3.5 Portfolio Constraints: Permitted Investments, Liquidity, Borrowing and Exposure Limits
Key Takeaways
UTS and PRS may invest in transferable securities, cash, deposits and money market instruments, units of other CIS, derivatives and other securities, and PRS funds may also invest in real estate.
Securities lending and repurchase transactions are allowed only for efficient portfolio management, and the fund manager must hold at least 100% collateral.
A unit trust fund may borrow cash only temporarily to meet repurchases, for no more than one month, up to 10% of NAV, and only from financial institutions under the current UTF Guidelines.
In the study guide's example, an equity UTS with RM10 million NAV can hold up to RM1 million (10% of NAV) of one company's shares and up to RM1.5 million (15% of NAV) in all securities of that issuer.
A breach caused by market movements, repurchases, capital changes or rating downgrades need not be reported to the SC but must be rectified within three months, while other breaches must be reported within seven business days.
The General Principle
The UTF and PRS Guidelines require a fund's assets to be relevant to and consistent with its investment objective, and to provide a prudent spread of risk. Specific constraints then shape:
- the portfolio objectives that can be set;
- how the portfolio is built; and
- how it is run day to day (for example when units in circulation change).
Permitted Investments
| UTS may invest in | PRS may invest in |
|---|---|
| Transferable securities (equities, sukuk, bonds and other securitised debt, warrants) | Transferable securities (same) |
| Cash, deposits and money market instruments | Cash, deposits and money market instruments |
| Units or shares of CIS | Units or shares of CIS |
| Derivatives | Derivatives |
| — | Real estate |
| "Other securities" (anything else permitted) | "Other securities" |
There are further limits on unlisted securities and foreign markets. A fund may only invest in what its deed authorises, and the prospectus or disclosure document may add restrictions.
Liquidity
Investors must receive repurchase proceeds quickly, so the SC requires Scheme Providers to keep arrangements to meet repurchase requests. The right level depends on the repurchase arrangements, expected redemptions and the fund's objectives. Liquidity can come from cash, short-dated fixed income, money market instruments or short-term borrowing. Repurchased units are cancelled by the Trustee for cash from the fund so investors can be paid promptly.
Securities Lending and Repurchase Transactions
Allowed only for efficient portfolio management, which means the transaction must:
- be economically appropriate and cost-effective;
- aim to reduce risk, reduce cost or generate extra capital or income at a level of risk consistent with the fund's profile and diversification rules;
- be fully covered to meet any obligation to pay or deliver; and
- have its risks captured by the fund's risk management policies.
The fund manager must have at least 100% collateral, with no uncollateralised counterparty exposure.
Borrowing and Lending
- Borrowing: a Scheme Provider may borrow, subject to conditions, for no more than one month so the fund can meet redemptions without selling assets in a way that hurts remaining investors. The current UTF Guidelines (R7-2024) add that the borrowing must be temporary, must not exceed 10% of NAV when incurred, and must come only from financial institutions.
- Wholesale funds (for sophisticated investors) may borrow to invest as well as to meet redemptions. Gearing magnifies gains in rising markets and losses in falling ones.
- No lending: apart from repurchase transactions and securities lending, none of the scheme's cash or investments may be lent, and the scheme may not guarantee or become liable for anyone else's debts.
Concentration and Exposure Limits
The SC caps a fund's exposure to a single issuer, a class of securities or a group of companies. The study guide's examples:
| Example | Limit | Applied to an equity UTS with NAV of RM10 million |
|---|---|---|
| Ordinary shares of one issuer | 10% of NAV | Up to RM1 million of ABC Berhad shares |
| All securities issued by one issuer | 15% of NAV | A further RM0.5 million of ABC's fixed income securities (RM1.5 million in total) |
| Concentration in an issuer's share capital | 10% of the issuer's ordinary shares | If ABC has 10 million shares, the fund may hold at most 1 million |
Both tests apply at once: holding 1 million ABC shares must also stay within the 10%-of-NAV value limit. SC limits apply per fund, so a Scheme Provider running several funds is encouraged to set internal limits on aggregate exposure.
Breach of Investment Limits
The Scheme Provider must comply with limits at all times using up-to-date values. The current UTF Guidelines (paragraphs 6.47 to 6.49) set two tracks:
| Type of breach | Requirement |
|---|---|
| General breach | Notify the SC within seven business days, with the steps taken to rectify it and prevent recurrence |
| Breach caused by appreciation or depreciation of investments, repurchases or payments out of the fund, a change in an investee company's capital, or a credit-rating downgrade or cessation | No need to report to the SC, but rectify as soon as practicable within three months |
| Extension of the three-month period | Allowed if in unit holders' best interests and the Trustee consents, with at least a monthly review by the Trustee |
Note
FIMM's study guide states both the seven-business-day notification and the three-month rectification rule without spelling out which breaches fall under each. The UTF Guidelines make the split shown above: passive breaches (caused by market movements and similar events) use the three-month track.
Worked Check
A fund's NAV is RM40 million. It holds RM3.8 million of XYZ shares (9.5% of NAV). XYZ's share price jumps and the holding becomes RM4.4 million while NAV rises to RM41 million, which is 10.7% of NAV. The breach was caused by appreciation, so the manager does not report it to the SC but must bring the holding back within 10% of NAV within three months, unless the Trustee agrees to an extension.
What minimum level of collateral must a fund manager hold for securities lending and repurchase transactions?
150%
75%
100%
50%
An equity UTS has a NAV of RM20 million. Using the study guide's limits, what is the maximum value of ordinary shares of a single issuer it may normally hold?
RM3 million
RM2 million
RM4 million
RM1 million
A fund breaches a single-issuer limit only because the issuer's share price rose sharply. What must the Management Company do under the UTF Guidelines?
Obtain unit holders' approval to keep the holding
Suspend dealing in the fund until the breach is cured
Notify the SC within one business day and sell the excess immediately
Rectify the breach as soon as practicable within three months, without needing to report it to the SC
Sections you finish are checked off in the contents.