7A.3 Dealing in Units, Valuation, NAV Calculation and Unit Prices

Dealing in Units

• The UTMC must issue and repurchase units on a unit holder's formal request.
• The Trustee creates and cancels units when the UTMC raises a requisition, under the UTF Guidelines.
• Units are created only for cash, which must be paid to the Trustee within 7 business days, at a price set by the deed and Guidelines.
• The Trustee ensures valuation and unit pricing follow the deed and Guidelines.

"Dealing in unit trusts"

Anyone involved in marketing and distributing units is dealing in unit trusts and must be a registered UTS Consultant. The definition: whether as principal or agent, making or offering to make an agreement with any person, or inducing or attempting to induce any person to enter into one:

1. to acquire, dispose of, subscribe for or underwrite any interest in unit trust funds; or
2. whose purpose is to secure a profit from the yield of, or price movements in, any interest in unit trust funds.

UTMCs, IUTAs and CUTAs must ensure everyone who deals in unit trusts is registered with and authorised by FIMM.

The dealing cut-off time

FIMM's IMS 1 – Dealing Cut-Off Time for Unit Purchases and Redemptions standardises the cut-off: applications must be received no later than 4.00 pm on a business day to use that day's end-of-day price. Later applications are processed at the next day's price.

Valuation

How Units Are Priced

Listed or closed UTS – units trade between investors (on Bursa, or from holder to holder for a closed unlisted fund); ownership changes when the register is updated.

Open-ended unlisted UTS – the UTMC sells units to investors and buys them back, acting as principal. It holds a stock of units, replenishing it by creating units through the Trustee or reducing it by cancelling units. So there are two sets of prices:

1. the NAV per unit, at which the UTMC deals with investors; and
2. creation and cancellation prices, at which the UTMC deals with the Trustee.

Single pricing

Since 1 July 2007 the industry uses single pricing: all buying and selling is at one price, the NAV per unit. Under the old dual pricing, separate buying and repurchase prices built in the initial and exit charges. A miscalculated NAV would let new investors dilute existing ones, so accurate NAV is vital.

Some UTS have a fixed price of RM1.00, at which all transactions with investors and the Trustee take place.

Calculating NAV

NAV = investments at market value + liquidity. Liquidity changes with:

1. creations less cancellations (cash for creations is paid to the Trustee, and cash for cancellations paid out, within 7 days of the UTMC's instruction);
2. sales less purchases of investments;
3. investment income less fees, charges and taxes (including Malaysian tax and foreign withholding tax); and
4. other assets less liabilities (income receivable, accrued expenses, unsettled trades, tax provisions).

Valuations follow the UTF Guidelines' Schedule C bases and must be objective and independently verifiable.

Transaction Cost Factor (Dilution Adjustment)

Buying and selling investments costs money (for example broker's commission). Without an allowance, investors who are not dealing would bear the cost of those who are. A transaction cost factor (TCF) may therefore be added to NAV on creation and deducted on cancellation:

$$\text{Creation price} = \text{NAV} + \text{TCF} \qquad \text{Cancellation price} = \text{NAV} - \text{TCF}$$

If costs are immaterial, no adjustment is made; in Malaysia a TCF is usually applied only to the creation price. The UTMC must tell the Trustee of any dilution adjustment and must not use it to make a profit or avoid a loss. During a launch period (usually no more than 21 days) the creation price equals NAV.

Selling and Repurchase Prices

These are the prices investors see. Under single pricing both equal the NAV per unit.

Study guide example: ABC Growth Trust, NAV RM45,626,788, 65,500,000 units in circulation, no TCF.

$$\text{NAV per unit} = \frac{\text{RM}45{,}626{,}788}{65{,}500{,}000} = \text{RM}0.6966$$

RM0.6966 is both the selling and the repurchase price that day. The UTMC must publish the price at least once every dealing day.

Incorrect Pricing

The UTMC must take immediate remedial action. Where the error is at or above 0.5% of the NAV per unit, rectification must extend to reimbursing money: by the UTMC to the fund, from the fund to the UTMC, or by the UTMC to unit holders and former unit holders. The UTMC must also notify the Trustee and, unless the Trustee considers the error minimal, the SC.