YBhg Dato’ Zarinah Anwar
Chairman, Securities Commission
The Edge-Lipper Malaysia Fund Awards 2007
12 February 2007
Kuala Lumpur Convention Centre
Distinguished guests, ladies and gentlemen, good morning.
- The Edge-Lipper Malaysia Fund Awards is a significant event in the calendar of the unit trust industry. In so far as performance is concerned, as a regulator, we tend to be chiefly concerned with dealing with bad apples and black sheep thus leaving it to the industry to honour and to recognise the best and the brightest. I am therefore delighted to be at today’s event to acknowledge the best in class for the Malaysian unit trust industry.
- The investment management industry has grown at a rapid pace over the past decade. The Malaysian unit trust industry is today the largest domestic unit trust industry in ASEAN. With a NAV in excess of RM121 billion, the industry has achieved critical mass and represents a significant presence within the region. We also have one of the largest Islamic unit trust industries in the world growing at a phenomenal rate of 59% per annum. As at the end of last year, there were 416 approved funds of which almost a quarter were Islamic unit trust funds.
- Since the liberalization of foreign exchange administration rules in April 2005, the collective investment scheme (CIS) industry also saw the introduction of global funds. As a consequence, investors are presented with wider investment choices and the ability to diversify risks. To date 47 global funds have been launched with a value of RM8.461 billion, or 6.95% of the total NAV for the industry.
- These trends reflect that the Malaysian unit trust industry is winning an increasing share of the investor wallet and is now firmly established as the leading vehicle for mobilising the savings of Malaysians into the capital market. Against a backdrop of growing affluence, expansion of the labour force and favourable demographics in Malaysia, the SC believes that the industry has the potential to grow at an even faster pace. Through the injection of new growth catalysts and concerted SC-industry efforts, impediments to rapid growth can be removed. Based on the experience in other markets, it is evident that product expansion, efficient distribution channels and the broadening of participation can act as catalysts in accelerating industry growth.
- One of the major challenges ahead for the industry therefore is to manage the transition from practices that focus on margin, towards practices that drive growth based on scale and efficiency. It is therefore critical that inefficiencies in terms of distribution bottlenecks are overcome and that these efficiency gains are passed on to investors in the form of lower transaction costs. In this regard, the SC is looking at its own rules and regulations that would allow further expansion of unit trust distribution channels such as online “fund supermarkets” and specialised discount distributors that would offer unit trusts products at very low initial cost of investment.
- It is also necessary that the range of products offered by the unit trust industry continues to expand at a rapid pace. A vast array of products is not only critical for industry growth but also in deepening liquidity in the various market segments and to strengthen the position of the capital market as a funding platform for economic growth.
- In this regard, investors must always be provided a choice to pay for higher levels of advice or to opt for low cost no frills products. Lower distribution cost have a substantial effect on the long term rate of return to retail investors who desire products which offer them superior returns, notwithstanding the vagaries of market cycles.
- In this context, skills and expertise is a key determinant. The growing appetite for overseas investments imposes additional need for the industry to grow the appropriate level of expertise and develop the quality of support for example in research and product creation. The industry has achieved sufficient scale and it must ensure that it invests in building human capital – to attract, develop and retain the best talents in Malaysia, even as it becomes increasingly international, thus retaining the value added activities within the country. The accumulation of talent is also a critical aspect of supporting Malaysia’s aspiration to be the hub for Islamic wealth management – as outlined in the MIFC initiative.
- The SC is committed to ensuring the necessary support to promote faster industry growth. We will provide the necessary facilitation to innovative and responsible members of the industry. As capital markets become increasingly complex, we have to find a practical balance for regulation to be sufficiently flexible to facilitate innovation and growth and yet provide effective investor protection. Hence, we have asked industry players to rise to the challenge of increasing their level of self regulation. This would then allow the SC to reduce the regulation imposed by us thus reducing friction costs and allowing industry players to bring products to the market faster in responding to market demands.
- In 2006, the SC undertook a comprehensive review of the unit trust industry. Following consultation with the industry, in October we announced several initiatives to accelerate the growth of the industry and to enhance investor protection including the adoption of a disclosure-based approach for product approval and the introduction of a single pricing regime.
- To put matters in perspective, the SC began the gradual shift to market-based regulation for the unit trust industry with a post-vetting approach for advertisements and promotional materials in 2001 and for prospectuses in 2005. I am pleased to announce that with effect from 1 March 2007, the SC will implement a disclosure-based regulation (DBR) regime for all applications to launch new unit trust funds. The implementation of DBR for unit trusts will reduce the time to approve a fund, register a trust deed and prospectus to within 21 calendar days. This is a vast reduction from the current merit-based review of applications and registration process which can take up to between 60 to 90 days. We believe that as a result, the industry will enjoy considerable efficiency and be better positioned to respond to changing trends in the market-place.
- I have to add the caveat that if a proposed fund has unique features or requires exemptions from existing guidelines, then we would require the Unit Trust Management Company concerned to undertake pre-consultation with the SC to enable us to review the new product features to ensure its suitability for retail investors. In this regard, the SC’s core regulatory philosophy is that a DBR regime entails an approach to investor protection based on transparency. With new products, due diligence is required to ensure that Unit Trust Management Companies (UTMCs) disclose all material information to allow investors to make informed investment decisions. As the SC no longer reviews the merits of an application, we will therefore focus on ensuring that the disclosures in prospectuses are relevant and accurate and allow investors to make a well-informed assessment on the suitability of the product to meet their investment objectives and risk profiles. In this regard directors, investment committee members as well as advisers of unit trust companies must realise that the onus is on them to ensure compliance with rules and regulation as well as adequate disclosure to investors.
- In addition, to provide greater flexibility to UTMCs for product launches, fund prospectuses may now be registered with the SC without being dated. Pursuant to this, registered prospectuses will have a shelf life of 6 months from the date registered with the SC. This would provide UTMCs the ability to respond quickly to changing market preferences. The faster approval process and increased flexibility to time product launches will create a more conducive environment for the unit trust industry to meet the demands of its customers in a timely manner; thereby providing greater opportunities for industry to grow at a faster pace.
- In October, we also announced our plan to change the regime for pricing of unit trusts from one that is based on dual-pricing to a single-pricing regime. One of the handicaps of the dual pricing method is the lack of transparency with respect to the sales charge paid by investors as the sales charges are incorporated into the selling price. The actual costs of buying a unit trust becomes even more confusing after the various discounts and rebates offered by distributors are taken into account.
- The single-pricing of units at the net asset value of the unit increases the transparency of the sales charge and allows investors to make direct comparison between various unit trust funds. In the single-pricing regime, the SC expects full disclosure of the different rates of sales charges between different distribution channels, in the prospectus or statement. The increased transparency assists investors in making informed decisions on which products to buy and from which distribution channel to source such products – given that the charge is likely to vary with the level of service provided.
To ensure greater clarity on the cost of unit trusts, discounts or rebates will no longer be allowed. Charges must be clearly disclosed in prospectuses and statements to investors. This would enable investors to have a clearer picture as to how much is actually invested into a fund and how much they are paying for service and sales charges. It also paves the way for management companies to offer a choice to investors by way of multi-classes of units with different rates of sales charges and fees.
- We had earlier announced that the implementation of the single-pricing regime was to take effect on 1st April 2007. Following feedback from the Federation of Malaysian Unit Trust Managers (FMUTM), the implementation of the single pricing regime would be deferred by three months to take effect from 1st July 2007. This would provide some of the industry members more time to upgrade their systems in preparation for the transition to a single-pricing regime.
Ladies and Gentlemen,
- I hope the awards to the top industry performers today will stimulate greater competition among unit trust companies to outperform each other in terms of providing higher returns to investors. As always competition will create a more dynamic environment and will contribute to higher industry and capital market growth. Allow me to congratulate the award winners in advance for doing a fine job. Thank you.