Essentially, the policy on distribution of returns advocates that the "total returns" approach, which evaluates the fund's performance based on its capital (price) portion and income (distribution) portion, is a better indicator of a fund's performance. This is to counter the misperception held by most unit holders and potential investors that a high distribution payment or popularly termed as dividend signifies a positive performance for a particular unit trust scheme. However, such perception does not take into consideration the inverse relationship between distributions and the fund's net asset value (NAV). When distributions are made out of the fund's income, the NAV for the fund would decrease by a similar amount, or even more, after factoring distribution-related expenses (i.e postage, printing of cheques, etc).
Practice Note 15, which forms part of the Guidelines on Unit Trust Funds, therefore, is intended to:
- Provide a "Best Practice policy framework" in relation to the determination of a distribution policy for unit trust funds; and
- Ensure sufficient and adequate disclosure in respect of the performance results of unit trust funds.
The "Best Practice policy framework" enunciated in the Practice Note serves as a guide for management companies to determine the amount of distributions to be paid by the unit trust scheme(s), under its management. Practice Note 15 prescribes the following as best practices:
- Distributions made out of the fund should be sourced from its realised gains/income;
- Any distributions of a fund should be tied to and reflect the objectives of the fund;
- The level of distribution made from the fund should be in accordance with the fund's total returns, income and cash flow. In addition to this, the stability and sustainability of distribution should also be considered; and
- There should not be any selective realisation of investments solely to realise gains for distribution.
As a move towards greater transparency, particularly concerning the performance results of unit trust funds, the Practice Note requires
additional disclosure requirements to be made in the following documents:
- Prospectus of the unit trust fund; and
- Financial Statements of the unit trust fund.
The additional disclosures would encompass explanations on the mechanics pertaining to distribution and sources of distribution. Apart from enhancing transparency, this requirement is aimed at creating awareness among unit holders and potential investors on the mechanics behind distribution, with emphasis placed on the total returns of the fund.
Financial statements of unit trust funds for the period/year ending on or after January 2001 should comply with the additional disclosures required by the Practice Note.
The enforcement of Practice Note 15 also requires that the term "distribution", instead of "dividend" be used for all distributions made by unit trust funds effective 1 January 2001. The term "dividend" will only be used if it refers specifically to distribution of dividend income received by the scheme.
The enforcement of Practice Note 15 also places additional responsibility on the trustees, as they will be required to verify that distributions are reflective of the fund's objectives.
The release of Practice Note 15, which provides for the establishment of a consistent distribution pattern in the unit trust industry and the additional disclosure requirements pertaining to distributions, would serve to create awareness among unit holders in understanding returns on their investments in unit trust schemes.
