Making mutual funds work for you

In our continuing effort to bring to our readers the range of savings and investments options available to them, the Sunday BG spoke to Kurt Valley, president of the Mutual Fund Association of T&T (MFATT). Valley breaks down the concept of mutual funds and how they work to bring returns.

What is a mutual fund?

A mutual fund is a form of collective investment where investors pool their money into one fund by purchasing units in the fund. This purchased unit should be considered an investment and is not a bank deposit where the funds are covered by the Deposit Insurance Corporation. 

The pooled funds are then invested in different types of securities such as bonds, treasury notes or stocks, guided by the investment mandate of the fund, where they generate returns which are then passed onto each investor.

What are the pros and cons of investing in a mutual fund, as opposed to equities, bonds, foreign exchange and the like?

Some of the pros of investing in mutual funds are:

Lower risk through diversification: 

Since mutual funds invest in a wide array of securities there is instant diversification with a relatively small amount of investment. Being diversified allows the portfolio to earn higher returns without facing equally high risks.

Professional portfolio management: 

These funds are managed by full time professional portfolio managers who vigilantly monitor the performance of the funds.

Improved access to the capital market: 

Through the fund, individuals gain access to securities that may not be as easily available to them as relatively small individual investors.

Liquidity: 

Investors can easily buy and sell their units from their mutual fund provider

Easy record keeping: 

Mutual fund investors are provided with regular statements of their holdings in each fund vs. keeping track of their individual investments on their own.

Lower trading costs: 

When individuals pool their funds, significant savings in transaction costs can be achieved arising from fewer transactions in larger amounts.

Some of the cons are:

Management fees: 

Investors should pay attention to all the fees charged to a fund. This would include the investment management, trustee and distribution fees. While these fees are necessary, fees reduce overall investment returns to the investor. Investors should ensure that they continue to get value for their money by judging funds based upon their net return.

Potential management abuses: 

Investors should review the prospectuses, financial statements and holdings reports for the funds they wish to invest. These investments are owned by each of the investors in the fund and they have the right to know what comprises the fund. This disclosure will help ensure that mutual funds adhere to their investment mandates and remain as transparent as possible.

Could I have some background on MFATT. When was it founded?

The Mutual Fund Association (MFATT) is a non-profit company incorporated under the Companies Act, 1995. The members of the association comprise the largest operators of mutual funds in T&T. 

The association is managed by a board of directors which meets quarterly and is comprised of president and chairman, Kurt Valley of First Citizens Asset Management Ltd; the vice-president and deputy-chairman, Baldath Ramkissoon of Republic Bank Ltd; the treasurer, Carolyn James of Bourse Securities Ltd, as well as representatives from the Unit Trust Corporation, Guardian Asset Management, ANSA Merchant, and RBC Investment Management. The corporate secretary is Annette Borel.

What was the reason for its being founded?

The main reasons for the formation of the Mutual Fund Association are to, firstly, promote professionalism and exemplary practice among members in the ethical conduct of the mutual fund business.

Secondly, MFATT would like to raise the profile of the mutual fund industry to make T&T the prime location and a domicile for mutual funds and the preferred choice for the administration of mutual fund services. This includes heightening the profile of this industry in local, regional and international spheres.

Thirdly, MFATT will provide a forum for members to discuss issues on matters relating to the mutual fund industry. 

As a body we will also represent members collectively in discussions with, or assist any member to make any representation or recommendation to, any government, government representative or supervisory authority which is concerned with the mutual fund industry.

Finally MFATT will serve the general society by providing an avenue for public comment and feedback, promoting education on mutual fund investments, serving as an information resource for research, establishing reporting standards and supporting the development of employees of the mutual fund industry through training, conferences and programmes. 

Who are its members?

The current members of MFATT are:

• AIC Financial Group

• ANSA Merchant Bank

• Bourse Securities Ltd

• First Citizens Assets Management Ltd

• Guardian Asset Management Ltd

• RBC Investment Management (Caribbean) Ltd 

• Republic Bank Ltd (RBL)

• T&T Unit Trust Corporation (UTC)

How does an organisation like MFATT intend to help bring greater awareness to mutual funds as a product?

MFATT aims to increase mutual fund awareness primarily through the website mfatt.org where users can gain a basic understanding of how mutual funds work, decipher industry jargon, as well as access current industry statistics, along with relevant local and regional industry news and market activities. 

MFATT has also worked closely with Value Horizon to develop the Caribbean Mutual Fund Journal. This independent publication provides information on all the local mutual fund players giving individuals an incredibly detailed view of the local industry as well as enabling powerful comparison tools among various funds within the various investment groups.

We continue to encourage our membership to publish joint reports listing the top 10 holdings in their funds along with return and expense ratio information.This would provide investors with an easy way of quickly comparing the various investments in the mutual fund market. 

Mention was made at a seminar we both recently attended about information that MFATT intended to make available to the public, that could shift the way financial institutions share information with their publics. Could you shed some more light on this?

MFATT’s aim is to move the industry into a culture of increased disclosure of information to investors as well as the general public. We believe giving investors more information about their mutual funds will allow them to make more informed decisions about their investment choices. 

Some MFATT members have chosen to share their Top 10 holdings and First Citizens has opted to not only disclose their Top 10 holdings in each fund but to make the entire portfolio available online at mfatt.org and the First Citizens website so that investors can review the underlying investments of their mutual funds. 

Sharing this information will create efficiencies in the industry as mutual fund providers will compete more intensely for the funds of highly knowledgeable investors.

Most importantly, the increased disclosure will tend to improve governance by our association members, regulators, and government policy makers. Through greater transparency, there is an increased likelihood that a spotlight will be shone on imprudent investment allocation choices, which would have otherwise put investors’ capital at risk, thereby reducing them.

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How do prevailing economic conditions, (the low interest rate environment in T&T, low oil prices, the Fed increasing interest rates in the US) affect mutual funds? 

This is a very complex question and the most honest answer is that it depends. It depends on the investment mandate of the fund, the portfolio manager’s skill and strategy but, most importantly, it depends on the speed and magnitude of each of these changing market factors. 

For instance, low interest rates are generally bad for bond funds but a net positive for equity funds. Low oil prices for oil producing countries like ours, would probably result in more government debt financing that would be helpful to local bond investors by provided much needed supply to the capital market. 

The Fed increasing interest rates is a response to the US economy doing much better, which is a net positive for the world. 

Rising US rates would not be too troubling as long as the rate increases are well telegraphed to the market and anticipated. Sharp increases in international interest rates would be damaging for both debt and equity funds, as the market does not like surprises.

My advice to your readers would be to call their portfolio managers and ask them about how they view the economic landscape and how are they positioning their portfolios to profit from the changing winds. 

If they are in agreement with the portfolio manager, then that is where they should invest.

How are fund managers compensated?

As fund managers we are paid a management fee which is usually calculated as a percentage of the net asset value of the fund. The management fee rate may vary for each fund from each mutual fund provider. Investors should ask about the funds expense ratio and read the respective fund’s prospectus carefully to have a better understanding of the fees that are charged before making any investment decision.