YBhg Datin Zarinah Anwar
Deputy Chief Executive, Securities Commission
at the Seminar on
Fund Management: Best Practices for Investor Protection
8 October 2003
Securities Commission, Kuala Lumpur
Assalamualaikum warahmatullahi wabarakatuh
Distinguished speakers, ladies and gentlemen
A very good morning to all.
1. I have great pleasure today in welcoming you to this seminar on Fund Management: Best Practices for Investor Protection, which is a collaboration between the Securities Industry Development Centre (SIDC) and the Malaysian Association of Asset Managers (MAAM). The Securities Commission (SC) is certainly pleased to be involved in smart partnership with industry associations like MAAM to promote industry training, thus ensuring that capital market professionals and investors alike are kept abreast with the latest knowledge to enable them to assume their roles effectively. This is our first joint training effort with MAAM, and I would like to take this opportunity to record our appreciation to Encik Amin Rafie, Chairman of MAAM for the association’s contribution and effort in ensuring the programme got off to a good start by providing assistance and input to the programme content as well as assistance in sourcing appropriate speakers.
2. This seminar is particularly pertinent in that it focuses on one of the most crucial preconditions for the proper functioning of any market, large or small, and that is investor protection. Investor protection is always a key priority for the SC and is an area that we will continue to focus on in the process of building a business-friendly market environment.
Ladies and gentlemen,
Managing investors’ expectations
3. The domestic fund management industry has seen steady growth over the years with 78 licensed fund management companies, 37 unit trust management companies and total funds under management of RM71 billion as at 30 June 2003. The potential for growth is significant given the presence of large institutional funds and investors, and the growing need for professional fund management services.
4. As the investment management industry in Malaysia grows and matures, investors place greater demands and expectations on the performance of fund managers. Investors are now getting more sophisticated (although sometimes the line between sophistication and greed is a very fine one) and tend to look for investments that would generate the highest returns. Maximising returns is acceptable provided one understands that the higher the returns, the higher the risks, and promised returns which are too good to be true are probably not true and would most likely involve activities that are frowned upon by the law. Unfortunately whether for lack of better appreciation of risk return concepts, business cycles and the investment environment or simply sheer greed, some investors do place unrealistic demands on their investment panels and fund managers.
5. And when the fund managers either promise or bow to the pressure for high returns, the results can be very damaging indeed. We have seen one too many of cases where such pressure has resulted in fund managers committing breaches of laws and regulations and ignoring prescribed rules and prudent practices to the peril of their clients. This is clearly detrimental to the investors, the fund managers in question and indeed to the image and reputation of the fund management industry as a whole. The industry is built on the twin pillars of integrity and trust both of which can be easily undermined by the lack of professionalism, sound business practices and strong compliance.
Appointing and monitoring fund managers
6. The pressure to meet investor expectations has made it crucial for fund sponsors and institutions to ensure that the best fund managers are sought out and selected for their skills, ethics and professionalism. In recent months however, breaches of securities laws in the investment management industry have brought to the fore, concerns of lapses in regulatory compliance and corporate accountability in this industry. While few in number, the detrimental impact on the industry cannot be over-stated. The SC has, and will continue, to act swiftly to punish the perpetrators.
7. This leads me to the next crucial point. How should organizations go about selecting, appointing and monitoring their fund managers. The quick answers are of course, the appointed fund manager must be licensed and yes, they should be experienced and certainly they must show proven track record.
8. But the question should also be asked as to whether the organisation has clear internal guidelines and processes which should be govern the selection of the fund manager. Does the organization have the capability and resources to regularly monitor the fund manager’s performance and ensure they comply with the investment mandate? And are best practices of the industry being observed?
9. All those responsible for making investment decisions either for themselves, or more importantly, for their organisations, must consider these questions carefully in safeguarding their interests and the interests of their organisations. In particular, members of investment panels must conduct proper due diligence in ensuring that high professional standards are exercised by the fund managers they appoint.
10. Appropriate systems must be put in place to ensure proper authorisation of funds for investment. Investment panel members must play an active role right from the start, and this normally includes the initial selection and engagement of the fund manager. In this context, it is important to consider not just the track record of the fund manager concerned, but also the quality and consistency of investment decisions as well as the calibre and experience of the fund manager’s investment team. Apart from a strong and realistic appreciation of the risk return concept and their own risk profile and appetite, investment panels must practice a higher standard of openness and transparency in the authorisation process for funds being invested. When engaging fund managers, they should demand the highest standards of professionalism and compliance, inquire into the fund manager’s research strength and capability, understand its investment styles, determine its willingness to be measured against a customised benchmark and agree on the regularity of performance reports back to the panel.
11. On their part, fund management companies must ensure that they develop the resources and capabilities necessary to meet the growing demand for more and better services from increasingly sophisticated customers. They should understand and strengthen their competitive edge and must develop the highest level of professionalism, sound business practices and compliance standards. Continuous efforts should be put into improving such standards and practices which should go beyond regulatory requirements in order to promote and sustain investor’s confidence and to enhance their reputation and that of the industry.
Compliance guidelines for fund managers
12. The SC recognizes the need to develop minimum standards for compliance with prudential requirements for fund managers. As such, the SC is working with MAAM on a set of new compliance guidelines for the fund management industry in order to enhance the financial, compliance and professional standards within the industry.
12. In this regard, the SC is currently developing a Compliance Risk-Based Supervision (CRS) Framework to enable quantitative and qualitative assessment of risks and control measures by fund managers. It is intended that the qualitative aspects of risks will be measured using predetermined ratings which will enable them to be quantified in determining the overall risk position of fund managers who will then be able to assess their own risk profiles. This will pave the way for a risk-based audit by the Commission. In this respect, I am pleased to mention that seven fund management companies have volunteered to participate in our pilot project to test the applicability of this risk model. This is a major step for the industry because the CRS framework will make risk positions of market intermediaries transparent and measurable.
Ladies and gentlemen,
14. As always, the SC will take all possible steps to protect the interest of investors in our capital market. Wrongdoing will not be tolerated and offenders will be severely punished. However, efforts in promoting a healthy fund management industry cannot be pursued by the SC alone. The industry must strive to enhance competence and professionalism so as to sustain investor confidence in the market while investors and fund sponsors too must play their part by ensuring appropriate internal controls, and ensuring a higher level of due diligence, monitoring and reporting.
Promoting investor confidence
Ladies and gentlemen,
15. Investor confidence provides the foundation on which capital markets are built. The capital formation process depends on the confidence of the investor in the integrity and fairness of the capital market as well as the ethical way in which the market functions. Lapses in diligence, professional negligence and corporate mismanagement inevitably undermine such confidence leading to the departure of investors who will seek investment opportunities in jurisdictions where diligence and governance standards are strong and their investments are safe.
16. This seminar has come at an opportune time. The programme was developed with the intention of generating awareness among investors, particularly on the kind and level of skills needed when evaluating and selecting fund managers and monitoring their performance. The issues which will be discussed include:
- The regulator’s expectations on compliance;
- The selection and performance monitoring of fund managers;
- Industry best practices underpinning ethics, good corporate governance and duties to clients; and
- Investment risk and return concept underlying the importance of managing investors expectations.
17. In conclusion, I would like to take this opportunity to thank MAAM and SIDC for their efforts in collaborating and working together to develop this important programme. Also, I thank our distinguished speakers for their contribution and for sharing their experiences and expertise so that we can all learn and benefit from their skills and insights. I hope all participants will maximise this opportunity for learning.