NOBODY like to lose money. Ask most investors in unit trusts last year and they will tell you that their portfolios took a hit.

It was understandable why that happened. Markets, especially in Asia, were down last year and the many funds that have invested in such markets mirrored the performance of those indices.

Likewise, it was the same for funds that invest in stocks on Bursa Malaysia. It would have been mostly through the stroke of luck or an absolutely brilliant unit trust manager that any fund with a heavy bias on investing in Malaysian equities and securities evaded posting a loss last year.

With that knowledge, many members too approached the announcement of the dividend by the Employees Provident Fund (EPF) with a little trepidation. When the EPF announced it was paying a dividend of 6.15%, many felt it was great. Not so against what they received last year but with the backdrop of a slumping stock market that was like a minor miracle that a major fund managed to not only outperform the smaller and private unit trusts out in the market but had a real rate of return that many wished they could receive.

Now it is going to be the turn of Permodalan Nasional Bhd (PNB). The second-largest fund in Malaysia after the EPF is set to announce it dividend rate for the various funds it manages. The reality is that it is not going to be better than last year but the expectation is that it should.

Maybe that is down to past practices. In the early decades of PNB, it managed to deliver superior returns because of the nature of its investments. Preferential allocations during the hot IPO days and ballooning values of their investment made it easy to deliver high returns.Those IPO days are long over and any large fund will attest that it is hard to deliver a significant return if their exposure is solely down to the domestic market. Plus, a larger a fund gets, the harder it is to make the kind of money needed to pay increasing returns.

In a year where the FBM KLCI dropped by 5.9%, PNB is not expected to generate a much better return than before. PNB invests nearly 97% of its assets in the local market with about 71% in the stock market. That heavy exposure to shares in Malaysia and the lack of investments overseas will also be a drag on what it can deliver.

Its main source of revenue has come from dividends of companies it owns and from the trading of shares. With Bursa Malaysia being a beta market, trading opportunities are going to be limited but so will be the losses.

The buttress it has is from the dividends it gets from the likes of Malayan Banking Bhd and the Sime Darby Group can only provide a decent foundation in terms of generating the billions of ringgit each year it has to pay its unit holders. For 2017, it paid RM14.4bil in cash and bonus distribution to unitholders. That amount is expected to grow as the size of the fund towards the end of last year was RM295bil compared with RM279bil at the end of 2017.

Corporate profits in a lot of companies on Bursa Malaysia have been trending downwards and that is no help to a fund like PNB.

PNB’s performance will also be juxtaposed against that by the EPF where the out performance by PNB has been narrowing over the years. That is going to be evident when only 3.1% of a portfolio is invested overseas whereby the EPF invests about 27% of its assets overseas and that money made close to 38% of the money it generated for members.

But it is not going to lose money like other private unit trust companies and it also knows there is pressure to deliver returns that are higher than the cost of a loan taken to buy units in its funds. That is because a number of people have taken bank loans to buy the units and as long as the dividends they receive can pay off those loans, then the members are in the clear.

The fund has managed to buffer periods of negative returns with the reserves it has accumulated over the years but there is a limit as to how much that can go around covering any shortfall.

What unit holders also have to recognise is that their investments in PNB funds are for the long-term. Given its overall performance over the years, it has performed better than nearly all unit trust companies but there will be eventual changes in how it will derive its income to pay its unitholders.

PNB is looking to change its asset allocation strategy to focus on more fixed income that will provide a larger base to unitholders. That adjustment will take time and eventually craft a more balanced and stable fund that will look towards delivering returns that will still outperform many of the private funds out there.