IFR Asia Malaysia report: Asset management

IFR Asia Malaysia report, May 2010: Asset management

Malaysia has one of the region’s most mature asset management industries. Boosted by the rebound in equity markets, assets under management grew by 40.9% in 2009 to RM315 billion, while the unit trust industry – the largest part of it – rose 47% in net asset value to RM191.7 billion.

While much of this was a function of market movements, the market didn’t account for all of the increase: RM24.8 billion of the increase was new inflows into unit trusts. “Industry penetration rates remained high at 19%, reflecting the increasing maturity of Malaysia’s unit trust industry,” says Tan Sri Zarinah Anwar, chairman of the Securities Commission. Penetration rates measure the net asset value of the unit trust industry against the market capitalization of the stock exchange.

The Securities Commission has long believed that Malaysia’s asset management industry will benefit from increased foreign participation and competition. For several years it has been licensing foreign fund managers, particularly on the Islamic side, and even seeding them with capital, in the hope that this will in turn attract international funds to be managed from Kuala Lumpur. Asset management has arguably been the most active part of the Malaysia International Islamic Financial Centre (MIFC), which seeks to make Malaysia a hub for international expertise – and international capital – in Islamic finance. Seven new Islamic fund management licences were issued in 2009, and a mutual recognition agreement signed with the Securities and Futures Commission of Hong Kong for the cross-border distribution of Islamic fund products. “The attractiveness of Malaysia as an Islamic fund management hub was reaffirmed by continuing strong international interest to establish operations in the country,” Zarinah says. So far 12 Islamic fund management licences have been issued in total.

Those who have built joint ventures with foreigners are by and large pleased with the results. “It has worked out very well,” says Datuk Noripah Kamso, chief executive of CIMB-Principal Islamic Asset Management, of the joint venture she oversees. “It came about as a result of the Principal Financial Group being happy with its joint venture in the conventional space with CIMB Group in southeast Asia,” she says. “That, combined with the MIFC’s comprehensive legal and regulatory framework for global Shariah aspirations, led the Principal Financial Group to believe that a 50% stake in an MIFC-initiated licensed entity headquartered in Kuala Lumpur would be a perfect base for their entire global Islamic asset management business.”

Other foreign groups have come to a similar conclusion. Nomura Asset Management was one of the first foreign fund managers to receive a licence in the wake of an announcement at the Invest Malaysia conference in 2005 that several would be licensed. It followed Aberdeen Asset Management and has since been followed by others including BNP Paribas, Franklin Templeton and Reliance. Nomura has decided to base its Islamic presence globally in Malaysia. “What’s very attractive about Malaysia is it is still in its early stages,” says Nor Rejina Abdul Rahim, managing director for Malaysia at Nomura Asset Management. “It’s always been very much localised and most investments have been plain vanilla, so foreign fund managers have been able to come in and give a bit of excitement to the market. The French players are very good in structured products; we are the only Japanese player in town and have always operated in a low interest rate environment and so have a track record of coming out with ways to get better yields.” Foreigners have generally not opted for a retail strategy, although it’s possible some may do so in future, probably through tie-ups with local houses.

While MIFC has clearly succeeded in bringing in big names and expertise, the jury is still out on whether it has attracted much capital alongside the foreign managers to be managed out of Malaysia. However, everyone accepts this is a long-term process in its early stages. Datin Maznah, CEO, Funds Management Division, AmInvestment Bank Group, says MIFC is a success, “from a very low base of course. It has not yet acquired the momentum that would be more noticeable, but many fund managers – both local and foreign who are set up in Malaysia – do manage funds in non-ringgit assets from Malaysia.” AmInvestment Bank is among them, she says. “When foreign clients give us mandates it’s to manage non-ringgit assets,” she says. “Some of it flows to domestic, but it’s not usually a Malaysian mandate – Asian, perhaps.”

Foreign managers, naturally, feel MIFC has achieved plenty already. “I think MIFC has done a good job in creating the brand Malaysia,” says Rejina at Nomura.

“Yes, it has been a success,” adds Noripah at CIMB Principal. “The MIFC team follows through quite closely with a conscious and calculated intent to ensure affirmative actions with all MIFC stakeholders.” The licensing of the 12 asset managers helps, she says; “these managers are included in the database of global consultants like Towers Watson and Mercer and will therefore be on the radar of global institutional investors such as pension houses, sovereign wealth funds and takafuls.”

While Malaysia seeks to bring money in to the country, its biggest institutional funds are increasingly looking overseas. Prime Minister Najib’s new economic model included a commitment to increase the Employee Provident Fund (EPF)’s exposure to overseas investment, from around 6% to 10%. This has also been welcomed by foreign managers hoping to help it do so.

There is also scope for the development of a private pension market, something Malaysia is looking at developing. “There is an opportunity for everyone in terms of the deepening of the pension fund market here,” says Rejina. “If you think about it, you’ve got almost 28 million people here and everyone is reliant on EPF. If you look at the contributors there are approximately 12 million EPF members. But there are at least four million people – traders, hawkers – who are not covered by the EPF.” There is scope for the development of pensions to cater for people who fall into that gap.

Additionally, there’s a sense that EPF is perhaps too big and that the development of other major institutions, or a private pension alternative, would help the market. “EPF has about US$108 billion. In terms of trading volume it accounts for roughly 50% of Bursa on a daily basis,” says Rejina. “The market needs to have more players and it cannot rely on EPF alone.” Noripah says the EPF “makes up approximately 50% of the market capitalisation” and sees an opportunity here. “Managers with global investment capabilities are able to help them mitigate their concentration risk of investing in Malaysia by diversifying their investible assets into global markets.”

Rejina adds: “Definitely that third pillar [private pensions] needs to be done and done now, because the average Malaysian is still not getting enough to retire on.” Foreign managers like this idea too: for Nomura pension funds are already among their largest clients in the world, particularly those in Japan.

In terms of product, CIMB and Public Mutual have developed new Chinese Islamic equity funds, but otherwise the range of product available in Malaysia – both conventional and Islamic – is already sophisticated and diverse. If anything, innovation has perhaps shifted to fund structure, with the traditionally high front-end fees on unit trusts under scrutiny as some managers attempt to replace them with conditional back-end fees, which are not charged if an investor stays in the fund for long enough.

A look at inflows shows that fads tend to come and go, too. According to data provided by AmInvestment Bank Group, global equity unit trusts enjoyed a RM5.36 billion inflow in the year to March 2008, an RM81 million outflow in the year to March 2009, and a RM1.02 billion inflow in the 11 months to February 2010. Domestic equity income funds saw RM749 million of outflows in 2007-8, then RM419 million and RM590 million in inflows in the two successive years. Mixed asset growth funds were flavour of the month in 2007-8 before logging outflows ever since. Very few patterns are constant: only domestic Islamic equity funds have been consistently popular throughout that period, logging close to RM2 billion or more of inflows in all three years.

“Each year has a theme,” says Maznah. “Consistency in domestic Islamic equities comes through, but there are huge swings in global funds year on year.” A similar picture exists in fixed income funds: each of general bonds, Islamic bonds, closed end bond funds, and guaranteed funds (both conventional and Islamic) have experienced both good and bad times over the last three years, with swings of hundreds of millions of ringgit from inflows to outflows in successive years. Here, money market products have been the constant, with more than RM4 billion of inflows in both 2007-8 and 2009-10. “In the global crisis, everybody rushed for capital protected, and in the last few years money market has been a refuge,” Maznah says. “This year bond funds are showing signs of life for the first time in two years. Every year the pattern changes.”