What to expect from a unit trust fund's annual report

Annual reports: Read before you weep
Published: 2009/06/10

There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports, says Securities Industry Development Corp

AFTER last week's article, some of you may have already started going through unit trust fund's annual reports for your future funds.

If you somehow stopped at the pages filled with a plethora of numbers, waiting for this installment to be released, so as to get a rough idea about what those numbers represent, do not fret! Read on and we will tell you what the following pages of your annual reports are all about.

Financial Statements

Never ignore the financial statements part! For those of you who are interested in drilling down further into the financial details, what you need to scrutinise are the financial statements that have been elaborately presented before you.

Your financial statements comprise:

* Income Statement

* Balance Sheet

* Statement of Changes in Net Asset Value (NAV)

* Cash Flow Statement

What do all these mean?

* Income Statement

The income statement will provide details on the investment activities, relative to the previous financial year's activities.

This statement will provide you with a way to differentiate the net income/loss contributed by realised gain/loss versus unrealised gain/loss, which is the result of portfolio revaluation.

For example, a fund's net income is reported as RM1 million, but the realised investment loss is RM2 million, offset by an unrealised gain of RM3 million. Here, you can tell that the RM1 million net income reported does not truly reflect the actual performance of the company. It's simply a matter of accounting practice that the amount is recorded as such.

As an investor, you need to be mindful of the unrealised items, such as unrealised gain or loss on foreign exchange, which may appear in the Income Statement.

* Balance Sheet

There are a few critical pieces of financial information that you can learn from this statement:

(i) whether the fund's total asset is appreciating or depreciating as compared to the previous period.

(ii) whether the units in circulation are increasing or decreasing - a significant decrease in units in circulation shows that the cancellation of units is much greater than creation of units for sale, which also implies that the fund is losing popularity among its existing customers.

* Statement of Changes in NAV

This statement will provide the details on the changes in the NAV during the period and differentiate between the changes contributed by investment activities and transactions with unit holders.

You should be able to see the net impact of undistributed income due to investment activities versus movement due to unit creation or redemption.

From here, it will tell whether the increase or decrease in the fund's value is due to investment effort or expansion/shrinkage in the funds.

For example, if a net decrease of RM5 million in NAV is attributed to RM1 million net increase in undistributed income and RM6 million in amount paid on cancellation of units under the movement due to unit redemption, you may want to be more cautious and investigate further on the reasons behind the redemption from the unit holders.

* Cash Flow Statement

This statement tells you where cash flow for the year is being generated and spent, whether the sources of cash flows are from operating or investment activities and financing activities.

Notes to Financial Statements

Notes can be rather mind-boggling but they function as a supplement to the financial statements and help make sense of the numbers presented.


* Management Expense Ratio

As managing a fund requires a whole team of professionals, the cost incurred to run a fund is part of the cost of investing in unit trust for an investor.

The cost inherent in operating a fund includes management fees, trustee fee, audit fee, administrative expenses (printing of annual reports, distribution warrants, and postage) and other service charges incurred in the management of the fund.

Management Expense ratio is the ratio of the total of all the fees incurred for the period deducted from the fund and all the expenses recovered from and/or charged to the fund, expressed as a percentage of the average value of the fund. It can be summarised as follows:

The MER ratio should be fairly consistent over the years. If you see a significant difference from the previous year, you will need to find out the reason for the change. This is a useful ratio to compare the fund you have invested in or intend to invest with other similar funds in your fund selection process.

The higher the MER ratio, the more expenses are required to manage the fund. Therefore, when you draw up comparisons between funds within a similar range, the ones having similar performance but with lower MER will be more beneficial to you as an investor, because less money is being spent by the managers and more is available for distribution.


* Portfolio Turnover Ratio

Portfolio Turnover ratio measures the average acquisitions and disposals of securities of a fund. The calculation is as follows:

The PTR usually comes after the section on MER in an annual report's notes to financial statement. PTR indicates the rate of trading activity in a fund's portfolio of investments. If the PTR is high, it means that the fund manager is constantly changing the companies or financial instruments in the portfolio. As each and every transaction involves cost, high turnover indicates that the transaction cost incurred is high and it will in turn eat into the profit earned, which will eventually not work out to the benefit of the investors.

You should also look for any other extraordinary items stated in the notes to financial statements, especially events that can materially affect the portfolio's performance or investors' interests, such as change of fund managers and investment committee members, compliance issues, change of investment objectives or policies and major change of shareholders.

Now that you know what to expect from a unit trust fund's annual report, it is high time you get started with the actual reading! There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports. You need to know what you are parting your money for and to whom you will be giving it in order to manage it, so "Read Before You Weep!"

Securities Industry Development Corp (SIDC), the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.


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