, it is better for medium to long term.
 Good investment will generate attractive returns in medium and long
term.
 Professional fund managers wait patiently several years before their
investment reach the required intrinsic values
 The buy-and-hold strategy is suitable for at least three years.
• When price is volatile, it is important
 to stay disciplined and hold the investment longer than being
influenced emotionally with the price movements.
 Only investment experts can benefits from the timing of the market.
 This will exposed themselves to a lot of risks and often can also make
losses.