ISLAMIC UNIT TRUST

Farhanah Mohd Noah

Maisyarah Stapah

Nor Azmidah Zali

Presenter:

For:

DR. MUHAMAD BIN ABD HAMID

Mutual fund is a collective investment scheme formed for the purpose of pooling funds from investors who share similar financial objectives with the intention that the funds be managed and invested by professional fund managers for their mutual benefit.

INTRODUCTION

maisyarah

MALAYSIA HISTORY

In Malaysia, the introduction of a structured Islamic funds management can be traced way back in early 1993 when a private unit trust fund was launched.

The development of the Islamic unit trust in Malaysia will stimulate the breadth and depth of the Malaysian Islamic capital market.

RECENT TRENDS

Investors of conventional unit trusts shifting their investments into Islamic unit trusts (including non-Muslim investors). Subscription for new Islamic unit trusts are very encouraging.

• Malaysian unit trust operators offering a wider range of Islamic unit trust products including those with foreign investments.

• Malaysian unit trust operators looking to offer unit trust products to investors outside Malaysia i.e in South East Asian region and Middle-East.

ISLAMIC UNIT TRUST FUNDS GAINING GROUND AMONG

INVESTORS Islamic unit trust funds have become increasingly

prominent of late as they are being sought by all investors, not only Muslims. The main objective of such funds is to invest in a portfolio of halal stocks that comply with the principles of the Shariah.

The returns of the Islamic unit trust will also avoid the incidence of riba or usury interest through the process of cleansing or purification by removing such amounts representing the interest element. The proceeds are normally donated to charities.

Shariah-based unit trust funds give investors the opportunity to invest in a diversified portfolio of Islamic securities that are managed by professional managers in accordance with the Shariah.

The main objective of these collective investment funds is to provide an alternative avenue for investors sensitive to Shariah requirements. This means the exclusion of companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products.

WHAT ARE SHARIAH-BASED UNIT TRUST FUNDS, AND WHAT IS THEIR OBJECTIVE?

PARTICIPANTSRelationship between 3 parties, namely,

the unit holders, the management companies and the trustee.

Investors (unit holders): participate in the Islamic unit trust scheme by buying units from the fund management company with the hope of generating returns in the form of dividends and capital gains.

Fund Management Company Role:

- Makes recommendation concerning the purchase, sale and portfolio administration of the assets of the unit trust scheme

- promotes the sale of units, service the unit holders and provide repurchase facilities to buy back units from unit holders who want to liquidate their investment

Trustee Role:

- trustee of the fund will be holding title documents of all assets, approving and monitoring all financial transactions, and collecting all income on behalf of the fund in order to safeguard those funds and ensure that they are correctly invested according to the Trust Deed

- supervises the operations of the trust to ensure that the objectives of the unit trust scheme are followed

The funds are available in many forms such as Shariah-based equity funds, balanced funds, Sukuk funds, money market funds, feeder funds and index funds

WHAT ARE THE TYPES OF SHARIAH-BASED UNIT TRUST

FUNDS?

- wakalah (agency)- al-Mudharabah

MODEL IMPLEMENTED

REGULATORY APPROACH

Securities Commission adopts 2 tier regulation for Islamic unit trusts

=1st tier – regulation that applies to all unit trusts

= 2nd tier – additional regulation required for Islamic unit trusts

i. Appointment of Shariah Committee / Advisory Board / Adviser

ii. Appointment of 2 Muslim Investment Committee Member

iii. Appointment of a designated compliance officer for Islamic

unit trusts

iv. Enhanced disclosures in offering documents

v. Reports by Shariah Committee / Advisory Board / Adviser in

annual and interim reports to unitholders.farhana

WHO REGULATES UNIT TRUST FUNDS IN MALAYSIA?

The Securities Commission regulates the establishment and operations of unit trusts in Malaysia under the Capital Markets And Services Act 2007, Securities Commission Act 1993, the SC Guidelines and other relevant securities law. This requires, among other things, that the unit trust fund manager and the trustee create a deed and register it with the Securities Commission. A copy of the deed may be inspected at the unit trust fund manager's office.

In addition, the Securities Commission has placed severe requirements in the appointment of the unit trust manager, the trustee, the unit trust manager's directors, chief executive officer, investment committee and Committee Members/Shariah Advisers. The appointment of all these parties must be approved by the Securities Commission.

The involvement of companies in the following elements is the criteria used in evaluating the status of Shariah compliant securities:

Financial services based on riba (interest);

Gambling;

Manufacture or sale of non-halal products or related products;

Conventional insurance;

Entertainment activities that are non-permissible according to the Shariah;

Manufacture or sale of tobacco-based products or related products;

WHAT ARE THE CRITERIA USED IN EVALUATING THE

COMPANIES?

Stockbroking or share trading in non-Shariah compliant securities; and

Other activities deemed non-permissible according to the Shariah.

There are two additional criteria:

Public perception or the image of the company must be good; and

The core activities of the company are important and considered

maslahah (public interest) to the Muslim Ummah (community) and

the country, and the non-permissible element is very small and

involves matters such as umum balwa (common plight and difficult

to avoid), uruf (custom) and the rights of the non-Muslim

community which are accepted by Islam.

The market is in a good position to benefit from a more rapid global expansion of Islamic finance, which has become more established in the last two years. Islamic products and services are gaining widespread acceptance.

On the supply side, there are now larger global offerings of Islamic securities by a wider selection of issuers.

Islamic financial innovation has also grown rapidly. At the same time, the investor base for Islamic products is beginning to widen; around half of the subscriptions for Sukuk are said to come from non-Muslims, reflecting the competitive pricing of Islamic products.

Over the years, Shariah-based unit trust funds have proven to be a viable investment option. As at the 31st December 2007, the total net asset value (NAV) of unit trust funds in Malaysia stood at RM169.41 billion (US$50.2 billion), an increase of 39.13% from RM121.77 billion (US$36 billion) at end-2006.

This represents 15.32% of the total market capitalization of Bursa Malaysia, of which conventional unit trust funds stood at RM152.5 billion (US$45.2 billion) while RM16.9 billion (US$5.03 billion) were Shariah-based unit trust funds.

WHY INVEST IN SHARIAH-BASED UNIT TRUST FUNDS?

Shariah-based unit trust funds are restricted to investment in Shariah compliant securities approved by the Securities Commission Malaysia while conventional fund investments are not restricted.

COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC UNIT

TRUST FUNDS

Investing in unit trusts transfers most of the necessary “know-how” of investing to those best equipped to handle it — professional fund managers. There are several other substantial benefits of investing in unit trusts. They include:

(1)AffordabilityUnit trusts are affordable as investors can start with an investment amount as low as RM100 (US$30).

BENEFITS OF INVESTING IN SHARIAH-BASED UNIT TRUST FUNDS

(2) DiversificationRather than concentrating on 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 in unit trusts means diversification of risk — “not putting all your eggs in one basket”.

(3) LiquidityMost investors prefer their investment to be liquid. That is, they can easily buy and sell without difficulty. 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.

(4) Professional fund managementThe people managing unit trusts are approved professionals. Their training and background ensure that decision making is structured and in accordance with sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund managers bring. In the long term, it is this expertise that should generate above-average investment returns for unit trust investors.

(5) Investment exposureFor the individual investor, it is sometimes difficult to gain exposure to a particular asset class. For instance, if an investor with RM5,000 (US$1,480) 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 for the investor to spread his money around to all of these asset classes at the same time, so that he can gain the investment exposure he requires.

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(6) Wholesale investment costs and access to other asset classesWhen making direct investments in Bursa Malaysia, the investor faces costs and charges that are much higher. With unit trusts, the economics of the transaction are more favorable, i.e. the fees and charges/brokerage and so on per investment ringgit are likely to be lower.

As fund managers invest in larger amounts, they are able to secure access to wholesale yields and products that 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 securities market because, among other reasons, the amount of each transaction could run into millions of ringgit.

(7) Comfort of regulationThe 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 interests of the investing public. Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.

TOP 5 UNIT TRUST AS AT JUNE 2007

NO UNIT TRUST MANAGEMENT COMPANY

FUND SIZE RM MILLION

MARKET SHARE (%)

1 PUBLIC MUTUAL 22,064 36.7%

2 AM INVESTMENT SERVICES 8,736 14.5%

3 HWANG-DBS INVESTMENT 4,987 8.29%

4 PRUDENTIAL FUND MANAGEMENT

3,989 6.63%

5 CIMB WEALTH ADVISOR 3,421 5.69%

MALAYSIAN UNIT TRUSTS INDUSTRY

WHERE WE ARE @ 31 JULY

GROWTH OF MALAYSIAN ISLAMIC UNIT TRUSTS

ISSUESGlobal Investments

• Ability to gather information to analyse global companies or issues to determine whether it is Shariah-compliant.

Selling Unit Trust Products Outside Malaysia

• Legal and regulatory issues.

• Acceptance by Middle-East investors of Malaysian unit trust products.

- Differing Shariah opinions and rulings

- Differing accounting standards

Purification of earning

- Shariah scholars have different views about whether the "purification" is necessary where the profits are made through capital gains

Liquidity

- large majority of Islamic funds is not

listed in any Stock Exchange.

RECOMMENDATIONEducation

-Promote understanding and general awareness of unit trusts

Re-branding

- re-branded unit trust to help penetration and acceptability the investing public

CONCLUSION

Why invest in Shariah-based unit funds now?

The demand for Islamic investment products is increasing. As at the 30th June 2008, the number of Shariah-based unit trust funds stood at 140, or 25% of the total of 557 approved funds.

The NAV (NET ASSETS VALUE) of Shariah-based unit trust funds accounts for RM17.98 billion (US$5.33 billion), or 17.74% of total net value to the Bursa Malaysia market capitalization compared to RM9.17 billion (US$2.73 billion) at end-2006.

The NAV of Shariah-based unit trust funds for the last decade grew at a compounded annual growth rate of 39.6% while the total industry recorded a growth rate of 17.8% in the same period.