5TH Asia Oceania Regional Dinner
20 April 2000 |   By : Encik Ali Abdul Kadir, Chairman, Securities Commission
The Evolution of an Advanced Fund Management Industry in the Asean Region

Encik Ali Abdul Kadir,
Chairman, Securities Commission

On the occasion of
5TH Asia Oceania Regional Dinner

20 April 2000

Distinguished guests, ladies and gentlemen. I am very pleased to be given the opportunity to address you this evening. Firstly, let me commend the Federation of Malaysian Unit Trust Managers (FMUTM) for hosting this annual regional meet. I am certain that a congregation such as the one present tonight will serve as an excellent forum for exchanges of ideas and sharing of experiences on all matters relating to fund management. One can foresee no better gathering than this to facilitate valuable dialogues between the various countries, and allow for a regional perspective to be formulated on the development of an advanced fund management industry within the region. Needless to say, it is incumbent upon us, in this age of intense competition and globalisation, to build a formidable reputation for our capital markets - one which can easily be measured up to other world class capital markets.

The Securities Commission of Malaysia, unlike most other securities regulators, especially in developed markets, is mandated by law not merely to supervise and regulate the capital market, but also to oversee the development of the capital market. We are therefore both a watchdog and facilitator of market development, and have always given equal emphasis to both these statutory roles, although undeniably often 'Police Story' tend to attract greater media coverage.

Indeed as an emerging market, Malaysia cannot afford to lag behind in its efforts to develop its capital market. However, such task has been never been more challenging and more demanding than in the last 2 years following the economic crisis where our efforts at putting in place specific and immediate recovery plans had to be pursued in parallel with longer term efforts to provide for the strategic positioning of our capital market. Now that we have almost achieved complete economic recovery, we should concentrate our efforts to strengthen the capital market - Pivotal to this is the development of a fund management industry, as the benefit of a well-developed fund management industry pervades the entire capital market indeed the entire economy.

One of the key factors, which led to the fall of the Asean economies during the recent economic crisis, was over-dependence on the banking sector as intermediaries and funders of corporate growth. To avoid the recurrence of similar event, we must address this issue and in this instance, the fund management industry may provide some of the more effective solution by playing a larger role as a mobiliser of savings, via providing funds through the bond and equity markets to corporations. Other than exposing our over-dependence on the banking sector, the recent financial crisis also reinforces and strengthens our belief that a strong and vibrant fund management industry is critical as it could serve to cushion any impact on the capital market in the event of an abrupt large outflow of foreign funds, as experienced by most countries in this region.

At the very outset, a factor, which must be focused upon, is the cultivation of a shift in investors' perception towards the significance of a developed fund management industry in the capital market. In general, investors' faith in fund management, particularly in unit trusts, has waxed and waned according to the sentiments of the market, but nevertheless remained intact. The fact that this is so is well and good, but for the fund management industry to grow further, it cannot continue to be perceived by investors as an "alternative" investment to direct participation in the stock market. There is therefore a need to change such perception so that investors would not regard unit trusts as a substitute investment, but rather as a preferred one.

In adverse market conditions, one would have thought that investment interest would likely sway towards the fund management industry. However, this proves not to be the case. Statistics show that in 1998, whilst unit trusts had performed significantly better than the overall KLSE market performance, interest in the product seemed to have abated. The total NAV of funds during the bearish market in 1998 increased by approximately 15% from RM33.5 billion to RM38.7 billion, whereas the market capitalisation of KLSE fell by 6% from RM375.8 billion to RM353.4 billion. Despite the increase, units in circulation only increased by a mere 2%, compared to an increase of 25% in the bullish market run of 1995 to 1996 when unit trusts underperformed the KLSE by 7%.

The above 'anomaly' could perhaps be attributed to investor's limited funds, reduced liquidity, and lack of purchasing power during the bearish market. However, it could also be explained by investors' lack of exposure in terms of industry performance and industry advantage as compared to other products, and perhaps lack of marketing efforts. If one goes further to analyse the growth of the unit trust industry in terms of its standing to the KLSE market capitalisation, it can be concluded that the unit trust industry has been growing at a relatively slow pace for the past 5 years.

SC recognises that for a long time now, the profile of investors in unit trusts has mainly been retail-based. Short of expecting industry players themselves to actively promote the product to the mass investing public, more needs to be done to encourage greater participation in this investment product. One of the ways in which SC has facilitated this process has been the introduction of the Guidelines on Institutional Unit Trust Agents (IUTA Guidelines) in February this year. With the advent of this distribution network, banks and other eligible institutions can now participate to distribute third party funds to both their institutional and retail customers. This would provide for a wider distribution base for unit trust products, and allow for unit trust funds to be marketed as part and parcel of other financial products made available and offered by banks and financial institutions, to their customers. The introduction of the IUTA Guidelines is anticipated to serve as an impetus for the growth of the unit trust industry in Malaysia.

I would also like to add here that the fund management industry should start to consider using technological advancement and applications to improve their services to clients and to increase their operational efficiency. On our part, we have made a recommendation in our consultation paper on the Framework for the Implementation of Electronic Commerce in the Capital Market that was released last month, that transactions on units in unit trust funds via computer transmission be permitted, with the SC working with relevant technology vendors to develop standards and guidelines for the electronic sale of units. It is hoped that this positive development in our market could eventually lead to further increase in the penetration rate in the industry.

Apart from allowing greater latitude for unit trust distribution channels, the SC has also encouraged the move for a healthy spread of investment offerings to be made to investors. One of the contributing factors, which had been cited for the sometimes, unappealing feature of unit trusts as a product, has been the limited range of products made available in the market. The bulk of funds offered to the public since 1995 were equity-based funds with concentrated investments in the KLSE, whilst only a dispersed few were bond and money market funds. What is encouraging to note however, is that in the last 6 - 8 months, there seemed to have been a concerted effort amongst industry players to introduce more specialised funds into the market, the likes of a sectoral and index-tracking stock funds.

It is accepted that in developed markets such as US, there are a wide variety of mutual funds made available to investors, some of which are country regional stock funds, global stock funds, as well as the world income bond funds and high yield bond funds. Although the efforts made thus far in Malaysia have been more geared towards specialised stock funds, the fact that there is this progress, albeit slow, is promising. The SC views the propensity to promote differing range of products, which in turn leads to more choice for investors, as a positive outlook for the unit trust industry in Malaysia, as cognisant of the mutual funds experience in US, product diversity is surely one of the features towards the successful fostering of a well-developed capital market. Niche products in the market will serve to harvest investors' appreciation of a wide variety of investment products and consequently provide for an avenue towards effective savings. Such advancement will also assist in according unit trusts the recognition of being an investment product with a leading edge.

The effort to promote, introduce and offer differing products should not be confined to conventional products only, but should be extended to Islamic instruments as well. In relation to this, the fund management industry certainly has an important role to play in providing access for investors who wish to participate in financial activities that conform to Syariah principles. As of December 1999, the Islamic unit trust represents a mere 3.2% of the industry's total NAV. With over 500 counters that are on the SC's Syariah Advisory Council (SAC) approved list, I believe there is a lot of opportunity for innovation, growth and development in this area, not forgetting the potential Islamic investors from abroad, especially from Middle-East, who may be interested to invest in our markets.

Development of a fund management industry in the manner that is best perceived to serve the economy is a futile attempt if the objectives of the process is not understood by those whom it seeks to reach. In this respect, the SC has undertaken efforts, through the Securities Industry Development Centre, to educate both industry participants and investors alike, on differing aspects relating to investments. A two-pronged approach is adopted to achieve this objective, both at the investors' personal level and on an industry-wide basis. For the former, the SC has entered into the second phase of its Personal Investment Planning Roadshow, a forum on financial planning targeted towards the average layman investor. Specific workshops on the other hand, have also been conducted to upgrade knowledge and compliance standards amongst market participants. An international perspective is also an integral part of these workshops and seminars, amongst others, to provide market participants with a comprehensive view of the fund management industry of other jurisdictions.

The development of the fund management industry to a higher standing involves, not only a need to inculcate a strong investing culture amongst investors, but most importantly, a pressing demand that the professional managers of the funds invested in, will be vigilant stewards of the assets entrusted to them. This is where we, the regulators have time and again, preached on the importance of good corporate governance amongst market participants, irrespective of the industries they represent. It is encouraging to note that the call for initiatives on good governance practices has been accepted and recognised world-wide, by regulators, practitioners and market participants, alike. This is a promising move if we are to develop our financial and capital markets to be on par with other developed markets.

As you know, the SC has been at the forefront in trying to entice foreign fund management companies (FFMCs) to set up their operations in Malaysia within a certain framework that has been established to ensure that the nascent local fund management industry would not be adversely affected by their presence. While some quarters may have opposing views, the SC believes that such 'limited' liberalisation is necessary to prepare us for market globalisation and competition. The presence of such FFMCs may also bring some incidental benefits to the local industry such as in the area of corporate governance, and may allow for transfer of investment skills and expertise, through joint ventures with local companies or by employing locals to work in the FFMCs themselves.

The enhancement of investment skills is very important as it also entails the ability to properly risk manage the funds. The unit trust industry, for example, suffered a serious and major set back in 1997 when the industry's total NAV declined by 44.1%, from RM59.9 billion as at end of 1996 to RM33.5 billion as at end of 1997. During the same period of time, the market capitalisation of the KLSE had declined by 53.4%. Although some of us would use this as a measure of industry performance, I would not be tempted to follow. Despite the better 'performance', the fact of the matter is that the industry suffered substantial loss in their investment assets. The industry could have performed better had they been able to utilise to the fullest extent the various risk management instruments and strategies available to protect the value of their investment portfolios, which are normally useful especially in times of adverse market conditions and extreme price volatility.

Malaysia's proposed inclusion in the Morgan Stanley Capital Index (MSCI) pose as a good stepping stone for us to execute our aspirations. There are boundless opportunities for us to capitalise on, from an influx of foreign investment and an increase in market capitalisation due to an inflow of funds into the country. Arising from the conservative nature of funds' investments, which mainly comprise blue chip and index-linked stocks, the fund management industry seems poised to be a direct beneficiary of this much-anticipated development. Fund managers should thus take advantage of Malaysia's inclusion in the MSCI as a platform to remedy the drought of unit trust penetration in proportion to the KLSE market capitalisation. There can certainly be no more convincing means of investor participation in the economic prosperity and growth of the country.

Lets us take whatever means necessary to elevate our local fund management industries to a superior stature - It is high time that we emphasise this mission and stand by our convictions. As John C. Bogle once said, "Sometimes one has to dig down deep and have the courage of one's convictions - to press on, regardless of adversity or scorn. In the long run, when there is a gap between perception and reality, it is only a matter of time until reality carries the day". In conclusion, I'll leave you with Thomas Paine's famous words, Tyranny, like hell, is not easily conquered, yet the harder the conflict, the more glorious the triumph".

Thank you and have a pleasant evening ahead.
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