How NOT to Lose Money in Unit Trust (a case study)

How not to lose money in your investment – we take unit trust as case study here.

I am not a close follower of the unit trust industry in Malaysia. But if you are, you should have read that RHB Islamic Bond fund NAV plunged overnight 8.323% on 24 October 2011.News here at FundSupermart

The reason?
Total write down of Tracoma bonds held by the fund portfolio. The value is RM 4.52 million
In layman terms, that means Tracoma defaults on its bond; on its obligation to pay bond holders.Its bond market value drops to ZERO.

This is the testament to the fact that contrary to what most of us thought, fixed income fund is not without any risks.
The history, and a tell-tale sign
The fund manager bought Tracoma bond on 28 February 2005 and it was rated A at that time. However, Tracoma bond was downgraded in February 2007, July 2008, October 2008 and early of January 2009 to BBB+, BB+, B, C respectively before finally downgraded to D at the end of January 2009. The downgrade was due to weak fundamentals of the domestic automotive industry.

*To understand more on bond rating, click here*

At the end of January 2009, Tracoma bond defaulted on its principal repayment obligation. Tracoma slips into PN17* status early March 2010.

Excerpt from iFast interview with the fund manager
When Tracoma bond was downgraded, there was no secondary market available. Also, there were ongoing restructuring efforts by Tracoma Holdings Berhad, which among others involved a white knight undertaking due diligence studies on the company. But, the white knight had pulled out from the study in October 2011.
However, the timeline as to how long the liquidation process and the NAV recovery from write-back may take remains unknown.

Tracoma Holdings Berhad is a leading manufacturer and supplier of automotive parts and components.

How NOT to Lose Money in Unit Trust (a case study) by CF Lieu - Certified Financial Planner MalaysiaThe fund’s holdings as of 31 Mar 2011 annual report. 4.55 and 4.28% of the fund’s NAV!

What YOU, as an investor should do to prevent this from happening to you
Read the annual or interim report for the ratings of the bonds held in the fund portfolio. Any downgrade of bond rating to BB or lower – you take your money and run like a plague! Because by the time news like this hits you in the face, it is already too late! And the fund manager now advises investor not to redeem, as there is very likely to recoup the losses as the bond’s secured creditor. Well, if you are invested in, just keep your fingers crossed, or you could cut your losses before NAV drops further.
Do your own due diligence folks!

*PN17 stands for Practice Note 17/2005 and is issued by Bursa Malaysia; relating to companies that are in financial distress.

9 thoughts on “How NOT to Lose Money in Unit Trust (a case study)”

  1. Suze is right. Interest rates will rise eventually, especially when the QE tapering takes place.

    In view of this, you should not buy long term bonds. Short term (3 yrs) good quality bonds are OK though.

  2. Recently, they have reopenened the subscription for the award-winning Amdynamic Bond at Fundsupermart. Wonder if it will be a good buy as many US financial experts, Suze Orman included, have spoken against buying long term bond funds in face of rising interest rates. Is such an advice valid in the Malaysian context? Or are we different? I am thoroughly confused. What is your take on this? Thank you.

    1. Yea, long term bonds would be most affected compared to medium or short term bonds.
      I think the prudent way is to look at the actual bonds held within the fund, and from there can gauge if it falls under long/med/short term.

  3. CF,

    Just saw your e-mail and read the article. My view of this is that the Fund Manager and the Trustee of the Fund have not fulfilled their obligation to the fundholders.

    Once a holding has been downgraded below the acceptable grade for the fund, action must be taken to address this. The comment “no secondary market available” is not acceptable. How will the Fund Manager handle redemptions by the fundholders if this is the case? As you rightly mentioned, “take your money and run like the plague”. Can the Fund Manager then say “Sorry but you cannot redeem because there is no secondary market?”

    From experience, I have come across such Fund Managers and Fund Houses before. That is why I am very selective of which Fund House I invest with. Even if they come highly recommended, I will still do my own due diligence on the Fund House before I place my funds with them.

    This past year has seen a number of mergers taking place amongst Fund Houses and as a result a couple of movements of CIOs and Fund Managers. I am waiting to see the implication of these mergers and resource movements before deciding if there is a need to move my investments if I am not comfortable with the new set-up of the Fund House. Maybe you can do an article on these mergers and how they can impact the market.

    1. Hey KS, I agree with your comments with my arms and legs raised! đŸ™‚ They also call what you explained as “survivorship bias”, I believe.

  4. Hey there just wanted to give you a quick heads up and let you
    know a few of the images aren’t loading correctly. I’m not sure
    why but I think its a linking issue. I’ve tried it in two different browsers and both show the same results.

Leave a Reply

Your email address will not be published. Required fields are marked *