09 November 2011

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

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.

The 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.

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