Asian Index & Quantitative Investment Insights Forum 2019
17 July 2019  |   By : Encik Kamarudin Hashim, Executive Director, Securities Commission Malaysia
Address by
Encik Kamarudin Hashim
Executive Director, Securities Commission Malaysia
Asian Index & Quantitative Investment Insights Forum 2019
Wednesday, 17 July 2019
Four Seasons Hotel, Kuala Lumpur

Distinguished speakers,
Ladies and gentlemen,
Assalamualaikum and a very good morning.

Introduction

1.

I am delighted to be here at the Asian Index and Quantitative Investment Insights Forum 2019. I believe that this is the second time such a forum has been held in Kuala Lumpur and I would like to extend a warm welcome to all international participants to Malaysia.

2. I also understand that this forum has garnered keen interest from various stakeholders and is a useful platform to delve deeper into the investment insights of passive funds. Before I begin, I would like to thank Ms. Selvarany Rasiah for sharing those insightful remarks. To complement her points, allow me to share some of SC's perspectives on the ETF industry.
Growing interest in passively managed funds
3. Since the start of the decade, global ETFs have achieved an organic annualised growth rate of 19%, more than four times that of standard open-ended mutual funds1. The growing demand for low-cost, easily tradable, liquid and transparent investment products has led to ETFs being one of the fastest growing asset classes in the investment funds industry globally.
4. Its rise coincides with widespread acceptance of indexing as a philosophy and core strategy. ETFs offer a convenient way to adjust portfolio exposure on many fronts including geography, sectors and size. Whether as tactical vehicles, satellite holdings or as strategic and core holdings, ETFs are versatile and able to cater for not only retail investors but those looking for more complex investment and trading strategies.
5. In the U.S., passive funds which track indices continue to gain market share this year, accounting for 37.5 % of the mutual fund market, up from 35.5% a year ago. In Europe, the market share increased to 18.3% (from 16.6% in the same period), according to Morningstar2. Due to challenging macroeconomic factors including concerns relating to slower global growth, the US-China trade war along with disappointing performance amidst a booming stock market, active funds in US and Europe have seen investors pull-out more than USD30 billion so far in 2019.
6. Passive investing that has been the driving force behind net inflows in Europe and U.S., is however relatively lagging in the Asia Pacific region ex-Japan. While ETFs in Asia Pacific stand impressively at more than USD500 billion, it represents only 14% of the U.S. ETFs as of September last year3. That being said, global passive asset under management (AUM) is forecasted to reach USD5.1 trillion by 20254. Despite this positive outlook, a business as usual approach is unlikely to lead to an increase in the pace of growth of the industry for this region.
ETFs expanding footprint in the Asian landscape
7. In Asia, one of the successful examples of utilising passive strategy as an investment mandate is the Bank of Japan who is seen as a strong proponent and buyer of ETFs tracking Japanese indices5. Australia's pension funds have also increasingly expanded their passive investment strategies. In June 2011, just 6.9% of self-managed superannuation funds (SMSF) in Australia held ETFs representing around 0.6% of total SMSF assets. As at 31 March 2019, almost 8 years on, 22% of funds held ETFs representing 2.9% of SMSF assets6.
8. While these two countries have shown traction, the ETF journey in Asia Pacific has been rather uneven. Looking at product availability, most institutional investors in this region are not restricted to ETF listed in their local market and can pick from funds listed in the U.S. and Europe where the offerings are more expansive with adequate scale.
9. Further, investors in this region largely remained focused on choosing a manager with good track record to consistently deliver results that outperforms the benchmark. There is a growing view however that only a few active strategies can consistently outperform index-based investments due to increased market volatility. Putting the active-versus-passive debate aside, one of the biggest challenge to ETF growth lies in the lack of investor knowledge within an industry structure that does not promote ETF sales. The low cost nature of ETFs has its drawbacks as it does not incentivise distributors to sell these products compared with the more lucrative active funds.
10. Moving forward, a significant development that would alter the face of asset management across this region is the increasing power shift to investors. Millennials will be playing a larger role in the market over the next decade. As this new generation of investors enters the market, the industry will become more digitised and firms will face increasing pressure to lower fees to remain competitive. Regionally, this shift towards transparency surrounding fees and services, coupled with younger tech-savvy investors who are more sensitive to cost will lead to greater opportunities for asset managers to offer ETFs.
11. We have already seen the advent of Digital Investment Manager or DIM where cost of investing is reduced along with smaller ticket size. Thus far, the SC has approved two DIM operators which invest in ETFs as a low-cost solution to gain exposure to most asset classes. The offering of passive funds on these digital platforms paves the way for greater access by the younger generation who are more tech-savvy and appreciate alternative cost savings solutions.
Ladies and gentlemen,
SC's initiatives to spur growth
12. Recognizing the need to create a conducive ecosystem for ETF for future growth of the investment management industry, the SC led an industry ETF taskforce established to spur sustained development and competitiveness of the Malaysian ETF market, capitalising on the strong growth trend and potential of the global ETF industry7.
13. In formulating the recommendations following engagements held with various stakeholders, the entire ecosystem was assessed to enable greater opportunities and options for investors and issuers as well as promote more inclusive participation in the Malaysian capital market. Among the key aspirations stemming from this initiative is to anchor Malaysia's position as an Islamic hub with the offering of Islamic ETFs, grow market capitalization and trading activities as well as retain liquidity onshore and attract foreign inflows into Malaysia.
14. Allow me to elaborate on some of the strategic thrusts of the recommendations, which encompass facilitating issuances and investments, enabling product innovation and intensifying investor engagements. To attract more issuers and encourage the issuance of ETFs, the minimum capital requirement for ETF issuers was lowered from RM10 million to RM2 million. In terms of lowering cost of issuances, issuers are allowed to submit directly to the SC without the need to engage a principal adviser. Internally, the issuance process has been streamlined leading to a reduced time to market for listing of ETFs.
15. To stimulate demand and address the challenges faced in the distribution space, the SC is facilitating regulations to ensure that financial planners which operate a transparent remuneration model, provide specific advice and offer ETFs to clients via stockbroking companies.
16. In facilitating further growth in the ETF industry, the introduction of new types of ETFs such as futures-based leveraged and inverse ETFs, synthetic ETFs, physical commodity ETFs and smart beta ETFs have been permitted under the revised ETF guidelines. This will provide affordable entry points for retailers in traditionally difficult–to-access investments. In Malaysia, the leverage factor is capped at two times for leveraged ETF while the leverage factor for inverse ETF is capped at one. Such products with a very short investment holding period would be appealing to sophisticated trading-oriented investors.
17. Recognising the important role of market makers in providing liquidity, SC and Bursa Malaysia are providing rebates and waiving relevant fees applicable to ETF market makers, including a 100% clearing fee rebate by both SC and Bursa Malaysia8. In improving market liquidity, market makers must have adequate resources and efficient infrastructure for optimisation of operational activities. In this respect, the Capital Market Development Fund or CMDF defrays some of the system cost for ETF market makers by providing a monthly maintenance9 for each market maker for a period of 4 years.
18. To add further excitement on the market, the SC is facilitating Bursa Malaysia's proposal to accord greater flexibilities to market participants, particularly market makers, to undertake short selling activities which would lead to efficient trading of ETFs10. The expansion of Bursa rules to allow foreign market makers would enhance the ETF ecosystem by providing greater liquidity in the secondary market.
19. Another crucial aspect of the recommendation by the taskforce is to increase investor awareness and understanding of ETFs. The SC acknowledges Bursa Malaysia's continuous efforts in this area through its nationwide roadshows and investor education programmes, among others, to attract participation and ensure investors are knowledgeable and well-equipped to trade ETFs11. To enable retail investors access to reliable and actionable research content, funding has also been provided by CMDF for freely available research coverage on each ETF for informed decision making. Lastly, to promote ETF as an investment product, the Government has exempted stamp duty on ETFs, which is effective until December 2020 for all investors.
Ladies and gentlemen
Future developments
20. In Malaysia, innovation within the ETF space is on the rise with the issuance of specialized ETFs such as the first Islamic commodity ETF in Malaysia12 in 2017 as well as the first ETF denominated in US Dollar which tracked Shariah US index early last year13 . Both funds have seen encouraging growth with NAV of the funds at RM51.6 million and RM60.4 million respectively as at end June 2018. Most recently in January this year, a new China ETF was launched which made available subscription in HK Dollar (via the Primary Market) and tradeable in US Dollar and Malaysian Ringgit (via the Secondary Market). With encouraging trends like this, the Malaysian ETF market continues to chart a positive trajectory where over the last four years, with a CAGR of 18% (from 2014 to 2018) and a market capitalisation of RM2.1 billion as at June 2019 .
21. To remain at the forefront, the industry must continue to innovate and offer products to suit the specific need of investors. Such initiatives are important to attract new investors and allow greater diversity of ETF products. REIT-ETFs is one such product outlined by the Institute for Capital Market Research (ICMR) Malaysia in its latest research publication "The Evolving Business of Asset Management: Malaysia's Perspective". The ICMR report highlights that the combination of having both REITs and ETFs as one product enables investors to have exposures in both sectors and allow investors to engage in the property sector while enjoying the long-term stability of ETFs14.
22. Over the past few years, there has been an increased focus on smart beta or factor based strategies. Due to smart beta's ability to utilise both passive and active methods, smart beta is also highlighted by ICMR as an ideal product for diversification as it takes into account risk profiles and volatility, enabling investors to achieve a balance between risk and return. We are encouraged that some Malaysian asset managers have started venturing into smart beta territory. Such innovation will accelerate pace of development with the shift from cap-weighted indices towards factor-based including ethical or Shariah principles, environment, social and governance investing.
23. Given the emerging shifts that could leave the future looking completely different from the current environment, thematic investing strategies have also gained prominence globally especially with long term investors. This type of investing can offer a complementary approach to traditional relative investing . Thematic investing can also draw parallels with increased investor's interest in sustainability and responsible investing15, whereby ESG considerations are gaining influence in capital allocation decisions of institutional investors.
24. As Malaysia continues to establish itself as a regional leader for Sustainable and Responsible Investment (SRI), ETFs is well placed as the "vehicle of choice" and capture this growth trajectory within ESG investing. The beauty of the ETF wrapper is that it has democratised investing to the point that these investors can put their money behind ESG themes with ease. In 2018 (based on research firm ETFGI), ESG ETFs assets increased by 29.5%, representing USD7.6 billion in net new assets16 . On the domestic front, the pension manager for civil servants, Kumpulan Wang Persaraan (KWAP), has set aside RM800 million to be invested in ESG initiatives17. This shows that there is demand from institutional investors and having an ETF wrapper could further attract these investors to incorporate ETFs in their portfolios.
Importance of data analytics and talent development
25. As we reshape the ETF environment, asset managers and intermediaries must have strategies in place to deal with changes sweeping across the competitive landscape. As the local ETF landscape open its doors to new products, it is critical for issuers to obtain guidance from asset managers in countries with more mature ETF markets, such as Taiwan, Korea and Japan. We are encouraged with the recent partnerships forged to provide advisory services in Malaysia. Such partnerships will not only allow transfer of knowledge but will also assist players to put in place proper checks and balances when managing such funds.
26. We must be mindful that lack of technical understanding will impact product innovation. Technological adoption within asset management industry includes usage of data analytics to make data-driven decision on assets, risk and investment analysis. Further advances in the use of big data, digital technology and social media will help improve decision making processes and transform client relationships in terms of communication, sales and distribution17.
27. While technology continues to evolve within the asset management industry, it remains a people-centric environment as certain skills set certainly cannot be automated. The ability to provide diversified investments will still depend on the competence of the fund manager. Hence, internationalisation efforts such as cross-border partnerships must continue to build up the knowledge transfer component.
Ladies and gentlemen,
Conclusion
28. After two decades of growth, there is every reason to think that ETFs will continue to be a prominent part of the global investment landscape. And while the development of ETF products in our market continues to be a priority, we are cognisant that active investing equally has its benefits in a diversified portfolio. Both passive and active investing are complementary depending on changing market cycles and dynamics. At the end of the day, it is the ability of fund managers to meet the needs of investors given the best risk-return profile.
29. In the wider context, SC and Bursa Malaysia remain committed to support a facilitative and market friendly ecosystem and will continue to undertake initiatives to grow and support the capital market. We urge asset managers to put more effort in invigorating the market by increasing their customer base, enhancing efficiency and improving investor's experience, and we certainly welcome further engagements with all relevant stakeholders to seek ideas and feedback on measures to drive and support a vibrant capital market.
30. On this note, I wish all of you a fruitful forum today. Thank you very much.
1 Quintessence by BNP Paribas, Issue 1, 2019
2 Investors flee active funds at highest rate in 3 years, FT 7 July 2019 https://www.ft.com/content/f08e4c94-20a1-3748-a4f1-4efbb2d41d29
3 Twenty Years On, There Are Still Plenty of Gaps to Fill in the Asian ETF Menu, Morning star, https://my.morningstar.com/ap/news/ETF-Watch/173005/Twenty-Years-On%2C-There-Are-Still-Plenty-of-Gaps-to-Fill-in-the-Asian-ETF-Menu.aspx
4 Asset & Wealth Management 2025, the Asian Awakening, January 2019 PWC https://www.pwc.com/sg/en/publications/asset-management-2025-asia-pacific.html
5 The central bank first started buying ETFs in 2010 and has since increased its holdings to an estimated ¥28.7 trillion ($260.4 billion), comprising 73 percent of the nation’s ETF market as of the end of April 2019, according to Investment Trust Association figures, BOJ disclosures and data compiled by Bloomberg.
(source: https://www.japantimes.co.jp/news/2019/05/24/business/financial-markets/boj-plan-fix-etf-problem-branded-meaningless-gesture/#.XSQ7MOgzZPY) – article is dated 24 May 2019
6 https://www.superguide.com.au/smsfs/smsf-investment-popular-etfs
7 The taskforce comprise of Bursa Malaysia, fund managers (local and foreign), market makers and institutional investors
8 For a 3 year period – 1 Jan 2017 to 31 Dec 2019.
9 RM10,000 per month.

10 SC has approved-in-principal the following proposals by Bursa (pending rule submission):

  • to expand the PSS framework to include market makers of SW, SSO and SSF which must be registered with Bursa Malaysia Securities Bhd. Following market makers of ETF, market makers of SW, SSO and SSF should also be allowed to effectively hedge their positions by short selling the underlying shares without being subject to the At-Tick Rule. This is to allow market makers to hedge their positions effectively by executing their short sell orders at the best bid without the need to queue their orders.
  • to include foreign corporations in the Qualification Criteria of a market maker to widen the scope of potential market makers, subject to Bursa’s rules
11 100% funding of RM30,000 for each issuer/fund manager seeking to provide research coverage
12 the TradePlus Shariah Gold Tracker in Malaysia launched in 2017
13 the MyETF Dow Jones U.S. Titans 50 was launched in early 2018

14 up by 5% from RM 1.98 billion as at end 2018. From end 2017 (RM1.94 billion) to end 2018, annual growth of market cap for ETF market was only 2%
15 ICMR Report – The Evolving Business of Asset Management, Malaysia’s Perspective

16 https://www.bnymellon.com/emea/en/what-we-do/business-insights/the-rising-demand-of-esg-etfs.jsp and https://etfgi.com/news/press-releases/2019/01/etfgi-reports-environmental-social-and-governance-esg-etfs-and-etps
17 https://www.thestar.com.my/business/business-news/2018/07/17/kwap-allocated-rm800mil-to-invest-in-international-esg-initiatives/. Note as at date of article dated 17 July 2018, RM520 million has been managed by external fund managers for both local and international ESG investment.

18 ETFs: A roadmap to growth, PWC https://www.pwc.com/gx/en/industries/financial-services/asset management/publications/etfroadmap.html



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