KCLau's Money Tips Forum

[midnight_pn]

i am a fan of the suze orman show on CNBC every weekend at 5pm-6pm.
this show is very US focused, but i find it very interesting to listen to the financial predicament that people find themselves in.

a point that suze made today - again - note this is pertaining to the US market - is that she does not recommend loaded mutual funds, where the typical load (in the US) is at 5%. In comparison, note that it is much higher in Malaysia at 5.5%-6.5% for the equity/balanced type fund. Suze strongly recommends no-load mutual funds. I don't even think we have this in Malaysia. She also made a comment that she looks for management expense ratios of less than 1%. Typically, most of the balanced/equity type funds have a MER of 1.5%.

This got me thinking .... what are the greatest fixed & variable costs that these companies have to warrant a 1.5% MER, whereas the companies in the US are charging <1%. Does this simply increase their profits?

[KCLau]

Malaysia is still not a mature market. There are still many people who don't understand unit trust funds.
Therefore, in order to take in more business, unit trust company have to pay higher incentive to unit trust agents to motivate them to sell.

However, it will happen soon that when investors and public are more informed and educated, investing in unit trust is a norm, commission will be slashed. It already happens this year that some companies had lowered the service charges to 5.5% instead of previous 6.5%. EPF also limit the load to 3% only for members who invest using their EPF money. Soon, there will be no-load fund in the future.

MER (Management Expense Ratio) as claimed by Midnight_pn is:

Management Expense Ratio - MER In simple terms an MER is a way of taking the expenses involved in investing through a manager and wrapping them up in one figure, making it easier to see how much you're paying and simpler to compare funds. The term applies to investments such as unit trusts, investment-linked insurance policies and superannuation schemes (but not workplace super) - the sort of things you buy and sell through a manager, rather than on the sharemarket. Managers express MERs as a percentage - of the value of your investment, not the amount you originally put in. So, if a fund's MER is 1.5 per cent and your stake in that fund is worth $10,000, you know that management is costing you $150 a year.

Local fund ( Malaysia) typically has higher than 1.5% MER - because the management fees alone is 1.5%.
Such as the Public Index Fund http://www.publicmutual.com.my/page.aspx?name=pix - the MER is 1.59% (for Financial Year Ended 31 January 2007). The expenses also include the transaction fees (brokerage) and also the trustee fees if not mistaken.

The portion that contributes to the profit of unit trust companies is the Annual Management Fees.