Unit Trust in Malaysian Companies
Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.
Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.
Published: Fri, 16 Mar 2018
As we all know, the number of unit trust companies in Malaysia is increasing year by year, since 1981 when the Skim Amanah Saham Nasional was launched by Permodalan Nasional Berhad (PNB). At that time, only 11 fund being launched and the total units subscribed by the public swelled to an unprecedented level because of the overwhelming response to Amanah Saham Nasional (ASN)
Amanah Saham Nasional Berhad is the Management Company of ASN, ASN 2, ASN 3, ASG Pendidikan, ASG-Kesihatan, ASG-Persaraan, ASB, ASW 2020, ASM and ASD, a wholly-owned subsidiary company of Permodalan Nasional Berhad (PNB).
ASNB was established on May 22, 1979, to manage the unit trust funds launched by PNB. Having been in the industry for more than 25 years, ASNB has confirms to maintain its position as a leading unit trust manager, controlling more than 40% of the total units in circulation.
The vision and mission of Amanah Saham Nasional Berhad are same with Permodalan Nasional Berhad which are “We will be a world class investment organization, distinctive and successful in everything we do” and “We are a premier investment organisation committed to enhance the economic wealth of the Bumiputera community in particular and contribute towards the growth and prosperity of the nation for the benefit of Malaysians”.
What is unit trust? A unit trust is a collective investment scheme which pools the savings of the public into a special unit trust fund managed actively by professional fund managers. A unit trust fund is constituted pursuant to a deed executed by the trustee and the manager on behalf of unit holders. The Deed is registered with the Securities Commission and sets out the rights of you as a unit holder and the responsibilities and liabilities of the trustee and the manager. The unit trust fund will invest in equities, fixed income securities and other assets authorized under the Guidelines.
In some countries, unit trust also known as mutual funds. In the United States, unit trusts are known as mutual funds whereas in other countries they are better known as unit trusts. The difference lies in their legal structure, namely mutual funds are investment companies that issue redeemable shares whereas unit trust is a limited liability company that issue unit instead of shares (Securities Commision).
The return on investment of unit holders is usually in the form of income distribution and capital appreciation, derived from the pool of assets supporting the unit trust fund. Each unit earns an equal return, determined by the level of distribution and/or capital appreciation in any one period.
Unit trust investors are typically those with savings to invest, who neither have the time nor the inclination to hold portfolios of direct investments or shares. Rather, they prefer to invest in a secure, reputable investment vehicle which suits their purposes. Unit trusts allow investors to have easy access to a wide range of investments not normally available to them.
As investors seek to maximize returns on their financial resources, unit trusts provide an ideal way for them to gain exposure to investments that, in the long run, should produce returns superior to cash savings and fixed deposit investments.
So, for this study we will investigate the linkage between the performance of ASNB with the macroeconomic variables such as interest rate, Gross Domestic Product, inflation rate, and unemployment rate for ten years from the years 2000 to 2009.
BACKGROUND OF THE STUDY
In making better judgment whether to buy or to sell or to switch between funds, investors need to know the factors that affect their funds return. The ability to predict would enhance the investors’ confidence and increase the ability of fund managers to provide better understanding of the mutual funds industry to potential investors.
The purpose of the study is to investigate the linkage between the macroeconomic variables and the performance of unit trust in Malaysia for ten years from year 2000 until year 2009. The factor of determining the performance of unit trust in Malaysia are include the macroeconomic variables which is interest rate, gross domestic product (GDP), inflation rate and unemployment rate.
TYPES OF UNIT TRUSTS
Equity unit trust funds are popular in Malaysia as they provide investors with exposure to the companies listed on Bursa Malaysia. The performance of the units is therefore linked to the performance of Bursa Malaysia. A rising market will normally give rise to an increase in the value of the unit and vice-versa.
There is a wide array of equity unit trusts, available in the market, ranging from funds with higher risk, higher returns to funds with lower risk, lower returns.
Aggressive growth funds
These funds invest generally in companies with higher capital growth potential but with associated higher risk
These funds invest in a range of companies that closely match (or “track”) companies comprising a particular index.
International equity funds
These funds invest primarily in overseas share markets.
Fixed Income Funds
These funds invest mainly in Malaysian Government Securities, corporate bonds, and money market instruments such as bankers acceptance and fixed deposits. The objective of a fixed income (or bond) funds is usually to provide regular income, with less emphasis on producing capital growth for investors. It is possible, however, for fixed income funds to generate both capital gains and losses during a period of volatile interest rate.
Money Market Funds
Money market funds operate in a similar way to a bank account-the unit price is normally set at a fixed amount. Money market funds invest in 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 (office) 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. By acquiring units in a listed REITS, however, it is possible to invest a small amount to gain exposure to the property market and have diversification in your portfolio.
Exchange Traded Funds (ETF)
ETF is linked unit trust fund whose investment objective is to achieve the same return as a particular market index. ETF often have low expense ratios and can be bought and sold throughout the trading day through a stockbroker, on an exchange.
Some investors may wish to have an investment in all the major asset classes to reduce the risk of investing in a single asset class. A balanced unit trust fund generally has a portfolio comprising equities, fixed income securities, and cash.
Syariah funds will exclude those companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products. The main objective of Syariah funds is to provide an alternative avenue for investors sensitive to Syariah requirements.
Sources from: http://www.asnb.com.my
HOW UNIT TRUST FUNDS WORKS
Sources from: http://www.asnb.com.my
BENEFITS OF INVESTING IN UNIT TRUST FUNDS
For an individual to maintain his own portfolio of investments, he needs to keep up to date with market information and sentiments. In today’s sophisticated financial markets, this means having to embrace a wide range of information from a plethora of sources. For many individual investors, this is difficult, if not impossible and at times, very frustrating as they attempt to “keep on top” of the information pile.
Investing in unit trusts transfers most of the necessary ‘know-how’ of investing to those best equipped to handle it – the professional fund managers. There are a number of other substantial benefits of investing in unit trusts that should be noted.
Unit trusts are very affordable. Investors can start with an investment amount as low as RM100.
Rather than concentrating an investment portfolio of one or two investments or shares, a portfolio of market securities can be held. The wider the spread of investments, the less volatile (i.e. variable) the investment returns will be. In simple terms, investment into unit trusts means diversification of risk: “not putting all your eggs in one basket.”
Most investors prefer their investment to be liquid. That is, they can easily buy and sell without difficulties. Unit trusts provide this benefit, easily bought and sold. An excellent return that cannot be “cashed-in” (i.e. sold) does not necessarily mean a good investment as poor liquidity constitutes an additional risk factor for the investor.
1.5.4 Professional Fund Management
The people entrusted to manage unit trusts are approved professionals. Their training and background ensures that decision making is structured and according to sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager can bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.
1.5.5 Investment Exposure
For the individual investor, it is sometimes difficult to gain exposure to a particular asset class. For instance, if an investor with RM5,000 wants to gain exposure to the Malaysian property market, global equity markets and the Malaysian bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. With unit trust investments, it is possible to spread your money around to all of these asset classes at the same time, so that the investor can gain the investment exposure he requires.
Wholesale Investment Costs & Access to Other Asset Classes
When making direct investments in the Bursa Malaysia, the investor faces costs and charges that are much higher. With unit trust the economics of the transaction are more favorable i.e. the fees and charges/brokerage etc. per investment ringgit are likely to be less. Because fund managers invest in larger amounts, they are able to get access to wholesale yields and products which are impossible for the individual investor to obtain. For instance, unlike unit trust funds, most individual investors cannot have direct access to the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.
The Comfort of Regulation
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the Securities Commission. The entire range of variables relating to the unit trust industry is governed by various legislations. The sole purpose of such regulations is to protect the interest of the investing public.
Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.
RISKS ASSOCIATED WITH UNIT TRUST FUNDS
Any investment carries with it an element of risks. Therefore, prior to making any investment, prospective investors should consider the following risk factors:
Any purchase of securities will involve an element of risks, As unit trust funds principally invest in listed stocks they may be prone to changing market conditions as a result of global, regional or national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations in the market caused by these uncertainties will affect the net asset value (NAV) of unit trusts which may fall or rise, thus causing the income generated by the fund to fluctuate.ing from funds with higher risk, higher returns to funds with lower risk, lower returns.
The various securities that are purchased by a fund may encounter liquidity risk. Liquidity risk relates to the fund’s ability to quickly and easily trade at a reasonable price, in and out of positions. Should a fund comprise a security that has become temporarily or permanently illiquid or difficult to sell, the fund manager may need to sell the security at a discount to its fair value, which eventually affects the fund’s value.
Performance of the fund depends on the experience, expertise, knowledge and investment techniques of the fund manager. Poor management of a fund can cause considerable losses to the fund, which in turn may affect the capital invested.
Ideally the purpose of any investment is to secure returns that are greater that the inflation rate. While a fund will constantly seek to maximize returns and exceed inflation rate, it may occasionally experience losses, which result in returns that will not keep pace with inflation in the short run.
Fixed income securities and bonds are particularly sensitive to movements in interest rates. When interest rates rise, the value of fixed income securities and bonds fall and vice versa, thus affecting the NAV of the fund. The general interest rate environment of the country may affect the value of the investment even if the fund (e.g Syariah Fund) does not invest in interest bearing instruments.
To what extent the interest rate has a significant effect on the performance of Permodalan Nasional Berhad?
To what extent the GDP has a significant effect on the performance of Permodalan Nasional Berhad?
To what extent is the inflation rate significant in influencing to the profit of Permodalan Nasional Berhad?
To what extent is the unemployment rate significant in influencing to the profit of Permodalan Nasional Berhad?
OBJECTIVES OF THE STUDY
The main objective of this study is to investigate the linkage between the macroeconomic variables and the performance of unit trust in Malaysia for ten years from year 2000 until year 2009. The factors of determining the performance of unit trust in Malaysia are including the macroeconomic variables which are interest rate, Gross Domestic Product (GDP), inflation rate and unemployment rate.
To study the impact of the interest rate towards the performance of Amanah Saham Nasional Berhad?
To study the impact of the GDP towards the performance of Amanah Saham Nasional Berhad?
To study the impact of the inflation rate towards the performance of Amanah Saham Nasional Berhad?
To study the impact of the unemployment rate towards the performance of Amanah Saham Nasional Berhad?
1.9 SIGNIFICANT OF THE STUDY
This study will provide us more information on the macroeconomic variables namely interest rate, Gross Domestic Product (GDP), inflation rate and unemployment rate. This research is important to help investors to make better judgment whether to buy or to sell or to switch between funds. Investors need to know the factors that affect their funds return. The ability to predict would enhance the investors’ confidence and increase the ability of fund managers to provide better understanding of the mutual funds industry to potential investors.
This research also helps investors and unit trust company instead to be well prepared against factors that affect unit trust performance which are from macroeconomic variables and plan for better strategies in order to face economic uncertainty efficiently.
SCOPE OF THE STUDY
This study is focus on the linkage between the macroeconomic variables which are interest rate, Gross Domestic Product (GDP), inflation rate and also unemployment rate with the performance of unit trust in Malaysia for ten years from year 2000 until year 2009 by using the secondary data which collected from data stream Universiti Teknologi Mara, Bank Negara Malaysia and Permodalan Nasional Berhad annual report.
LIMITATIONS OF THE STUDY
This study will only focus on Amanah Saham Nasional Berhad and Permodalan Nasional Berhad although there are other unit trust companies in Malaysia.
This research only focus on certain macroeconomic variables such as interest rate, Gross Domestic Product (GDP), inflation rate and unemployment rate although in Malaysia there are many economic indicators that may affect the performance of unit trust in Malaysia.
The research will only cover the data within 10 years period.
FORMAT OF THE STUDY
The structure of the rest of this paper is as follow: Chapter 2 discusses literature review, which related to this study. Chapter 3 discusses the data and methodology been used. Chapter 4 presents the results and findings of the study and Chapter 5 concludes and some recommendations given about this study.
For this study, few articles that are related to the macroeconomic variables that effect on the performance of unit trust can be view. There are articles not only related on economic factors that that can affect the unit trust performance but also narrate on unit trust performance in different perspective. Therefore, this issue can be view in different angle in their performance.
2.2 INTEREST RATE
Smith and Spudeck (1993) defined interest rate in term of a bribe, eflecting additional consumptive ability, that deficit budget inits in order to get them to postpone consumption and lend money. Strictly speaking, interest is the price paid for the use of money for the same time period. Interest is the price of credit.
According to Domian, Gilster, and Louton (1996) decreased in interest rates contributed to twelve months of excess stock returns. However, increases in interest rates show a little affect on the stock returns.
Fauziah and Hanafi (1995) examined the relationship between interest rate and inflation rate; there are indicators to the economic condition against the stock market index. They found that there is a significant relationship between the variable, but for the regression analysis, no significant relationship exist.
Dudley W.Johnson (1976) found that it is important to analyze how investment spending responds to movements in the interest rate. This responsiveness, called the interest elasticity of investment demand is the percentage change in the quantity of investment goods demanded that result from a percentage change in the quantity of investment goods demanded that result from a percentage change in the interest rate. Beginning in the late 1930, the general feeling among many economists was that investment is a relative incentive to interest rate change. Theoretical considerations suggest that in situations where lending and borrowing rates are different and both differ from internal rates of the return, change in the rate of interest may have little or no effect on the rate of investment. Although the existence of a relationship between the interest rate and investment as well established there is some question as to how strong the relationship is empirically.
Lawrence J. Gitman Jeff Madura (2001), write change in interest rate effect consumer’s purchases with borrowed funds and the firm’s cost of financing. Firms whose values are more sensitive to the influence of interest rate movements are referred to as interest rate sensitive. Most of the firms are unfavorably affected by upward movement in interest rates and are favorably affected by downward movements in interest rates.
Investors closely assess possible interest rate movements when deciding whether to purchase or sell stock stocks of these firms, because they recognize that any interest rate movement will affect the value of these stocks.
2.3 GROSS DOMESTIC PRODUCT
GDP or Gross Domestic Product can be defined as the market value of the final goods and services produced by workers and other resources located within the borders of a nation over a period of one year (David N. Hyman-1996). The good and services whose values are included in GDP are the nation’s final products that are sold to final users and not used as materials, parts, or services to be incorporated in the value of other items that are to be resold. In GDP, the value of domestic output produced by foreign works with jobs in the United States and by foreign-owned property located within the borders of the nation. For example, the cars produced in Japanese-owned Toyota factory located in Kentucky are part of America’s GDP.
Fikriyah Abdullah, School of Finance and Accounting, Universiti Utara Malaysia, Kedah, Malaysia, Taufiq Hassan, Department of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia, Serdang, Selangor, Malaysia and Shamsher Mohamad, Faculty of Economics and Management, Graduate School of Management, Universiti Putra Malaysia, Serdang, Selangor, Malaysia said that before the outbreak of the financial crisis in 1997, the Malaysian economy had registered high growth for a decade, averaging at 8.5 percent per annum.
Due to high GDP growth rate and inflows of foreign capital, cyclical sectors such as banking sector, property and entertainment sectors had recorded high performance in the stock market.
A study by Robert E. Hall and Marc Lieberman (2001) said that, when the economy is expanding, real GDP is rising; firms in general tend to earn high profits, and these profits are less risky. By contrast, in a recession sales and profits are decreased. This is in addition to the normal rise in real GDP that would be occurring anyway, as income growth. In the typical expansion, profits will rise along with GDP. Higher profits are themselves enough to make stocks looks more attractive.
Based on annual report 2001, the less encouraging global economic environment is expected to have some impact on the growth of the Malaysian economy in the year 2001. The latest government forecast estimated a lower GDP growth of around 5% to 6% from an earlier estimate of 7% due to stronger than expected deceleration of growth in U.S, which in turn could affect the electronics sector. Besides that, weak performance of Japanese economy and uncertainty in the global financial market also could affect the economic growth.
2.4 INFLATION RATE
Inflation is a situation of arise in level of price but at the same time, the value of money declining. When inflation occurs, people hold less money as the value decreasing. In the other term, inflation reduces money role as a store of value.
Geske and Roll (1983) and Chen, Roll and Ross (1986) in their research show negative relationship between inflation and equity returns. This is in line with later result from Mukherjee and Naka (1995) also show that negative co integration exist between Tokyo Stock Exchange and inflation
Gerlach et al., (2003), measured their variable by taking CPI inflation rate. Inflation rate is calculated from Consumer Price Index. CPI inflation is calculated by (Current year CPI – last year CPI/ last year CPI)*100.According to Irvin Tucker (1995), inflation can be benefit holders of wealth because the value of assets tends to increase as price rise. Wealth includes real estates, stocks, bonds, bank account, life insurance policies, cash and automobile.
Lawrence J. Gitman Jeff Madura, (2001), writes inflation can affect the value of the firm through its influence on interest rate movements. A high level of inflation tends to cause a high level of interest rate. As inflation rises, savers tend to reduce the amount of funds that they save, because they prefer to purchase products with their funds now, before the price of products rise further. In addition, borrowers tend to borrow large amount of funds in periods of rising inflation, because they prefer to purchase the products now (with borrowed funds) before the prices of products rise further.
Previous researcher found that macroeconomics variables such as inflation rate, interest rate and money supply, have a great influence on stock and bonds price movement. It is beneficial to investigate whether these macroeconomic variables have a direct impact to Mutual funds NAV is Malaysia. By looking at this impact fund managers can plan and take necessary action to save the NAV from fallen if these macroeconomic variables move up and down. (Noor Azlinna Azizan, Institut of Mathematical Science, Universiti Malaya).
2.5 UNEMPLOYMENT RATE
Unemployment as defined by the International Labor Organization occurs when people are without jobs and they have actively looked for work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.
Heffernan and Fu (2008), identified the determinants of Chinese bank performance and assessed whether recent reforms had any effect. The results also reported that the macroeconomic variables that performed best in this study is the real GDP growth rate, followed by the unemployment rate.
For this study, the researcher will use the SPSS Version 17.0 for Windows. All the data collected will be processed using this program in order to derive the estimated regression. The researcher will use the Multiple Regression Analysis. The Multiple Regression Analysis is such analysis where more than one predictor is jointly regressed against the criterion variable. The regression analysis is a powerful statistical technique that describes the way in which one important economic variable as independent variables is related to one dependent variable. In this study, the researcher will be regressed the dependent variable against the independent variables.
3.2 DATA COLLECTION METHODS
3.2.1 This study will be using the secondary data that can be collected from annual reports of Permodalan Nasional Berhad, journals, data stream and also internet.
3.2.2 The data are also gathered from the annual reports of Bank Negara Malaysia and Economic Report.
3.3 THEORETICAL FRAMEWORK
Gross Domestic Product (GDP)
DEPENDENT VARIABLE INDEPENDENT VARIABLES
3.4.1 Hypotheses 1
H0 : There is no relationship between interest rate and performance of unit trust.
H1 : There is a relationship between interest rate and performance of unit trust.
3.4.2 Hypotheses 2
H0 : There is no relationship between GDP and performance of unit trust.
H1 : There is a relationship between GDP and performance of unit trust.
3.4.3 Hypotheses 3
H0 : There is no relationship between inflation rate and performance of unit trust.
H1 : There is a relationship between inflation rate and performance of unit trust.
3.4.4 Hypotheses 4
H0 : There is no relationship between unemployment rate and performance of unit
H1 : There is a relationship between unemployment rate and performance of unit
3.5 STATISTICAL TESTING
3.5.1 Regression Equation
The proposed models for this study are as follows:
General form of equation:
PROFIT = f (BLR, GDP, INF,UNEM)
BLR = Interest Rate
GDP = Gross Domestic Product
INF = Inflation Rate
UNEM = Unemployment Rate
Specific form of equation
PROFIT = C + β1 BLR + β2 GDP + β3 INF+ β4 UNEM
C = Constant
β 1, β 2, β 3, β4 = Regression Coefficient
3.5.2 Coefficient of Determination (R2)
The objective is to test the goodness of fit for a multiple regression model. It is use to determine how well the regression lines fit the data. It measures how many percent of change in the dependent variable that can be explained by the independent variables. The higher the value of R-squared or R2 will be indicated that the higher the explanatory power of the estimated equation and the more accurate for forecasting purpose.
R2 = ∑ (Å¶ – Yt )2
∑ (Yt – Y )2
3.5.3 T-statistic (T-stat)
T-statistic is used to determine if there is a significant relationship between the dependent variable and each independent variable. It is defined by:
T-stat = bx
= Coefficient of variable
Standard Deviation of bx
If T-stat > T-distribution /tabulated; it indicates that there is significant relationship between dependent variable and independent variables. Therefore, accept H1.
If T-stat < T-distribution/tabulated; it indicates that there is significant relationship between dependent variable and independent variables. Therefore, accept H0.
3.5.4 F-statistic (F-stat)
F-stat is used to test the hypotheses that the variation in the independent variables explained a significant portion of the variation in the dependent variable. It also used to test the significant of the overall model. F-statistic can be defined as:
F-stat = Explained variation / (k-1)
Unexplained variation / (n-k)
To conduct test: calculated F-values with the critical value from the tabulated F-values.
If F-value > tabulated F-value; it indicates that there is significant relationship between the independent variables and dependent variable. Therefore, the overall model is said to be significant.
If F-value < tabulated F-value; it indicates that there is significant relationship between the independent variables and dependent variable. Therefore, the overall model is said to be insignificant.
3.5.5 Trend Analysis
Trend analysis is based on the premise that economic performance follows an established pattern and that historical data can be used to predict future business activity. In this study, the trend of profit of Permodalan Nasional Berhad will be observed with a series of independent variables that are interest rate, Gross Domestic Product, inflation rate and unemployment rate. The analysis is based on 10 years period that is from the year 2000-2009.
FINDINGS & DATA ANALYSIS
The main objective of this research is to identify whether the selected macroeconomic variables such as interest rate, Gross Domestic Product (GDP), inflation rate and unemployment rate affect the performance of unit trust in Malaysia. We knew that there is a relationship between the variables. So, we need to analyze whether the independent variables can affect the changes of the dependent variables.
In order to determine the relationship between dependent variables and independent variables, regression analysis is applied in analyzing the data. There are two types of regression analysis which are Simple Regression Analysis and Multiple Regression Analysis. For analyze this data in this study, Multiple Regression Analysis has been chose.
Cite This Work
To export a reference to this article please select a referencing stye below: