Encik Abdul Kadir Kassim, Chairman of the Federation of Investment Managers Malaysia
Distinguished guests,
Ladies and gentlemen
- Good morning and firstly let me express my sincere thanks to the Federation of Investment Managers (FIMM) for inviting the Securities Commission to deliver the keynote address at FIMM’s 2012 Unit Trust Consultants Annual Convention.
- This year’s convention theme is entitled “Growing Confidently With Change” which speaks to the saying “the only constant is change itself”. In this context, it is important to recognise the challenges arising from a rapidly changing financial landscape and the need for the industry to play a more assured role in providing reliable investment options for the average Malaysian.
- Reflecting on industry statistics, one would be amazed at the significant turn of events and rapid development that has occurred over the course of the last two decades. For this reason, I would like to review some of the unit trust industry’s key accomplishments over the preceding years, and outline some key priorities for the near future for us to “grow confidently with change”.
Overview of unit trust development in Malaysia
Ladies and Gentlemen,
- In a modern market economy, the role of the capital market is important in creating value for society. A well-functioning capital market is vital as an efficient infrastructure for issuers and investors to meet; to intermediate capital, provide liquidity, facilitate optimal allocation of capital and resources among a variety of users.
- Malaysia’s capital market has tripled in size over the last decade to its current size of RM2.4 trillion. The state of our markets today is profoundly different with many market segments leading the region. Our equity and bond markets are important fund raising platforms within Asia. Increased capital raising activities via these market segments have enabled the country to undertake many landmark projects and catalyse economic activities; resulting in Malaysia having one of the most comprehensive capital market infrastructure in the region.
- There is ample liquidity for our domestic capital market as the total size of investment pools in Malaysia is in excess of RM1 trillion. The private investment management industry constitutes 40% of these funds and has generated significant growth evident from the high double-digit growth of assets under management (AUM) from RM55.2 billion in 2000 to RM423.6 billion in 2011.
- The rapid growth of AUM can be attributed to a five-fold expansion in the unit trust industry during this same period. Since the establishment of the Securities Commission, unit trust funds have grown tremendously – from 43 funds in 1993 with a total net asset value or NAV of RM28.1 billion to 587 funds at the end of 2011 worth a total of RM249.5 billion. We have also seen comparable growth in unit holders’ accounts; increasing from 5.3 million in 1993 to 15.4 million in 2011. This clearly shows that unit trust funds have become part of the social fabric by which Malaysian families and individuals, manage their financial affairs. The penetration rate for unit trusts has also improved from 4.5% to 19.4%, reflecting the industry’s role as a driver to move the public’s savings into the capital market.
- All this would not have been possible without the introduction of some crucial measures which has stimulated the industry’s growth. Let us reflect on a few of these measures. The first was the introduction of the EPF member’s investment scheme in November 1996. This allowed EPF members to take out a percentage of their savings to invest into unit trusts. Secondly, the issuance of guidelines for registration of institutional agents for the marketing and distribution of unit trust by FMUTM in February 2000 assisted in widening the delivery channels, thereby increasing penetration and reach. Last but not least, in April 2005, UTMCs were allowed to invest 30% of their NAV abroad; thus allowing greater risk diversification and product innovation.
- Other regulatory enhancements have seen us streamlining our procedures to shorten the time for product approval, creating a single pricing regime that ensures full transparency and disclosure of up-front costs, and the broadening of technology usage to improve investor access to unit trust products.
- Indeed, this twin approach of undergirding growth with governance has been instrumental in developing a diversified and comprehensive capital market, with a vibrant unit trust industry. A balanced and dynamic regulatory structure coupled with a structured development agenda can guide and harness the potential within the market and industry. Making sure that all these measures work effectively requires strong collaboration between the industry’s trade association and the market regulator.
- In this regard, the FIMM has come a long way to be where it is today. In its early years, its predecessor, FMUTM, had the responsibility for the testing and registering of Unit Trust Consultants (UTCs), Institutional Unit Trust Advisers (IUTAs) and Corporate Unit Trust Advisers (CUTAs). It also played a major role in investor education and awareness programs through its promotional and advertising campaign.
- Last year, the SC recognised FIMM as a Self Regulatory Organisation (SRO) to undertake regulation of the unit trust industry. This complements the SC’s efforts in ensuring a more efficient and effective regulatory framework for the industry. As a SRO, the FIMM is entrusted to uphold the public interest objective of enhancing market integrity, market efficiency and investor protection whilst maintaining a prudent balance between this objective and the interests of its members.
Unit trust industry moving forward
Ladies and gentlemen,
- Into the next decade, the CMP2 envisages the unit trust NAV to increase to RM827.9 billion by 2020. This growth will largely be driven by high domestic savings, favourable demographics, expansion of the scope of intermediation as well as the deepening of market liquidity. Domestic demand for professional advice from fund managers, investment advisers, and financial planners is also expected to grow in tandem with rising affluence and sophistication.
- Recent regulatory efforts are directed towards increasing product diversity to overcome the current reliance on relatively static and narrow product silos and traditional business models. Looking ahead, the introduction of Private Retirement Schemes (PRS) in early July this year will see a more prominent role for unit trust agents and financial planners to drive growth as the range of products allowed for distribution is expanded.
- The launch of PRS has the potential to change the face of the retirement landscape in Malaysia by increasing and supplementing coverage across all sections of the labour market, including the self-employed. The aim is to ensure that all Malaysians have a wide range of options to secure their retirement nest egg.
- With a quarter of the funds in the initial rollout of approved PRS funds comprising of Islamic funds, the private pension industry is expected to increase the diversity of Shariah-compliant instruments available in our Islamic capital market. Given Malaysia’s leading role in Islamic finance as well as our aspirations to be the leading Islamic fund and wealth management hub, more efforts needs to be undertaken to not only expand the range of Islamic investment products but to also increase its reach to a wider group of investors and market participants.
- At 10% to 11% of the total unit trust NAV, there is a lot of room for growth of Shariah-compliant funds in the market. When measured in terms of number of funds, it also exhibits a similar pattern with only 165 Islamic funds launched as at July 2012 as opposed to the total industry figure of 589 funds. The industry must strive towards ensuring that their Islamic funds remain innovative and in line with the needs of both Muslim and non-Muslim investors.
- In terms of fund distribution, the industry will also need to prepare itself to capitalise on regional and product opportunities arising from the commitment among ASEAN member countries to create an integrated ASEAN capital market by 2015. This will set the stage for greater cross-border flows of capital and services within the region.
- On the part of the ASEAN regulators, we have earmarked the creation of an ASEAN Collective Investment Scheme (CIS) framework that will provide a unique avenue to facilitate cross-border investment within the region. This regional funds passporting vehicle will allow for a greater range of products – that are locally manufactured, managed and administered – to be sold to a wider audience. Our industry must be ready for the challenge. This means being able to stay innovative, build scale and remain competitive – traits which I am sure most of you have acquired after many years of robust domestic competition.
Growing and empowering the investor base
Ladies and gentlemen,
- Each one of the changes mentioned earlier will no doubt foster new challenges for the industry in this decade. As the nature of the unit trust industry evolves and adapts to changing market conditions and investor needs, the regulatory framework must also be continuously evaluated to ensure that investor safeguards are well-maintained. This approach has always been part of our regulatory playbook.
- In order to ensure the sustainability of the industry’s growth path, it is pertinent that emphasis must also be paid to empowering investors to complement the dynamic regulatory process we have in place. This combination of growth, regulation and empowerment will enable us to achieve success in addressing industry issues, misconceptions as well as ensure growing confidence in and the popularity of unit trusts.
- Today, products being offered to investors have moved beyond the basic and plain vanilla type investments. Proper consumer education is needed if new market segments such as the private pension industry, as well as the more complex and sophisticated wealth management and asset management products, are to take off. Therefore, it is crucial that the approach towards empowerment of the investor is two-fold to be truly effective.
- Firstly, the seller has to be clear on the products being sold to investors. It is incumbent on those distributing and selling unit trust funds to have greater awareness and understanding of the risks associated with investing in the funds. They must also possess the right knowledge to be able to guide their clients in managing these risks in accordance with their clients’ own personal circumstances. Only then will you be in a position to best serve your customer. Otherwise, the issues which have been the bugbear of industry such as counterproductive selling practices as well as the lack of product understanding will continue to be highlighted from time to time.
- Secondly, it is equally important for the investors themselves to stay informed on market movements in today’s environment, as well as understand the products offered to them in order to protect their interests. With growing consumerism as well as greater customer expectations, there is a need to reinforce financial literacy to help the individual better manage their personal finances in line with the country’s move to be a high-income economy. The right financial education will certainly go a long way in ensuring that we become a developed nation with financially savvy investors.
- In terms of disclosure requirements, the Securities Commission will continue to work with industry to ensure that investors are given clear and concise information about a particular fund. Unit trust fund disclosures need to serve the basic purpose of letting investors know right off the bat, what the fund’s objectives, strategies and fees are. Investors must always be provided clear, simple and meaningful disclosure at the time they are making an investment decision to help them make informed decisions.
Conclusion
Ladies and gentlemen,
- Given the important roles played by each and every one of us in the entire financial ecosystem, that is why we need you to partner with us to make sure the unit trust industry meets the highest possible standards for investors. Both FIMM and the industry can help the Securities Commission ensure the effectiveness of regulatory and developmental measures by providing feedback through dialogue sessions and events such as this.
- Since its inception, FIMM has been tasked to enhance the industry’s sales practices and distribution standards by formulating a robust sales practice regime with adequate supervision and monitoring. While FIMM is expected to demonstrate proactive monitoring of industry behaviour and to undertake fair and consistent disciplinary measures against any misconduct or non-compliance, it is also necessary for the Unit Trust Management Companies themselves to step up their oversight and monitoring of the conduct of their sales force to ensure proper and responsible selling practices are adopted.
- Ultimately, investors will depend on you for answers and this requires accountability, fairness and integrity in the conduct of business. Their investments are in your hands. You have a truly important responsibility, both to our market and its investors, and the SC has every confidence that the industry is up to the challenge. It is on this closing note that I therefore urge all of you to move ahead by “Growing Confidently With Change” whilst ensuring that unit trusts will continue to be the premier investment vehicle for Malaysians.
Thank you.
