The guidelines will introduce a new collective investment vehicle to complement the present unit trust industry. Like unit trusts, closed-end funds can also be seen as a means to effectively mobilise the nation's savings as well as provide investors with another avenue for participating in the capital market through professional fund managers. Both vehicles seek to mobilise retail funds for professionally managed investments in a portfolio of authorised investments. A growth of various fund options would add to the depth and choice of the market, and encourage greater institutional participation.
The main difference between a closed-end fund and a unit trust is the legal structure. At any one time, a closed-end fund has a limited number of shares issued while the total number of units issued by a unit trust fluctuates. Also, when an investor who has bought shares in a closed-end fund at the initial offer wishes to sell his shares, he cannot sell them back to the fund. The investor must find a buyer in a secondary market. On the other hand, should an investor want to sell his units in a unit trust fund, they can be redeemed by the fund.
As closed-end funds are not subject to the risks of redemptions, they may undertake to invest in more diverse investments which may include less liquid securities and even investments in unlisted companies. Hence, closed-end funds tend to have longer term investment strategies.
Closed-end funds in the form which the Securities Commission seeks to introduce, must be set up as Malaysian incorporated public limited companies. The investment capital needed to carry out its sole activity, viz. investment in authorised portfolios will be raised from potential investors in the form of an initial public offering. Investors in the closed-end fund are, therefore, shareholders of the fund and will enjoy all rights afforded to shareholders of any company incorporated under the Companies Act 1965.
By reason of its nature, a closed-end fund would not normally have a track record before it applies for a listing and therefore starts as a new venture. As such, the potential growth and risks involved in the management of the fund's investments is dependent on the qualifications and experience of its fund managers. The guidelines require such details to be fully disclosed by the closed-end fund in all documents relating to the public offering to investors.
The listed share price of the closed-end fund will initially be determined by the net asset value of the fund. The net asset value of a closed-end fund immediately after the initial public offering will usually be lower than the offer price given the expenses that would have been incurred prior to the offering. However, the net asset value is expected to improve with time, once sound investments are made and actively managed by the fund. Like the shares of any listed company, once listed, the price is determined by supply and demand, and such prices may deviate for significant periods of time from the net asset value per share of the fund.
The guidelines also permit closed-end funds to borrow to a limited extent. The ability to borrow or 'gear up' will give such closed-end funds an upperhand in a rising market to take advantage of market timing. However, in a falling market, closed-end funds which are geared would suffer greater losses. As such, closed-end funds may be regarded as higher risk investment vehicles than unit trusts.
The Guidelines,
ScopeThese guidelines cover all offerings of securities of closed-end funds, whether with or without a listing.
It is to be noted that Part XI Division 1 of the Companies Act 1965 has specific provisions in relation to "investment companies". Thus, closed-end funds will only be subject to those additional provisions if it falls within the definition of "investment companies" under Part XI Division 1 of the Companies Act 1965.
Minimum Criteria
The guidelines seek to establish the minimum criteria which closed-end funds must satisfy before being entitled to offer its securities. The purpose of some of the stipulated criteria is to ensure a minimum spread of shares, a certain level of liquidity and stability in the performance of the shares of the fund, and some measure of investor protection.
Amongst other things the closed-end fund must have:
- a minimum issued and paid up share capital of RM 100 million
- at least 25% of the issued and paid up capital must be in the hands of the public. Of that at least 10% or 15 million, whichever is greater, of that issued and paid up capital must be held by not less than 500 shareholders holding not more than 30,000 shares and not less than 1,000 shares each
- investment objectives and policies which remain unchanged for the first 3 years from the date the closed-end fund is listed
- provisions in its memorandum and articles of association which stipulate that:
* no shareholder of the closed-end fund shall hold more than 20% of the total issued and paid up shares of the closed-end fund
* the closed-end fund shall not conduct any other business other than that of a closed-end fund
* the closed-end fund shall not either on its own or in conjunction with any persons take legal or effective management control of its underlying investments
Investment limits
These guidelines also set out the investment limits for closed-end funds.
Investments by a closed-end fund in the securities of any other listed entity shall not exceed -
- 10% of the closed-end fund's net asset value, or
- 10% of the of the issued capital of the listed entity
whichever is lower.
A more liberal approach with respect to investment limits has been adopted compared to the unit trust guidelines. Closed-end funds are allowed to:
- invest 20% of its net asset value in securities listed on approved foreign stock exchanges,
- invest 10% of its net asset value in unlisted Malaysian companies, and
- have borrowings not exceeding 30% of its net asst value.
Investments in derivatives are also possible subject to the approval of the Securities Commission.
Fund Managers
The guidelines also seek to regulate persons who manage such closed-end funds.
All individuals responsible for managing the fund must have:
- authorisation to deal in securities pursuant to the Securities Industry Act 1983, and
- at least 3 years experience in investment management.
All such fund managers (companies) must have:
- a shareholders fund of not less than RM 2 million,
- authorisation to deal in securities pursuant to the Securities Industry Act 1983, and
- a minimum track record of not less than 3 years in the management of funds.
The Securities Commission is entitled to disapprove the appointment of such individuals or companies managing such funds in certain circumstances which are set out in the guidelines.
Custodians of the closed-end fund must be approved by the Securities Commission and meet certain criteria.
Reporting and Disclosure
Consistent with the Securities Commission's move towards a more disclosure-based regulatory framework, the guidelines also provide for additional disclosure requirements for closed-end funds, in view of the different nature of such companies. The guidelines also require additional reporting requirements by closed-end funds such as annual reports, quarterly reports and other reports to be circulated to shareholders.
Effective Date
These Guidelines is effective from 30 October 1995
