Benefits and Risks

What are the benefits and risks of investing in FHUT?

The Benefits of Investing in FHUT

As an investor, some of the benefits of investing in FHUT are:

Under the current income tax laws, dividends paid to resident and non-resident Unit holders are tax exempted. This however may be subject to change in the future. For further clarification, please seek professional advice from FRCS or tax agents.

FHUT will manage your funds for you once you put your money in the unit trust. The manager invests your funds, monitors and manages the portfolio of investments on a day-to-day basis and maintains records. This saves your considerable time and effort.

FHUT units are affordable for most investors. Furthermore, you will need only 50 units (Employee Deduction Scheme – 10 units) to start your investment. For any further investments (top-up), FHUT allows you to purchase a minimum of 5 units.

FHL FML is made up of a team of professionals that manage your investments for you. The Fund Manager has a greater access to market, research and investment information which enables the team to provide their expertise and in-depth knowledge in fund management.

FHUT funds are invested in a diverse range of asset classes. This diversification reduces the risk that your investment will be adversely affected if one asset class encounters unfavorable returns. It means that you can usually achieve more consistent returns and reduce your risk.

FHUT pools Unit holders’ funds and therefore FHL FML is able to invest in a broader range of investments, including those in overseas markets. Many individual investors cannot afford to invest in such a broad range of investments. Imagine trying to invest in property (which may cost thousands of dollars), shares and bonds, both in Fiji and overseas, at the same time. In other words, for many small investors, FHUT provides more opportunities to diversify their investments.

FHUT, FHL FML and FTL must comply with the Companies Act 2015 and other regulations imposed by the RBF which seeks to ensure that the unit trust is managed prudently and fairly and that the interests of Unit holders are protected.

Unit holders can easily withdraw their funds by selling their units back to FHUT. The Manager has to buy-back your units on the prevailing market value therefore you don’t need to look for a buyer.

FHL FML has a team of driven and dedicated professionals, all working towards enriching our Unit holders by providing the most affordable high-quality investment product that provides competitive income and growth returns to help them achieve their financial goals.

Enterprise Risk Management at FHUT

Understanding Risks

Like any other investment, there are risks associated with investing in a unit trust. To assess whether a unit trust is suitable for your investment objectives and your investment timeline, you need to understand these risks and how they may impact on your investment return.

Enterprise Risk Management at FHUT includes the culture, capabilities, and practices, integrated with strategy-setting and performance, that FHUT rely on to manage risk in creating, preserving and realizing value. To maximize Unit holders’ value, management sets strategy and objectives to strike an optimal balance between growth and return goals and related risks, efficiently and effectively deploys resources in pursuit of FHUT’s objectives.

Risk Management

The Manager uses enterprise risk management tools and techniques for effective assessment of risk, applied in strategy setting and across FHUT. The Manager has implemented an effective risk management policy which is designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, reducing the possibility of failure.

FHUT’s Risk Management Process

The process of risk assessment begins by conducting an overall risk assessment of strategic plans, including an understanding of how they drive value and the key assumptions those plans are based on. This assessment includes scenario analysis of various iterations of changing assumptions surrounding drivers of the strategy. FHUT’s risk management process involves:

  • methodically identifying the critical risk scenarios surrounding business activities;
  • assessing the severity and likelihood of the events and scenarios that might occur, especially those outside management’s control, such as systemic risks;
  • responding to these events conducting risk analysis using expected monetary value/loss;
  • Putting systems in place to deal with the consequences of risks facing a firm and accordingly prioritize them for ultimate treatment; and
  • Management has established a process for continuous monitoring of the risk profile using key risk indicators.

Benefits of Implementing Enterprise Risk Management tools:

  • Reducing vulnerability to adverse events and minimizing operational surprises and losses;
  • Identifying and managing cross-enterprise risks and reducing exposures;
  • Enabling a focus on the risks that matter most through integrated management reporting;
  • Improves decision-making, planning and prioritization; and
  • Maximizes value for FHUT’s stakeholders.

The Types of Enterprise Risk FHUT faces:

The four quadrants of risks are:

  1. Strategic Risk arises from trends in the economy and society, including changes in the economic, political, and competitive environment, as well as from demographic shifts.
  2. Financial Risk arise from the effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk.
  3. Operational Risk falls outside the hazard risk category and arise from people or a failure in processes, systems, or control, including those involving information technology.
  4. Hazard Risk arise from property, liability, or personnel loss exposures and are generally the subject of insurance.

Reputational Risk

Reputational risk is the risk that some negative circumstance could negatively impact FHUT’s brand’s reputation and image in the marketplace. Damage to company’s reputation can result in decreased revenues, failure to meet key business objectives, loss of market shares and reduced investor value. A company’s reputation affects its ability to do business in the marketplace, appeal to new customers, and drive revenue-activities that are essential for funds success and survival. FHUT’s reputation and brand equity are intangible assets with a real value. It is part of FHUT’s marketability and should be preserved to ensure its long-term viability. There are many situations or circumstances that could negatively impact FHUT’s reputation, such as misleading investors, poor working conditions, poor product and services, unattended customer complaints, corruption, poor data security, privacy and poor regulatory compliance.

Mitigation Strategy

FHUT manages the risk of reputation damage by implementing internal controls and systems to support regulatory compliance, adequately secure data, detect and prevent corruption, control product quality, maintain safe and healthy working conditions, and deliver timely and accurate information to investors and the public.

Regulatory, Compliance and Legal Risk

Like any managed fund, investments made through fund are exposed to the risk of future changes to tax or other legislation that could affect the operation of the fund or the returns available. Compliance risk is FHUT’s potential exposure to legal penalties, financial forfeiture and material loss, resulting from its failure to act accordance with industry laws and regulations, internal policies or prescribed best practices. New and emerging regulations can have a wide-ranging impact on fund’s strategic direction, business model and compliance system.

Mitigation Strategy

To mitigate regulatory risk in an efficient manner, FHUT has adopted an integrated approach to compliance management. Management monitors changes to regulations for compliance and implementation of market best practices. FHUT has a robust compliance program which includes obligatory rule mapping, creating and maintaining a repository of regulatory obligations and mapping them to policies, risk, controls and processes. Management conducts regular compliance control assessments by testing and continuously monitoring of compliance controls to ensure its effectiveness and alignment with evolving regulations, policies, and standards. FHUT manages various regulatory engagement activities, including onsite examination, meetings, requests for information, and engagement-related documentations. These processes, along with the technology support and risk-based approach, enable FHUT to respond in an agile manner to the fast-changing regulatory landscape.

Economic Risk

This refers the broader economic landscape and its potential to affect the success of FHUT’s strategic plan. Every country has economic risk factors, and even the most resilient economy can fall into a recession or have its growth derailed by them. The economic risk factors are unemployment or underemployment, cyber-attacks, foreign exchange risk, failure to national governance and fiscal crises.

Mitigation Strategy

Mitigating economic risk is done by investing in assets such as international mutual funds. This can increase the amount of diversification simply by investing in a wider range of international securities. FHUT keeps pace with external events that can affect the risk profile.

Political and/ or Environmental Risk

Political risk is the risk FHUT’s investment returns could suffer as a result of political changes or instability in our country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers or military control. The investee companies may operate in countries where the ownership rights may be uncertain and development of the resources themselves may be subject to disruption due to factors including civil disturbances, industrial action, interruption of power supplies, as well as adverse climatic conditions.

Mitigation Strategy

Due diligence, ongoing research and political risk analysis is the most important foundational elements of any emerging market business strategy. The Fund considers diversifying in overseas investments so that all the risk isn’t concentrated in just one or two 16 emerging markets. FHUT monitors political risk anticipating leadership changes, influence policy, and participate in social change as well as monitor the impact of regulatory, social, and economical change. Systematic political risk management protects investments indicating by evaluating political risk for new investments.

Competitive Risk

Competitive risk is the risk associated with the fact that there are often competing companies in the market, each of which seeks to obtain the highest position and consumer ratings on it to gain maximum benefits for themselves.

Mitigation Strategy

With increasing competition, conditions today are such that every company faces some level of competitive risk one that can prove crucial in deciding the fortune of a business. Managing this risk is more about being prepared to tackle the resulting situations. It is also about being proactive enough to convert a risk into your fortunate break. FHUT proactively manages the competitive risk by identifying the competitors, develops new technology, focus on customer and monitor market dynamics.

Market risk

Market risk is also called the systematic risk, inherent in all types of investments that results from the erratic nature of the market and of the global economy in general. Market risk is simply the possibility the market or economy will decline, causing individual investments to lose value regardless of the performance or profitability of the issuing entity. For example, during COVID-19 pandemic, nearly every stock lost value despite the fact most companies had not done anything wrong or altered their operations in any way. The result could not have been predicted or prevented by any one company. This is the risk that the value of the FHUT portfolio will be experiencing losses due to factors from the overall performance of the financial markets affected by recessions, political turmoil, changes in interest rates, natural disasters and terrorist attacks. The main type of market risk is equity risk, interest rate risk and currency risk.

  • Equity risk – applies to an investment in shares. The market price of shares varies all the time depending on demand and supply of stocks. Equity risk is the risk of loss because of a drop in the market price of shares.
  • Interest rate risk – applies to debt investment such as term deposits and bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of term deposits and bonds will drop.
  • Currency risk – applies when you own foreign investments. It is risk of losing money because of a movement in the exchange rate.

Mitigation Strategy

FHUT focuses on Investment strategies that helps manage market risk by reevaluating portfolio diversification and asset allocation, lowering portfolio volatility, rebalancing, investing consistently, analyze stress test of the portfolio and establishing a maximum loss plan. Asset allocation is done by including different classes in FHUT’s portfolio, it increases the probability that some of the investments will provide satisfactory returns even if others are flat or losing value. Diversification method takes place when you divide the money allocated to a particular asset class, such as stocks, among various categories of investments that belong to that asset class. To lower the volatility of the portfolio is to keep some percentage allocated to cash and cash equivalents. To rebalance the portfolio will lower the risk of severe loss by keeping the portfolio well-diversified. Rebalancing helps get things back to the mix of investment based on personal risk tolerance. Management conducts maximum loss plan method to cautiously manage investment portfolio asset allocation. A well maximum loss plan keeps Manager from making bad decisions based on the anxiety about movement in the market.

Liquidity risk

Liquidity risk exists when investments are difficult to liquidate in a short period of time. A Fund’s investment in illiquid securities may reduce the returns of the Fund because it may not be able to sell the illiquid securities at an advantageous time or price. Investments in local and foreign securities, derivatives or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk. Illiquid securities may be highly volatile and difficult to value. This is the risk that FHUT will not be able to pay Unit holders’ redemption requests on a timely manner. FHUT manages liquidity risk to ensure to remain solvent.

Mitigation Strategy

FHUT maintains a buffer fund in liquid assets at all times to meet expected and not expected redemptions. AT FHUT liquidity risk is mitigated by careful cash flow management including optimizing working capital and by maintaining liquidity buffer. These allow FHUT to meet its future requirements or contingencies.

Under the Scheme Deed, the Manager, with the concurrence of the Trustee, may suspend the redemption of units for such time as may be necessary to realize sufficient liquid funds to meet any unusual redemption requests. FHUT has implemented redemption payment policy that states the timeline for processing payments given the maximum amount of each redemption.

Credit risk

Credit risk arises when a corporate or individual borrower fails to meet their debt obligations. It is the probability that FHUT will not receive the principal and interest payments of a required to service the debt extended to a borrower. The interest charged on a loan serves as the lender’s reward for accepting to bear credit risk. A corporate borrower with a steady income and a good credit history can get credit at a lower interest rate than what high-risk borrowers would be charged.

Mitigation Strategy

FHL FML conducts thorough due diligence for issue of any corporate or individual loan as per Investment policy statement. FHUT’s loans should not exceed 30% of the total measured against each asset class. The loan portfolio provides one of the highest returns which consist interest income. There are certain criteria under FHUT Investment policy statement to assess and provide loan to institutions. Some of the basic criteria are to check the credit score and history, income derivatives, collateral/securities and background of the industry. The Manager has implemented loan checklist for assessing and approving the loans.

Process Risk

Process risk is a loss in revenue as a result of ineffective and /or inefficient processes. Ineffective processes hamper the achievement of the organization’s objectives, whereas the processes that are inefficient, may be successful in achieving objectives, yet fail to consider high costs incurred.

Mitigation Strategy

To mitigate process risk of FHUT, the Manager does reconciliation of transactions and accounts on a timely basis. The Manager ensures to check compliance with management controls embedded in business crucial processes and keeps risk indicator dashboard for business key processes. The Fund’s establishment of internal control policy measurement framework is used to improve the management of process risk. The function of the internal control policy framework is to identify and control process risk. These measures include, and are not limited to, adding processing controls on all business transactions, and increasing training and development to improve quality control.

Systems Risk

Systems risk is that the firm’s information systems are insufficiently protected against certain kinds of damage or loss. This encompasses inter-branch connectivity, management information systems, information technology systems, power backup systems, cybersecurity and other technical systems.

Mitigation Strategy

The Manager mitigates systems risk implementing risk management tools such as daily data backups, quarterly checking authorization matrices and mapping of systems risk associated with integrated registry system. The Manager conducts systems audit annually. FHUT branches are connected online and in real time for all business operations. The Manager has generator for power supply for any uninterruptible power supply. The Manager has implemented the Business Continuity Plan including backup testing of data, evacuation plan, non-tropical diseases (e.g., COVID-19).

People risk

People risk is the risk of financial losses and negative social performance related to inadequacies in human capital and the management of human resources. This encompasses the inability to attract, manage, motivate, develop, and retain competent resources and often results in human errors, frauds, or other unethical behavior, both internal and external to the institution.

Mitigation Strategy

Fund has developed an operation manual to deal with all operational processes in line with necessary regulations. The Manager has developed a three-year strategic plan and annual KPIs to ensure performance of the Trust. The Manager has dual controls of relevant processes documented, job description for all staff, conducts periodic training of staff on relevant policies, procedures and risk awareness training for all new staff. The fund follows through structured communication lines for any communication.

Anti- Money Laundering Risk

Anti-Money Laundering (AML) is the process of disguising money obtained from criminal, unlawful or illicit activities, by making the money appear clean and from a legitimate source. Although money laundering is a diverse and often complex process, it generally involves three stages: placement, layering, and integration. A money laundering risk assessment is a process that analyses FHUT’s risk of exposure to financial crime. The relevant risk associated with AML is negative publicity, damage to corporate reputation and legal and regulatory risk.

Mitigation Strategy

The Manager has implemented Anti Money Laundering policy aligned to the Financial Transaction Reporting (FTR) Act and the Fiji Financial Intelligence Unit (FIU) Guidelines. To mitigate the risk of AML, FHUT conducts screen test while customers boarding. Conducting due diligence process of identification and verification of customer to understand the type of customer, source of funds and customer occupation. The due diligence process of customer onboarding includes the identification of suspicious transaction with reasonable grounds to suspect that a transaction related to money laundering; or other serious offence, e.g., drug trafficking, tax evasion, fraud, cybercrime, corruption, bribery, robbery, theft, human trafficking, piracy and copyright offences counterfeiting. Once a transaction meets the indicators of suspicious transaction reporting (STR), the Manager will report the transaction details to the FIU.

Hazard risk is external events risk of financial losses related to the occurrence of external events typically outside of funds control. This encompasses both natural disasters such as hurricanes, flooding, earthquakes, and fires, as well as man-made events such as civil disruptions, war, robberies, arson and terrorist attacks.

Mitigation Strategy

When evaluating the risks associated with specific hazards, the risk management techniques include elimination (physically remove the hazard), substitution (replace the hazard), engineering controls (isolate people from hazard), administrative controls (change the way people work), and personal protective equipment (protect the workers with PPE). FHUT conducts mapping of external event risk and maintains security measures at each branch including guards, cameras and safes. The Manager maintains business continuity plan strategy preparing FHUT for any unexpected or unwanted events.