Keynote Address at The The Edge-Lipper Malaysia Fund Awards 2008
26 February 2008 |   By : YBhg Dato’ Zarinah Anwar, Chairman, Securities Commission Malaysia
Keynote Address

YBhg Dato' Zarinah Anwar, Chairman, Securities Commission

The The Edge-Lipper Malaysia Fund Awards 2008
26 February 2008
Hilton Hotel, Kuala Lumpur

Yang Berbahagia Dato’ Sri Che Khalib Mohamad Noh, President & Chief Executive Officer, Tenaga Nasional Berhad

Mr Ho Kay Tat, Managing Director & Editor in Chief, The Edge Communications

Mr Simon Soo Hu, Managing Director, Reuters Malaysia

Distinguished guests, ladies and gentlemen

Good morning.

1. First of all, I would like to thank the organisers for inviting me to deliver this keynote address. As you all know, the Edge-Lipper Malaysia Fund Awards is a significant event in the calendar of the unit trust industry; a testament to those who have pushed the boundaries of excellence and risen above the competition . It gives me great pleasure therefore to be here today to acknowledge the recipients of these Awards who represent the best in the Malaysian unit trust industry.

Strong Unit Trust Industry Growth

2. As the global economic growth story unfolds, the Malaysian investment management industry is poised to be a leading source of growth for the capital market. Robust regulatory and intermediation infrastructure, large growing pools of domestic and regional liquidity coupled with a broadening range of conventional and Islamic products serve as a strong platform to advance Malaysia’s position in the global arena as an international fund management centre.

3. Within the investment management industry, unit trust funds are by far the largest contributor to assets under management. Over the last 5 years, the Malaysian unit trust industry has grown at a phenomenal pace, and we continue to hold the largest market share in ASEAN (approximately 45%) in terms of mutual funds and unit trust assets under management.

  • In 2007, the number of funds in operation grew by 26% bringing the total number of domestically incorporated unit trust funds to 495 of which 128 are Islamic funds.
  • Backed by new investments from investors, as substantiated by the increase in number of accounts and net sales, and the stellar performance of Bursa Malaysia and other markets in the region, the NAV of unit trust funds grew by 39% to RM169.4 billion in 2007.
  • The performance of Islamic funds has also been encouraging and during the same period, the NAV of Islamic funds grew by 84% to RM16.86 billion.
  • With the liberalisation of investments abroad, and Unit Trust managers now permitted to invest up to 50% of their asset under management overseas, a significant number of funds have increased their exposure to foreign securities, either directly or through a master-feeder structure. In 2007, total investments abroad had increased by 79% to RM15.16 billion, representing nearly 10% of asset under management.

Promoting Product Innovation & Wider Investor Participation

4. In the light of these growth trend s, it is no surprise that the Malaysian unit trust industry has established itself as the leading vehicle for mobilising the savings of Malaysians into the capital market. Notwithstanding these trends though, I believe that the industry has the potential to grow even faster through the injection of new growth catalysts and the removal of impediments through concerted efforts by the SC and industry. Based on the experience of more developed markets, it is apparent that a robust regulatory framework, the availability of a wide range of products, acceptable cost of investments and efficient distribution channels are catalysts in accelerating industry growth.

5. In this regard, the SC had in March 2007, moved towards a disclosure-based regulatory approach (DBR) for product approval, enabling the market to enjoy significant improvements in the efficiency of the approval process, through faster approval time and more business-friendly and market-based rules. Furthermore the reliance placed on the adequacy and accuracy of disclosures provides greater transparency and added protection for investors.

6. The SC also undertook the massive task of reviewing the securities laws and regulations to remove regulatory bottlenecks and to ease the restrictions which prevented the development of effective competition. The Capital Market and Services Act effective September 2007 introduced a new category of licence which allows for restricted dealing in securities. This initiative which enables third party distributors to market and distribute unit trust products will facilitate the introduction of “fund supermarkets”1 and “Corporate Unit Trust Advisers (CUTA)”2 to widen distribution channels to provide greater access to products for investors. We expect these efforts to ameliorate distribution bottlenecks and efficiency gains to be passed on to investors in the form of lower transaction costs.

Ladies and gentlemen,

Areas for Improvement – Reduction in Cost of Investing

7. I mentioned earlier that acceptable cost of investments is a catalyst towards achieving industry growth. In this regard, the Malaysian unit trust industry still has a long way to go. Our sales charges for equity funds are amongst the highest in the region. It is important therefore that the industry look seriously into implementing a more competitive framework of charges that will provide a more attractive long-term rate of return to investors. While we recognise the need for a strong value proposition to incentivise the industry, this must be balanced by the needs of investors. Thus while it is possible that reducing sales charges may affect profitability in the short term, it is important for unit trust managers to move away from focusing on margins and work instead on building scale and efficiency that would ensure long-term sustainability.

8. With this in mind, during last year’s Awards presentation, I announced that the SC will implement a single-pricing regime that will provide for a more transparent pricing mechanism. Pursuant to this, full disclosure must be made of sales charges, thus providing a clearer picture to investors on the differing costs of investing and helping them to make informed decisions on which products to buy and from which distribution channel to source such products.

The decision to introduce the single-pricing regime as well as the widening of distribution channels was taken with a view towards introducing a tiered pricing structure within a market driven framework. It is essential for the distribution side of the industry to evolve and explore greater innovation in cost options where differentiated charges can be applied, enabling significantly lower charges to be imposed where “no frills” service is provided. This will enable customers to benefit from paying fees that are commensurate with the level and quality of services offered. Additionally management fees should also be looked into and a structure that rewards long-term investors, as practised in some developed jurisdictions, be introduced.

9. We appreciate that it is a major challenge for the industry to manage the transition from practices that focus on margin, towards practices that drive growth based on scale and efficiency. This however is a crucial hurdle to cross, and I must commend those players who have begun taking pro-active measures to meet these challenges head on.

Penetrating Regional Market

10. Although overall, our unit trust industry is relatively well developed and we are well- positioned within the region in terms of size and domestic penetration, greater efforts should be made towards regional and global expansion by increasingly making available products for overseas distribution, thereby diversifying the sourcing of funds from beyond Malaysian shores. As developing countries within the region embark on regulatory changes to promote their own unit trust industry, it is imperative that Malaysian players leverage on our headstart to win a share of the regional wallet. Just as Malaysian investors seek diversification of investments beyond Malaysia, there is no doubt that investors within the region will similarly seek to do the same. Malaysian funds should therefore position themselves to exploit the opportunities afforded by the large pools of regional liquidity.

11. In this regard there is a need for us to develop the necessary capabilities to improve global fund management skills and expertise as well as research capabilities to ensure the ability to meet investor expectations for better returns from their investments. Malaysia's competitiveness will depend more and more on our ability to innovate, to develop higher value-added processes and better quality products and services. Unit trust managers must therefore ensure that they are equipped with world-class capabilities and quality human resources to advance as a developed industry. In this regard it is essential for there to be a change in mindset; from viewing the recruitment of qualified, experienced and therefore more costly personnel as burdensome, to regarding it as an essential investment in development of skills, expertise and knowledge which will result in long term business profitability. I firmly believe that it is investment in capacity building, that is key to strengthening the ability of our intermediaries to compete effectively.

Ladies and gentlemen

Towards a Self-regulating Framework

12. As the investment management industry continues to develop greater capacity and improved capabilities, the SC encourages greater industry self-regulation to complement the SC’s supervision. We have as you know, moved to a principles based approach to supervision where we no longer prescribe rules on how intermediaries should organise their resources and conduct their business. Intermediaries are instead allowed the flexibility to design controls and processes as well as align their business objectives with the expected regulatory outcomes that will see equitable and fair treatment of clients, protection of clients’ assets, adequate risk management and proper dissemination of information. This will enable us to promote the development of efficient, orderly and fair markets.

13. The SC will seek to work closely with industry participants to instil best practices and to strengthen internal controls and compliance structures. Our audits have revealed scope for enhancing portfolio management skills set, strengthening risk management practices and compliance framework, as well as disclosures to clients and investors. It is essential therefore that steps are taken to address these shortcomings by having in place appropriate resources and policies to ensure that portfolio managers conduct themselves with integrity and due care to mitigate market uncertainties, and protect client assets.

Thus, as the very form of our capital markets change, yielding to product innovation and investor sophistication to expand global reach to out perform competition, i t becomes imperative that we continue to inculcate a compliance culture that recognizes the importance of robust safeguards to avert lapses that may result in adverse systemic consequences to the capital markets.

Ladies and gentlemen,

Measures to Ensure Continued Growth and Increased Regional Competitiveness

14. To ensure that the Malaysian unit trust products are globally competitive, rules and guidelines would have to be benchmarked against international standards. The implementation of these standards and other international best practices, will greatly enhance the transparency of information, alleviate market uncertainty, reduce cost of compliance and raise the levels of integrity of our unit trust industry.

15. On this note, I am pleased to announce that the SC will be issuing the revised Guidelines on Unit Trust Funds on 3 rd March 2008. The revisions are intended to streamline several of our current rules and requirements with international standards. Some of the main amendments include -

  • The removal of prescriptive investment restrictions such as investment limits in options and futures, which will be replaced with prudential limits for investments in derivatives . This relaxation will allow more flexibility to fund managers to transact in derivatives other than for risk management purposes. It would also allow unit trust managers to launch new products that predominantly invest in derivatives.
  • Relaxation and streamlining of requirements with Bursa Malaysia in respect to securities lending . Unit trust funds which are long-term investors are a natural source of securities for securities borrowers, and the ability of the funds to lend their securities will be an additional opportunity to enhance returns.
  • Thirdly we will remove the need to seek SC’s approval for foreign markets 3 , subject to these markets fulfilling certain criteria such as the home regulator being a member of the International Organisation of Securities Commission (IOSCO). This relaxation will allow fund managers more flexibility in managing their foreign investment portfolio.
  • Fourthly we will remove the cash borrowing restriction to meet redemption requests . By allowing funds to borrow for a limited period of time, redemption requests may be met without the need to dispose assets in a fund’s investment portfolio, which may otherwise affect the interests of the remaining unit holders.
  • Dissemination of an abbreviated version of an interim report to investors will be allowed . In response to representations made by fund managers to facilitate reduction in management expenses, the SC will permit the dissemination to investors of a short interim report which will consist mainly of pertinent information regarding the fund’s performance to date. The full version of the interim report, which must still be prepared, must be made available upon request and must be posted on the unit trust managers’ websites.

Ladies and gentlemen

16. Although a unit trust fund is predominantly a retail product, it is also an interesting proposition for sophisticated and institutional investors who, by and large, are more receptive to higher risks for higher returns. To attract sophisticated investors and institutions to invest in unit trust products, the SC has allowed for the distribution of “Wholesale Funds” which are given more flexibility in terms of investments to cater to their higher risk appetite. As such, I am pleased to announce that the SC has further relaxed the rules for Wholesale Funds -

  • Firstly, cash borrowing for investment purposes will be allowed .As investors of wholesale funds are more sophisticated in nature and are more receptive to higher levels of risk in return for potentially higher returns, the relaxation to borrow cash for investments will provide greater flexibility for fund managers to meet investors’ expectations.
  • Secondly, the frequency of valuation and repurchases of units will be relaxed. Given that sophisticated and institutional investors invest on a longer-term basis, a monthly valuation and a limited monthly repurchase arrangement will be allowed for wholesale funds.
  • Thirdly, qualified investors for wholesale funds will be expanded by allowing trustees with absolute discretion in the investment of trust assets worth RM10 million and above and pension funds approved by the Director General of Inland Revenue to invest in wholesale funds.

Ladies and gentlemen,

Concluding Remarks

17. In our dual role as regulator and developer of the capital market, the SC constantly strives to be facilitative, transparent and accountable to our stakeholders. In relation to investment management and unit trust industry, we have established clear rules, as well as efficient and transparent business processes to promote the growth of the industry.

18. The Government has demonstrated its strong commitment by introducing relevant tax incentives and increasingly liberalised measures to enhance competitiveness of the investment management industry, particularly in the Islamic finance space. Underpinned by a vibrant economy, deep broad based capital markets and strategic connectivity for investors to capitalize on domestic and regional growth opportunities, we should be well placed to meet the challenge of maximising the full growth potential of the investment management industry.

At the SC we will continue to monitor trends and developments globally and regularly update our regulatory framework to foster the growth of the industry while ensuring no compromise in investor protection.

19. I hope the awards ceremony today will stimulate greater competition among unit trust managers to create a more dynamic environment and contribute to higher industry as well as capital market growth.

20. In closing, please join me in congratulating the award recipients.

Thank you.

1) A company that sells unit trust products from multiple unit trust management companies, either directly to investors of or via online.
2) A company of financial planners that market and distribute unit trust products pursuant to a financial plan.
3) This relates to foreign markets other than stock exchanges recognised by Bursa Securities.
4) Retail unit trust funds are required to conduct daily valuation.
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