Closed-End Funds

Marketing Closed-End Funds

Rightly or wrongly, closed-end funds (CEFs) are often regarded as marketing nightmares and thus, do not bask in the limelight normally associated with other investment vehicles such as unit trusts or mutual funds. Upon closer reflection, part of this actually stems from the inherent structure and characteristics of the CEFs themselves rather than their performance per se.

Whilst unit trusts are marketed with the support of well-established distribution networks (branches or kiosks) of major financial institutions or via a large pool of direct agents - known these days as financial consultants or planners? CEFs are unable to call upon such marketing channels because there are no juicy front-end loads or sales commissions available. Secondly, stockbrokers would rather earn their commissions from a portfolio of individual stocks that can be constantly turned-over, rather than a CEF held for the long term. As a consequence, broking houses seldom pitch the achievements and prospects of CEFs to the investing public. Furthermore, fund managers and management companies generally prefer funds with an open-ended feature for they are able to sell additional units of the existing funds to reap higher management fees and profits. Combining these factors together, it is no coincidence that CEFs have not captured the imagination of the ordinary investors despite their superior performance as an investment vehicle.

Handicapped marketing-wise by the no front-end loads or sales commissions, managers of CEFs will thus have to rely on several indirect channels to front their products. One such means is via special-purpose investment newsletters or websites that are dedicated to CEFs and the industry in particular. Among the more popular publications in circulation or on the web to date are 'CEF Advisors', 'The Closed-End Fund Reader' and 'The Internet Closed-End Fund Investor'. In addition, there are also several non-profit national trade associations such as the Closed-End Fund Association (CEFA) in the US and Canada that are committed to educating investors about the many benefits of these unique investment products and to providing a resource for information about their offerings.

Nonetheless, much of the success or failure in marketing CEFs really comes down to the efforts of the fund managers themselves. For instance, as the bulk of the marketing for a CEF is carried out prior to its listing (IPO stage), the efforts of the fund manager in promoting the fund during the book-building exercise, investment road shows, analyst briefings and etc. are crucial in not only educating the public of such a vehicle but also in creating awareness and demand for the product. Post-IPO, marketing efforts will then focus more on updating investors and the public on the performance and prospects of the fund and the outlook of the economy that forms the backdrop for the investments. This can be articulated via its own company website or through periodic announcements to the media.

In short, unlike unit trusts, the marketing efforts for a CEF are minimal due to its inherent structure and the lack of lucrative sales commissions. To shareholders, however, the absence or the lack of marketing may well prove to be a boon rather than a bane for the fact that their entry or exit costs are minimised, hence, providing greater room for higher returns. Unlike unit trust funds, CEFs have no marketing and distribution expenses and the only fee charged is the broker's commission.

Unit Trust Funds

Marketing Unit Trust Funds

The unit trust industry has been developing rapidly in Malaysia, as can be seen from the percentage of market capitalization of unit trust in Bursa Malaysia due to its aggressive and extensive marketing efforts. There are several marketing channels and methods to meet the end users, which are [a]. Banks, [b]. Financial Planner & Unit trust agents. [c]. Advertisements and [d]. Others.

[a]. Banks
Unit trust management companies (UTMC) that are affiliated to banks can take advantage of the large network of branches of banks under the group to act as their collection agents. Some UTMCs have also collaborated with other banks to provide a wider network beyond their own branches. These banks usually do not have their own funds so they are considered as third party agents because of its structure of selling other UTFs. Institutional Unit Trust Agents or IUTAs are institutions approved by the Guidelines for Regsistration of Institutional Agents for the Marketing & Distribution of Unit Trusts to distribute UTFs of various UTMCs.

Retail banks have the facilities that enable investors to walk in to a teller at the bank and buy the UTF of their own choice directly. In addition, investors can invest or purchase units of any UTF through cash payments, cheque or debit account modes. With a comprehensive range of UTF, IUTAs have proven to be an effective distribution channel for unit trust.

[b] Financial planners & unit trust agents
Investors who wish to purchase UTF can do so by contacting a financial planner or a unit trust agent. These planners or agents will provide advice and financial assistance to them without supposedly being bias to any specific fund. The advice given is supposedly based on the investor's investment objectives, time horizon and risk appetites. However, the question is, are these planners and agents well trained in the matters of economics and stock market? Do they close a deal because of the commission and additional incentives that the UTMCs offer? Are there conflicts of interest?

Conflicts of Interest
Table 1 shows the agent's hierarchy. The commission that an agent gets can be between 2%-4.5%. However, because of the hierarchy system, in the first tier, an agent only earns at most 3% commission from the investment amount. As the agent climbs up higher in the hierarchy, the commission received will be higher due to the overriding system which is similar to direct selling. This can range between 0.5-1.3%. An agent can only serve one UTMC and their third parties. For instance, Bank A services their third parties, say, UTMC B and UTMC C; any agent under acknowledgement of Bank A is entitled to sell funds from UTMC B and UTMC C.

Table 1: Agent's Hierarchy

Agents may receive 3-4% commission for selling funds from UTMC B while they may get less (some nil) commission if they promote the funds from UTMC C. Will the agent promote funds from UTMC B for higher commission, or funds from UTMC C which have higher returns but pay lower commission? Thus, there are conflicts of interest between the investors and the agents.

[c] Advertisements
Very often you see banks or UTMCs flashing their banners to promote either a new UTF or an existing UTF. Advertising methods range from giving out brochures to advertising in major newspapers. However, these advertisements may be misleading in the sense that they only highlight a good period, when a UTF is the best performer, but ignore a bad period, when a UTF is one of the worst performers. For example, Fund A may be at the top of the list for the first 3 years but may be at the bottom in the fifth year. A possible reason may be that the fund manager responsible for the good period may have left. The fund manager is the most important consideration. When a fund manager leaves, he is actually taking his expertise elsewhere. Unit trust investors usually based their investment decisions on past performance and are not aware of the implications of a change in fund managers. Advertisements tell only the good bits and are not reliable buying guides.

[d] Other methods
Due to the extensive and aggressive marketing efforts carried out to ensure continuous strong demand, UTFs have become popular in Malaysia, especially with the increasing number of UTFs being launched almost every month. Besides relying on banks, planners, agents and advertising, the marketing efforts include unit trust and fixed deposit/insurance bundling promotion, distributing bonus units to unit holders and providing discounts on front load charges. Even UTMCs and banks are actively recruiting sales agents to promote this vast growing demand of UTFs. More and more creative and aggressive marketing and sales efforts will be seen as one can expect that there will be a whole range of new product options being developed as the lucrative industry becomes more competitive.