7A.2 UTS Fees, Charges and Expenses, and the Management Expense Ratio

Two Classes of Cost

Investors must understand these costs to make informed decisions.

Direct Charges

Initial service charge (sales, entry or "up-front" charge)

• Covers the UTMC's costs of marketing and distributing the UTS and opening the account; it is based on the NAV.
• Must not exceed the maximum in the prospectus and allowed by the deed.
• Since the single pricing regime of 1 July 2007, the maximum service charge of each distribution channel must be disclosed so investors can compare channels.
• Distributors and Consultants must tell investors the actual rate at the point of investment; charges paid appear separately on purchase and sale statements.
• Quoting a higher rate but charging a lower one (a disguised discount or rebate) is prohibited.
• With an illustrative 5–7% charge, every RM1,000 invested costs RM50–RM70, much like a broker's commission. Most UTS are therefore not short-term investments: frequent buying and selling erodes capital.
• UTMCs may reduce charges during a launch period (for example free units in a 21-day offer period) or on switches.

Fees for specific services

Separate fees, paid directly to the UTMC, for services such as issuing a unit certificate, transferring units to another holder or switching (sometimes a fixed fee). They can be deducted from transaction proceeds.

Exit fee (repurchase charge)

Deducted from repurchase proceeds. It may be charged instead of an initial service charge, though UTMCs rarely do this.

Indirect Charges

Annual management fee

Management fees may include a performance fee, which must be fair to all unit holders, crystallised no more than once a year, independently verifiable, measured against a suitable benchmark (or a high-water mark of the NAV at which it was last paid), payable only on excess performance, with cumulative losses offset by gains, and fully disclosed with illustrations.

Trustee fee

Must be reasonable, considering the Trustee's role, unit holders' interests, the maximum rate in the deed and the fund's size and composition. No other fees may be charged by the Trustee for its operating costs, though it may recover expenses properly incurred (for example external legal advice). It must be disclosed in the prospectus.

Fund expenses

Other expenses directly related to and necessary for running the fund may be paid from its assets:

1. transaction costs of buying and selling assets;
2. income tax and other duties;
3. auditor's fees;
4. investment valuation fees;
5. legal costs of amending the deed (unless for the UTMC's benefit);
6. costs of unit holders' meetings (unless for the UTMC's benefit); and
7. the cost of issuing a prospectus, only where the selling price includes no initial service charge.

The UTMC's own management and administration costs come out of its management fee, not the fund. The Trustee ensures reimbursed costs are legitimate and reasonable.

The Management Expense Ratio (MER)

The MER summarises a fund's annual operating costs per unit and must be disclosed in the annual report.

$$\text{MER} = \frac{\text{Fees} + \text{Recovered expenses}}{\text{Average value of the fund (daily)}} \times 100$$

• Fees: all ongoing fees charged to the fund (management fee, trustee fee and others), calculated daily.
• Recovered expenses: operating expenses charged to the fund, excluding costs an investor would bear anyway, such as brokerage, taxes and levies.
• Average value: the fund's NAV (including net income, less accrued expenses), calculated daily over the period.

Study guide example – ABC Growth Fund, year ended 30 November:

Average fund size RM3,122,250, so MER = 41,524 ÷ 3,122,250 × 100 = 1.33%.

MER lets investors compare a fund's cost with past and expected returns, competitor funds and other investments. A gradually falling MER suggests the UTMC is managing costs efficiently, and larger funds generally have lower MERs through economies of scale, though not always.